Into Debt And Out Again – Overcoming $40,000 Of Debt

Posted by The Happy Rock on May 20, 2010

The following is a guest post by a dear friend and colleague Ed who is just months away from finally getting out from under $40,000+ in debt. Give him a warm welcome in the comments or a shout on twitter(@ed_bruner):

The First Step Into Chains

When my wife and I got married, we were debt free with money in the bank (minus my student loans…which I wasn’t even thinking about). When she got pregnant, we decided it was time to buy a house. The year was 2001. The Housing bubble in NJ was already ballooning. We had difficulty finding anything that wasn’t a “fixer-upper”x2. Mistake #1: the mortgage loan officer realized that I didn’t want to borrow all the money I was qualified for, so his advice was: “When you buy your first house, you want to borrow to the point that the payments are difficult to make because over time it will get easier”. I believed it. And so, our first house was a challenge. Our savings were wiped out because there was no extra money. In 2003, we moved to our current house. It too was a stretch. Over the course of years our debt was slowly becoming unmanageable.

Journey into the Red

To be honest, I tried to create a budget, but there was no room for savings. If something unplanned occurred, we had to put it on a credit card. We used an ATM card for our purchases, not cash. We would set an amount to spend, but would easily go over the small amount when tallying receipts. So, when I would “do the bills” I would have to juggle things to make it work. I would have to estimate the days it would take for a check to get delivered/processed so it wouldn’t bounce. We were living without a budget and the credit card debt was beginning to get stressful. 2005 brought pregnancy with child #3, the harsh reality of a needed minivan became apparent. Mistake #2: I reasoned in my mind that I could make the loan payments on a used vehicle if I took advantage of just 4 hours of OT a week. The vehicle was purchased in 2006, a month before the child was born.

Crisis

In May 2006, I suffered two strokes a week apart. I am thankful that I have made a full recovery, but I was on disability for several months….needless to say, no OT was happening. Debt was piling up, and for the first time in our marriage my wife begun managing the bill. I was mentally “checked-out” due to recovery. She realized the financial house of cards, I built for us was crumbling. When I returned to work, either OT was not available or I was still too mentally “checked-out”, either way, I wasn’t doing any. Between my medical costs, car loan, student loan, new baby we found ourselves 40k in debt with increased monthly expenses. Failure was imminent.

Hope and Change

Because I have the best wife in the world and because of several positive influences in my life, we realized that managing our debt was not the way we wanted to live the rest of our lives. Two main positive influences: 1. The Happy Rock, because I know him personally I was challenged and inspired to embark on this journey toward debt freedom. 2. Duggars, as corny as you may think the show is, it has made a resounding positive influence on my family. For those who don’t know, the Duggar family contains 19 children and boasts that they live debt free. If they can do it in AR with 19 kids, why can’t I do it in NJ with 3? These influences allowed me to see that not only is debt freedom possible, but it is essential to a successful family.

Resolved

I began to see debt as the enemy of our success and dreams. In addition, because of my faith, I began seeking Scriptural verses to confirm this avenue I felt God was directing me. “Owe no man anything but love” Romans….”the debtor is a slave to the lender” Proverbs…. Seeing debt as slavery brought more clarity and resolve. Large sums of debt keep us from enjoying things like much needed vacations, car repairs & maintenance, and proper heath care among other things. With debt, we are not free to pursue our dreams because we are tethered to a lender. I want freedom, don’t you?

Roll Call

Credit card = $10,000

Auto Loan = $4,000

Student Loan #1 = $5,000

Student Loan #2 = $6,000

The First Steps Out of Debt

After expressing my intentions to the HappyRock, he gave me a copy of Total Money Makeover – D.Ramsey. We began by creating a budget. We started using Ramsey’s Debt Snowball method. Mistake #3: we wanted to get started immediately, we didn’t start with a $1,000 security fund first. I recommend the security fund. Basically, we stopped adding to our debt using a good budget. We started making minimum payments on all loans except for the one with the lowest balance. Finally, we began living on cash. My wife and I each divided a modest amount for each other for each week. When that money was gone, the spending stopped.

The Journey is almost Over

After two years of intense debt reduction, we have paid off all non-mortgage debt, except for Credit card #2. My father felt bad about not helping me out with college and started sending me money to pay the Student loans. With his help, we wiped them out. When you get to the point where we are at now, it is amazing to see how much money we could be keeping instead of sending to creditors. Never did I dream about so much available money.

Our goal to reach debt freedom (minus the mortgage) this September.

» Filed Under Debt Elimination, Financial Succes, Guest Posts

DD’s Annual Debt Checkup

Posted by Debt Destroyer on January 21, 2010

Tonight at dinner I told me wife that we were down to only $3500 left on her student loan. She gave a chuckle and said that she has forgotten almost everything she learned in college. I told her that was alright since the stuff she did remember was probably out of date anyway.

I figured it being January and all that it was time I gave a look to see how we are sitting debt-wise. Last January when I did this we still had $99,625 in debt. This was comprised of:

$94,274 – Mortgage
$5,350 - Student Loan

As of today we now owe……..drumroll……$96,055, which is comprised of:

$92,534 – Mortgage
$3,521 – Student Loan

So in the last 12 months we paid down $3,500+ of debt.

Pathetic!

Even though I’m going back to school and barely working, I still thought we’d do better than that. But looking back, I don’t see why I should be disappointed. You have to make payments to actually pay the debt!

When our mortgage increased, I started only paying the minimum (I use to pay a couple of bucks extra before to make it a round number). Which meant that our only hope of seeing any improvement was in paying down the student loan.

We started out in good shape in 2009. I routinely paid an extra $75-100 a month. But then for some reason in the summer I stopped this and went down to only paying $20-$50 extra. And that is how we ended up only taking a $3,500 bite out of our debt.

What’s sad is that by this time next year I’ll have my own student loan to pay back. I really wanted to be done with Mrs DD’s loan before mine kicked in. That definitely won’t happen with my willy nilly payback plan.

So I came up with a new one.

Starting this month I’m going use a system where I designate $500 a month for our electric bill and our student loan payment combined. For example in January the electric bill is $380, so I paid $120 on the student loan to come up with the $500.

Last year we spent a combined $4620 on these two categories ($2575 on electricity and $2045 on the student loan). So committing to increase this total to $6000 next year is a pretty big jump. But I think it will be worth it.

Admittedly there is a slight problem with my plan. What happens when I get socked with super high electric bills? If that happens (which I’m pretty sure it will next month) I plan on paying the minimum on the loan and then make up the spending difference in future months when our electric bills are lowered. So while a few month’s total might be over $500, the total spent on the year for these two categories will be $6000.

If I stick to this plan, it would be smart to utilize the budget option that my energy company offers so my payments would be stable and I’d know what they’d be in advance. But where is the fun in that?

So, what do you think? Am I crazy? Or crazy like a fox?

Do any of you have any irregular debt payment/saving plans that you feel like sharing with the rest of us? Do you think that the “goofy” nature of a plan helps or hinders the results?

I can see it both ways.

By making an individual plan it could provide extra motivation by giving a feeling of ownership over the idea, instead of just using a tried and true method such as the debt snowball.
But I also think strange plans could be a sign of a lack of focus and discipline, so a person could find themselves getting off track easily.

Hopefully #1 will be the case for us.

Until next time,

-DD

» Filed Under Debt Elimination

Get Out Of Jail Free Card – Visualize Yourself Without Debt

Posted by The Happy Rock on June 12, 2009

Debt is a prison and you don’t get out of jail until your creditors are paid off. Even if you don’t feel like you are in prison debt still narrows your range of choices and options. You may be just to distracted with the shiny things you bought or by the stress of just making it each month that you might not even be able to visualize what life is like without debt.

I will tell you first hand, being out of debt is awesome. We have so many more options as a family it is so energizing and even a bit overwhelming at times, but it is a great problem to have.

This post is designed specifically to try and lift our heads out of the muck to visual and imagine what it would be like without debt.

A good way to start is to close your eyes and picture your list of debts in your head. Now cross them off one by one starting with the the debt that irks you the most. Pause after each cross off to let yourself feel the emotion of having that debt gone. I am picturing having my house paid for and a big smile comes across my face.

Once you have finished that exercise consider a few ways that getting out of debt frees up our future.

Cash flow. How much cash is tied up in monthly payments? Think about all the savings, vacations, or purchases that you could quickly save for.
Stability. How much less scary losing your job would be? How about a major repair?
Career. Think about how little you would be tied to a job you don’t like when you only have a few monthly bills to take care of. That career or job you always wanted is now on the table.
Time and Energy. Imagine all the time and energy that you were wasting on thinking, stressing, and paying for your debt. What kinds of great things you could be using it for?

There are thousands of other areas that debt effects, but it is for you to start to put on the no debt mindset.

If you really start to feel and see how great it will be,you will be amazed at how much energy it creates for your debt destruction journey.

Let’s hear it. What type of things are you going to reclaim in your life? What dreams can you begin to consider again?

» Filed Under Debt Elimination, Psychology of Debt

Should I Cash My Savings Bonds?

Posted by The Happy Rock on May 11, 2009

Short answer = Yes.

Let’s start with the basics first though. A US savings bond is note representing a US government debt. The government agrees to pay back the money you give them in exchange for interest paid to the bondholder when you redeem the bond. Currently in 2009 the savings bond rates are 0.70% and 0.00% for EE and I bonds respectively, so that makes them terrible investments right now.

Know that you know what you are dealing with, take them to the bank and get the bond value plus their accrued interest.

There are a few things to note:

You will pay taxes on the income/interest) portion of the cash you get back.
You have to wait 12 months from the date of purchase before you cash them.
If you cash them before 5 years, you will forfeit 3 months of interest.

Even with those three negatives, it still makes sense to cash them. When you do, I would personally use the money to get rid of debt. The interest savings on your debt alone is usually enough to justify bond redemption, but I would also that there are much better investment vehicles than bonds too. So hunt down those bonds from your childhood and cash them up.

» Filed Under Debt Elimination, Misc.

Paying Off Credit Cards With The Credit Card Snowball

Posted by The Happy Rock on April 8, 2009

This is a guest post by Trisha Wagner. Trisha is a freelance writer for DepositAccounts.com, where you can compare rates from dozens of banks in one place. Trisha writes regularly on the topics of personal finance and saving money.

Credit card debt is among the hardest debt to pay off once you have accumulated it. Not only are the interest rates pretty high, but most people use their cards regularly, which means they add to the balance just as fast (or faster!) than they make payments on them. If you make a payment late or charge more than your available credit, you get slammed with additional charges on top of the interest.

Paying off high interest credit cards should be your first priority for finally taking control over your financial situation. Here is a method you can use to pay off your credit cards in a way that gives you results early, and helps you build momentum and motivation to pay them all off!

Step One: Figure out how much you owe. Sit down with each of your credit card statements and write down the total amount owed, the current interest rate, and your minimum payment. Also figure out your living expenses (rent/mortgage, other loans and debts, utilities, etc) to figure out how much money you have available to contribute to your credit card payments on a monthly basis.

Step Two: Call each of your credit card companies, one by one. You’re going to say something similar to the following, in an effort to get your interest rates lowered:

“I have been offered a 5% balance transfer offer from another credit card company. They are willing to transfer the balance from this 18% interest credit card to theirs for a 5% interest rate for the life of the balance. I’ve gotten great service from you, but I am going to have to switch my balance to help me save money if you can’t lower my interest rate.”

The response at first will probably be something they read off their customer service response manuals, and basically tell you that your rate is the best they can offer. Thank them for their time and let them know you will be transferring your balance since they are unable to help you. Many customer service representatives will put you on hold to speak to their managers at this stage, and will come back with a lower interest rate to keep you as a cardholder. Sometimes, they don’t help you but they can’t raise the interest rate just for trying to get a lower one, so what do you have to lose?!

Step Three: Once you have called each of your credit cards (and hopefully lowered a few interest rates), re-arrange the order of your credit cards on your list of accounts so that the smallest balance is first, followed by each of the others ordered by balance owed.

Step Four: Pay all of the cards on your list the minimum amount due, except for the credit card in the first position. You will send this account as much as you possibly can every month until it is paid off. So if the credit card with the smallest balance owed is $300 and you can afford to send them $100 a month, it will take you 3 months to pay it off, during which time all of your other accounts receive the minimum payment.

Step Five: As soon as you pay off the account in the first position, take the amount you were sending to that creditor and add it to the minimum payment you had been sending to the credit card second on your list. So if you were paying that card $20 each month, you’ll know send $120 a month until it’s paid off, while paying each of your other creditors the minimum amount due.

You’ll simply continue this process, getting larger payments to apply to each of the credit cards on your list as you pay off the one before it.

Many people argue that you should pay off accounts with the highest interest first, but for most of us, we need to get results to stay motivated. If your highest interest account also happens to be your largest balance, you could be paying for years on that account before you see it get paid off. When you can pay a card off rather quickly and make a larger payment to the next one in line right away, you start to see the benefits of your hard work much sooner, and are more likely to continue your debt repayment process.

» Filed Under Credit Cards, Debt Elimination

I’ve talked the talk, but have I walked the walk?

Posted by Debt Destroyer on January 13, 2009

With a name like “Debt Destroyer” it’s kinda implied that I’m spending my waking hours destroying debt. I wish that was the case. But I have to admit that I spend much more time watching “Arrested Development” on DVD, than I do destroying debt.

But before I declare myself a fraud, I thought I’d take a second to check if my six months here at The Happy Rock has lowered my debt.

Back in July of 2008 we owed:

$95,108 – Mortgage
$11,843 - Car Loan
$6,130 - Student Loan

For a total of $113,081*

*I originally included a credit card balance in my initial debt total. But I always pay off the balances, so I decided to not include it as debt in this recap.

And as of today we owe:

$94,274 – Mortgage
$5,350 - Student Loan

For a total of $99,625.

That means that we’ve paid off $13,456 in the last six months.

Not too shabby.

Of course that total is misleading because $10,992 of it came in the form of a gift. You long time readers out there will remember I was the benefactor of a personal bailout. But the other $2500 was all us!

But DD, didn’t you say that you took out an additional $7750 in student loans to go back to school?

Um…yeah I did. Thanks for paying such close attention.

But as of this writing I haven’t been granted those funds yet, so I didn’t include them in my debt total. I wanted to savor the feeling of owing less than $100,000 for a little while. I should be getting my grubby little hands on that money in a very short time, once again putting our debt in six figure territory.

Of course I shouldn’t have expected to make great strides in the beginning of this journey. Heck I’m still trying to get our expenses under control. In fact, I’m tickled pink that we paid close to $2500 ourselves during this time. When you consider that I no longer work full time and am going back to school, I’d say we’re off to a good start.

I’m going to go out on a limb and say that I’m not alone in my debt reduction journey. How are you doing? Are you pleased with your progress? Have you come across any unexpected roadblocks?

Remember, we’re all in this together!

Until next time,

-DD

» Filed Under About The Debt Defier, Debt Elimination

As Long As You Can Make The Payments – You’re Fine

Posted by The Happy Rock on January 8, 2009

“I can pay all my bills each month, I am doing well.”

In a world of leased BMWs, credit cards galore, no interest credit offers, and high standards of living, what does it really mean to ‘live within your means’?

We all might have our own definition, but I wanted lay out what I think it means and see what others think.

The prevailing definition seems to be living on less than you make. Living within your means is much more than just being able to meet your bills each month. What type of bills you have matters immensely. If you have a huge car loan for a $30,000 new mini-van and you make $50,000 a year, I am arguing that you are living outside of your means.

Living within your means = Only purchasing items that you can buy with cash

This includes cars, vacations, mortgages…everything. The only means you have is the income you take home each paycheck. So if you take on any debt, it means you are living outside what you can actually afford. If you have debt it means you lived outside of your means at some point and are still paying for it. Payments for cars and TVs are debt and proof that you couldn’t afford the item. I know we like to stick our head in the sand to forget about debt and only see payments, but debt it is real and it is an extremely heavy burden. It might be hard to hear, but it is the truth.

Using that definition I am still living outside of my means because I still have a mortgage. If we scraped every spare penny at applied it to our mortgage, we might be able to pay it off in three years. That sounds to me like I bought something I couldn’t afford.

I suspect most of us are ok with getting a mortgage, which is fine, but the whole point is that we need to reclaim our financial language to represent real financial sense not the distorted consumerist mess that we espouse today.

What do you think?

» Filed Under Cars, Debt Elimination, Psychology of Debt, Psychology of Spending

Student Debt…How Much is Too Much?

Posted by Debt Destroyer on December 10, 2008

According to the local public radio station, South Dakota students carry the highest debt load in the nation. I was shocked to hear this for a couple of reasons:

South Dakota Universities (public ones) are very affordable. For example, I’m currently enrolled in 17 credits (6 graduate, 11 undergrad) and tuition & books totaled slightly less than $4000.
South Dakota incomes aren’t that high. So if these students are going deep in debt only to get a low paying job, they are setting themselves up for disappointment.

Perhaps because of #2 above, I guess I shouldn’t be surprised that students are needing help to afford school. Most people here don’t make much money, so of course they’d need help to pay for school. Heck I just took out a $7750 loan to help me go back to school (and me & my wife still owe around $6,000 from our first go around with school).

So I probably shouldn’t be shocked at all.

According to the Quick Fact Section at The Project on Student Loan Debt, borrowing is becoming more prevalent.

By the time they graduate, nearly two-thirds of students at four-year colleges and universities have student loan debt (66.4% in 2004). In 1993, less than one-half of four-year graduates had student loans.

In addition to the number of students needing help increasing, the amount they need to borrow is also increasing.

Over the past decade, debt levels for graduating seniors with student loans more than doubled from $9,250 to $19,200 – a 108% increase (58% after accounting for inflation).

But at the same time the news is talking about South Dakota having the highest student debt burden, I also remember hearing stories about how this fall’s enrollment in South Dakota schools was the highest ever. So clearly people are OK with borrowing for school.

But are those days near an end?

During Thanksgiving, my wife’s cousin was telling us about her experience at college, she’s a freshman going into social work. This girl’s Mother joked that she should be on the lookout for a rich husband since social work is not a very lucrative field. But in all seriousness, I can see this being a concern for those low-paying fields that require a college degree.

I know that I hope to not have to borrow any more money just to land a teaching job.

But I guess it probably wouldn’t be so bad except when you add on credit card debt and a car payment, fresh college graduates can find themselves behind the financial 8-ball in no time.

So Happy Rock readers, what do you think about all of this? If you went to college, did you need a student loan? If so, was it worth it? And to what level do you think we’ll keep borrowing to go to school?

I look forward to your insightful comments.

Until next time,

-DD

» Filed Under Children and Money, Debt Elimination, Financial Succes

DD’s Monthly Expenses – November 2008

Posted by Debt Destroyer on December 2, 2008

I can’t believe its December already…where does the time go?

Anyway…

You long time readers out there will recall that I’m charting my family’s monthly expenses in an effort to see where our money is really being spent. Below are the results from November:

$830.00 – Mortgage
$639.00 – Daycare
$400.53 – Groceries
$245.95 – Household Misc
$239.32 – Medical Bills
$135.00 – Student Loan
$129.43 – Electricity
$115.75 – Phone & Internet
$106.79 – Dinning Out
$ 79.39 – Hair stuff
$ 49.02 – Gas
$ 44.52 – Shoes
$ 35.00 – Grad School App
$ 24.00 – Tennis
$ 20.00 – Clubs
$ 15.00 – Donations
$ 15.00 – Kid’s Stuff
$ 5.30 – Videos

For a grand total of…$3129.00

This is much lower than last month, but last month’s total was misleading. But I am glad to see a number close to $3,000.

Biggest Budget Busters:

$245.95 Household Misc – This is about double of what it should be. Even with the receipts, I can’t believe it’s so high. The envelope system can’t get here fast enough.
$239.32 – Medical Bills – Can’t we be healthy for once? The sad thing is we were. This total is mainly from a prescription and a dental bill.
$106.79 – Dinning Out – We were doing really good in this category until last week. I think we ate out 5 times in 7 days. Throw in Thanksgiving and we were real porkers.

Biggest Budget Breakthroughs:

$400.53 – Groceries – I’m impressed by how we did in this category. We even had two special occasions (election night gathering & Thanksgiving) to deal with this month.
$ 49.02 – Gas – This is a combination of the low prices of gasoline and the fact that we didn’t really go anywhere this month.
$ 5.30 – Videos – I’m marking this here because even though the total is higher than what it was in my old Netflix days. The reason I’m happy about this category is that we took advantage of a local deal and rented 5 movies over Thanksgiving break. Too bad we only got to watch 4 of them.

Overall I’m pleased with this expense report. Of course next months will be much higher thanks to Christmas, but hopefully we can stick to our budget so it doesn’t get out of hand.

Until next time,

-DD

» Filed Under Debt Elimination, Spending

Fundamental Problem With Debt Consolidation

Posted by The Happy Rock on November 19, 2008

Putting debt on a 0% credit card or rolling high interest debt into a home equity line of credit may help save you money in the short term, but it is only addressing the symptom. The symptom is the debt; the debt isn’t the problem. The behaviors and attitudes that got you into debt are usually the problem.

Imagine a couple in a pool flailing around unable to swim or even tread water. You through them a lifeline and they are saved. The trick is though that they only stay saved if they don’t go into the water again. Unless they learn how to swim they are going to continue to have the same problems if they go in the water.

The same is true for money, although unlike avoiding water we can’t avoid spending, earning, and needing money. The only other option is to learn how to swim. We need to change our relationship and behavior towards money. Debt consolidation often helps people escape the symptoms of their problems without having to actually address the issues. Bankruptcy and bailouts usually have similar deleterious effects. People who roll their credit card debt into a second mortgage often find themselves with credit card debt again and now they have a second mortgage to boot.

The way issues get addressed is often by hitting rock bottom or the end of your preverbial rope and coming up with a real desire to change your behvaior and your financial destiny. Feeling pain promotes real change. Watching other people suceed inspires change. Hard work, discipline, and repitition change behavior. Focus on the problem not the symptom. Fix the problems and the symptoms will go away with some hard work.

» Filed Under Debt Elimination, Psychology of Debt

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