Last month marked the end of an era for me. I completed paying off my student loan! After doing this, I posted a picture of the “Paid in Full” notice that I received from the loan servicing company in hopes of inspiring other people to get out of debt. Everyone was very supportive! But, I got one question several times. How?! Well, here is what I found to work best.
1. Get Pissed Off
This step is really about establishing the reason that you want to get out of debt. In other words, getting out of debt for the sake of getting out of debt is NOT enough motivation. The process is hard and can take a lot of time! So why is it worth it? For me it was a combination of several things.
The first thing was math! Let me explain what I mean. Let’s say you buy a brand new $25,000 car and you finance the car over 60 months (5 years) at 5% interest. That means you would have a monthly car payment of $471.78. At the end of the loan you will have paid $28,306.85 for a car that will be worth only $10,000 after five years if it depreciates at the average rate. To summarize, you will have paid $28,000+ for a car whose highest value was $25,000 but is currently worth only $10,000. No Bueno.
In my personal situation I paid off $23,071.28 in 9 months and 22 days. For comparison, if I would have waited until the loan repayment period started and carried out the loan over the suggested 10 years I would have paid back $34,200.00! So paying aggressively saved me $11,128.72!
In the earlier example I discussed how paying off my student loan early saved me $11,128.72. But, that is not all of the money that staying in debt longer would have cost me! You also have to consider opportunity cost. That is, the amount of money that you lose as a result of losing the original money (which in our running example is $11,128.72). Confused? I’ll explain. In our example, by waiting for my loan to move from deferred to payment status and paying on my loans over 10 years I would have lost $11,128.72 to interest. However, I would have also lost the amount that I could have made had I invested that same $11,128.72 over that 10 year period.
To continue this example, let’s say we invested the $11,128.72 and over the course of 10 years we made an average of 7% on our money (The stock market average return is around 11.3% so 7% is fairly conservative). After 10 years we would have $21,891.86 which means we made $10,763.14. In this example the $10,763.14 is what the lost “opportunity” cost us! Therefore, once you consider the actual amount you would have paid together with the opportunity cost you see that paying my loans more slowly would have taken an extra $21,891.86 out of my pocket! That is essentially “paying back” $42,391.86 (The amount lost to interest and opportunity plus what was borrowed) after borrowing only $20,500. Hopefully now I have illustrated how actually doing the math on debt will begin the process of getting you pissed off!
What do You Want for Yourself & Your Family?
After doing math the next step to getting pissed off and motivated is thinking about what you want for your family. For me it is simple. I want more time to spend with the people I love. And I want generational wealth to leave to everyone that comes after me. I want my children and their children to be secure because of the foundation I have laid. When paying money for debt you are building that exact thing…for the family of the lender you are making payments to. When you realize that your student loan payment is costing your future child a college fund or inheritance you are starting to feel it. Or maybe it is costing you the opportunity to spend more time with the people you love as opposed to grinding your whole life to keep up with payments. Simply put, debt dictates your life. When you have a certain number of payments that need to be made you lose the freedom to decide what you want to do and why. Instead, you make decisions based on what you HAVE to do. It doesn’t have to be that way! YOU CAN CHANGE IT! Think of what you want your life to be and what you will do with your money once it’s not flying out the window every month. Once you get that motivation. You are ready!
2. Give yourself a SMART goal
The goal you set for your debt payment should be “SMART.” That is, specific, measurable, achievable, realistic and time-bound. For me, the “Time-bound component was the most important. When you make a SMART goal you will likely be surprised to find that you will push yourself to beat it. My initial goal was 1 yr and I finished in just under 10 months!
3. Make a budget & Cut Expenses
You have to make a budget. Every time you earn a dollar it becomes an employee for your personal company, You Incorporated. If you were hiring an employee would you tell them “just do what you want every day. I’m not going to give you any specific tasks?” No! Of course you wouldn’t! (If there are places out there that do that I want to know about them! Best job ever!) Your money is the same way. Every one of your dollars needs a specific task. Otherwise, nothing is going to get done! Your budget will really become the business plan for You Inc. and tell you where your business is going.
This is where the sacrificing begins. You have to cut out everything that is not necessary! It hurts. It is annoying. But, it is temporary. Eating out multiple times a week? Gone. Vacation with your friends? Gone. Morning coffee stop? Gone. Cable or Satellite? Gone. Depending on your circumstances, the extent of the sacrifices that you make will be different. However, sacrificing to cut expenses will truly commit you to the process. It will also motivate you to get done so that you can stop sacrificing!
4. Work Your Butt Off
You have to find any extra money that you can find. That means working multiple jobs, having yard sales, whatever. If you have time to binge watch TV shows then you have time to work your butt off for a finite period of time to make your life what you want it to be. DO NOT MAKE EXCUSES! Too busy? Then figure out what part of your schedule must change. Too tired? You’re going to have to get over that. Being tired is a symptom of aggressively paying off debt! Cutting expenses and increasing income are the only ways to improve this situation. The harder you sacrifice on both sides, the faster the process goes (and the more money you save)!
5. The Debt Snowball
If we are being honest, I did not follow the debt snowball exactly. I had one debt smaller than my student loan but I still paid my student loan first because the big number overwhelmed me and I wanted it gone. However, the debt snowball is probably my favorite method of debt reduction and I think it works the best! I learned about the debt snowball from Dave Ramsey whose book “The Total Money Makeover” is a must read for those who are getting out of debt! Here is how it works. You list your debts from smallest to biggest. You pay minimum payments on everything but the smallest one. On the smallest one you pay as much as you possibly can. Once it is gone you move to the 2nd smallest debt. At this point you have all of the money that you were paying on the first one plus any you were paying on the 2nd one to get the 2nd debt paid off as fast as possible! You keep going until you have paid off all of the debts! The reason this plan is so successful (as described in the book I mentioned) is because you have a series of successes resulting from paying off the smaller debts that provides motivation throughout the process!
Honestly, that is about it. There are no secrets. No secret money making methods. No secret expense cutting methods. It really comes down to a lot of sacrifices and long hours working. Remember though, these are short term sacrifices for long term gains. True enough, some people with more debt may have a plan that spans 5 years rather than 9 months. But, that too is a relative short period of time when you consider the reward of being financially free for the rest of your life! YOU CAN DO THIS! I know you can!