We’re Debt Free!

Debt Free

Ten years ago, I borrowed $68,000 to buy a house.  If I had made the regular payments for the full 30-year term, I would have paid $101,076.80 in interest, repaying a total of $169,077.60 on that $68,000 loan.  Ouch!  That’s an overall interest rate for the life of the loan of nearly 150%!

Today, I went over to the bank, got a cashier’s check for the remaining amount, and mailed it off to the payoff department.

As it is, I paid somewhere in the neighborhood of $25,000 in interest and fees over the last 10 years (including initial closing costs and a refinance 8 years ago), which is about 34% of the $73,000 purchase price of the house.  Still a hefty chunk of change!

Looking forward to getting the title to our house in a few weeks!


Some thoughts on financial management, budgeting, getting out of debt, etc.

It takes time. You need to be organized, and take the time to keep track of your finances.

It can seem overwhelming at first. When someone is thousands of dollars in debt, sometimes they would rather just not think about it. That only makes the situation worse, because if you don’t figure out exactly how much you make and how much you owe, you cannot create a plan to get out of debt.

First steps:

1. Net Worth: Know where all your money is, and how much there is.
-Some people have multiple checking/savings accounts, and may not even know how much is in each account. Consolidate multiple accounts. Use your bank’s website to keep tabs on your account balances.

2. Income: Figure out how much you make. (net salary, after taxes, on a monthly basis)
-Don’t include overtime or odd jobs if they can’t be counted on for regular income.

3. Expenses: List all of your regular expenses. (mortgage/rent, car payments, other loan payments, utility bills, phone/cable/internet, magazines, food, gas, etc.)
-For expenses that don’t occur once a month, figure out the monthly equivalent. (expenses for total year, divided by 12)

4. Liabilities: Add up all past due bills. (we’ll come back to this one after Step 5)
-List your debts in ascending order, for the smallest amount owed to the largest amount
-Be aware of interest rates, late fees, service charges, etc.

5. Balance your budget.
If your expenses (#3) are more than your income (#2), then you need to aggressively reduce your expenses and/or increase your income. Increasing your income isn’t always within your control, but reducing expenses usually is. TV, internet, cell phones, magazines, movies, etc., are all optional expenses that may need to be eliminated. You may need to find strategies to save on gas money and food. You may decide you can’t afford your current car or residence, and need to trade down. You may need to find a second job. Do whatever it takes to make sure that your income is greater than your expenses.

6. Manage expenses.
Now that you have a budget that allows you to live within your means, you need some structure to keep your spending under control to make sure you stick to your budget. This is why keeping track of your spending habits is important, so you don’t get to the end of the month and realize (too late) that you’re out of money. Many people find it helpful to use an envelope system. At the beginning of each month, take out the budgeted amount of cash for food, gas, entertainment, and other discretionary expenses, and put each amount in it’s own envelope. Use only the allotted cash to make your purchases (don’t write checks or use your credit card). If your food money runs low, you’ll have to eat peanut butter and jelly for a while. If your gas money runs low, you’ll have to stay close to home for a while. If you don’t use all your gas money in a given month, don’t just blow it on something else: save it, or use it to pay off debt.

7. Pay down debt.
While you’re creating your budget in Step 5, it’s important to not just have your expenses be equal to your income, but to have your expenses be less than your income. This excess income is used to create savings and pay off accumulated debt. It is often recommended to eliminate your smallest debts first, and work your way up, but sometimes the debt with the highest interest rate or highest late fees should get top priority. Once a debt is payed off, don’t treat the money you were paying as being freed up for other expenses, roll it over into paying off the next debt.

This is the step that people are often the most worried about, but without doing Steps 1 through 6, Step 7 will never happen.

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