Look at the latest articles on the wire about personal finance these days, and you’d think we’ve stumbled across the greatest discovery since Einstein declared that e=MC2. How I paid off $XX,XXX in debt is now a headline worthy read? I suppose if you wanted to, you could create a whirlwind of virality with a post on how to tie your shoes with your eyes closed. I guess we’ll never know until we create a pin for it, will we?
Debt sucks. And anymore, we get saddled with negative figures for a whole host of mainly well-intended things. Mortgage? Good. Student loan debt? Good. Getting by for a spell after a layoff or health issue? Good (assuming all other options are exhausted.) We then have the mix of dumb debt that really gets us into a spiral, like fancy new cars, jet skis, trips to Cancun, and shopping mall mania credit card debt.
Paying off Debt Is Not Rocket Science
It’s really quite simple, even in the most complicated circumstances. You figure out which debt is forcing you to pay the highest percent of its balance in minimum payments. Slay those first. In other words, if you have a $10,000 car loan balance with a $400 monthly payment, that’s a score of 25. If you have a $100,000 mortgage balance with a $900 monthly payment, that’s a score of 111. You just divide the balance by the payment. The lower the score, the more aggressively you attack that particular debt.
But what if the interest rate on the mortgage is 5.4% while the car loan is only 2.9%? Sigh… Doesn’t matter. You’re not going to benefit by arbitraging marginal rates when you need CASH FLOW.
An overriding rule in all of this: Pay of credit cards FIRST. They are the devil. You can practically smell the brimstone when you open a new statement envelope. In most cases, the interest rate is 12% or higher. Set aside the cash flow index for now, and tackle each credit card in order of descending rates. Those bastards come pretty close to billing interest-only minimum payments, at 2%-5% of the total balance.
For non-credit card debt, use the Cash Flow Index. For credit cards, pay those first, and prioritize by interest rate. That’s it folks. All there is to it.
Now for the Hard Part
The psychology of the matter is far from easy. This is where your brain gets in the way of, well, your brain. Many of us stumble quickly out of the gates after college or starting out fresh in the workforce. We have a low paying hourly job, or, a collection of part-time jobs that pay just enough to allow us to share rent with a roommate or two.
Life is still good, because we’re young, and we subconsciously operate as if the future will take care of itself. This is a common trap, and one that I’ve personally fallen into. It’s the reason I’m cramming for early retirement in my mid-40s, as opposed to my mid-30s.
I have to believe a lot of the “advice” the personal finance community pushes is a hard pill to swallow for many. We’re not all in our 20s or 30s anymore. It’s true that it’s never too late to start, but the golden period of opportunity is when your driver’s license age starts with a 2 or 3 (and is double digits, unless you’re Baby Boss.)
If you are starting late on this journey, and you’ve figured out how to chuck the silliness of consumerism out the window, you can, as J.D. Roth would say, “Turbo Charge” your situation. When I got my head out of the sand about five years ago, my “turbo charge” was to fire up a rental property business.
And wouldn’t you know it, the lessons and discipline I gained there came in handy at work, where I started to apply pragmatic problem solving on the job. Raises and opportunities to move up the ladder soon followed. Notice I said “opportunities” right there. I’m still angling hard on that elusive promotion…
Bottom-line: Stick with it. No hole is too deep to climb out of. Patience and consistency will get you to the finish line when it comes to paying off large sums of debt. Others have done it under very difficult circumstances. Learn from their example.
Debt Pay Off Tricks That Have Helped Bigly
Sometimes home ownership does not suck. That one time back in 2001, when I got laid off for being a punk of an employee? After band camp? Thank goodness I was able to take out a home equity line of credit for $30,000. Were it not for that, I’m not sure how I would’ve paid for groceries, much less the mortgage during a year of nothing but grad school classes.
What I soon learned, not long after landing my next job, was that I could use a home equity line to pay down other, higher interest debts. A lot of people assume you can only use a “HELOC” for home improvements. Honestly, the bank doesn’t care what you use it for, because they have your ass in a sling already, where the primary mortgage is concerned. “Go ahead, good sir, take a cruise with that HELOC. Just be sure to make your monthly interest-only payments!”
At any rate, I started to consolidate some of my stupid credit card debts and higher interest student loans on that HELOC. The interest rate was much lower. And double-bonus, the interest on HELOCs is tax-deductible.
Long-term, the ideal strategy is to keep your HELOC open but untapped as your emergency fund. If you’re a crazy son of a bitch like me, you could bend that rule a little and use it to make the down-payment on a rental property or five. This is the fun leverage part of debt that you should tread lightly into – but it is a pretty lucrative approach if you do your homework.
The Three Stages of Financial Independence – Where the Debt Monkey Fits In
A very good read this week that complements my little ditty can be found over at my neighbor’s, Apathy Ends. Apathy hits us right over the head with a very similar message, “There are not a MILLION ways to pay down Debt.” Love it! The message is underpinning his post is all about persistence. That shit ain’t rocket science my friends.
If you wanted to be clever about all this, you could draw up the classic evolution ladder to depict the stages of financial independence. The monkey in the beginning is more illustrative of the monkey on your back. That goddamned motherfucking debt. Then, after our stupid debt is paid off, we get to evolve into neanderthals. Loin cloth and furry knuckles. The only thing holding us back from evolving into full-fledged financial Kardashians is our need for that hamster wheel day job to support our living expenses. We reach fully erect Kardashian when we’ve saved 25 times our annual living expenses.
Getting from monkey to neanderthal is the part that drains our psyches the most. I remember those years as being absolutely draining. I was always worried about money and whether and when I’d get out from under all of our own non-mortgage debt. Having that weight removed is a huge first step. Getting the freedom to say “Fuck You!” to the day job is “huge weight number two”, and is a ticket you can redeem when you feel the need, depending how your hamster wheel suits you.
Let me know what you think in the comments. Am I oversimplifying the debt payoff process? Is there something more to this than persistence and resilience?