As of 8/23/2008, our debt looks like this:
Debt - $52,148.16
- Credit Cards:
- Universal - $7,380.00 (2.15%)
- Citi - $2,920.20 (7.74%)
- USAA - $12,200.00 (8.90%)
- Auto Loans
- Toyota - $13,707.53 (7.40%)
- Volkswagen - $11,311.96 (5.90%)
- School Loans
- Direct - $4,153.47 (5.9%)
- Other Debt
- Medical - $475.00 (0.0%)
It is definitely overwhelming to look at over $52,000 in debt. It is very easy to panic, to wonder where it all came from, to seriously doubt that we will ever pay off that much money. I definitely feel the weight of the debt every day. It often catches me off guard, usually as I am pulling my wallet out to pay for something, anything, with the sudden “do I really need this” thought that (hopefully) puts the brakes on whatever purchase I am trying to accomplish. I’ve carried too much debt since I was a freshman in college, from the day I signed up for my first credit card. Sure, initially I was good about paying the balance every month, but once I got the taste of “deferred payments,” the spiral began.
It is helpful to understand where the debt came from, to know why it happened, and unlike too many consumers now, I freely accept that it is my fault. I don’t expect, and I certainly will not welcome, outside assistance or government programs to help me with pay off things that I bought. But as helpful as it is to understand where the debt came from, that doesn’t answer the more pressing question: what to do with the debt from here. Eliminating the debt will take patience, time, and determination - and buy-in and cooperation from my wife.
The Debt Elimination Plan
I’ve been calling this my Debt Reduction Plan for a while, but I decided that I won’t settle for just reducing the debt - I want it gone. My Debt Elimination Plan has been around for almost a year - I first put pen to paper on the topic in October of 2007. I realized that for years I had been telling myself that I would pay off the debt “later” - when I finished school, when I got a different job, when I reached some vague milestone that never materialized - and that “later” would never come.
I wish I could say that having the Debt Elimination (Reduction) Plan for almost a year had helped us make measurable progress on reducing and eventually eliminating our debt. I can say that from October 2007 through April 2008 we knocked $2,268 off the credit card balances, increased our savings by $1,175, and boosted our taxable and non-taxable investments by $2,300. So what happened between May 2008 and today? Chaos. Financial anarchy. A complete loss of focus. My wife and I hit a rough patch in our relationship. Our temporary drop in compatibility was driven by a multitude of reasons, though personal finance was right up there in the list. In the midst of debating whether we should stay together or separate, and ultimately a short “trial separation,” we both lost control of our spending, me more than her, and in three short months we managed to undo the bulk of what progress we had made.
Our Debt Elimination Plan is based on the same three principles that form the foundation of every debt reduction/elimination plan out there: Responsible Spending, Budgeted Savings, and Lots of Debt Payments. This is essentially the same plan that we started with in October 2007, but this time around, my wife and I are making the extra effort to work together, stay connected, and keep each other on track. In the past, I handled the majority of the finances and bills, and no matter how hard I tried, couldn’t get her to sit down with me to talk about money. It wasn’t that she was intentionally undermining our financial health, but by not taking an interest in our finances, she just didn’t know. We’ve established that every other Friday, on payday, we will have a standing date to review our income, plan our expenses for the two weeks, and figure out what money to transfer where (more on the distribution of accounts later). Hopefully, by having us both take a more active role in determining the budget, it will be far easier to subscribe to the budget without so many reservations.
Our Current Debts
Our current debt breaks down as:
- 43% Credit Cards
- 48% Auto Loans
- 8% School Loans
- 1% Medical Debt
The percentages next to each balance above reflects the APR on the card. The Universal Card is still locked with a decent APR after a balance transfer offer that is good until paid. The USAA and Citi cards are variable, but with the current interest rates are still tolerable. The Toyota loan was a mistake, I admit, but nevertheless a 66 month term at 7.4%. The VW loan was a little better with a 48 month term at 5.9%. The student loan has an unrealistically long term, I believe 10 years, at 5.9%. The medical debt will be paid in full after the next payment.
To maximize the impact of each payment, and in an effort to save every penny of finance charges that I can (a somewhat laughable gesture, as my aversion to finance charges did nothing to encourage me to keep the balances down in the first place), I am currently focusing all extra debt payments, after all of the minimum payments are met, on the highest interest rate, the USAA Card.
The Next Steps
Our Debt Elimination Plan starts with Responsible Spending, which can be described as spending less than we earn by seeking the best deals on the things that we need to buy and being careful not to buy everything that we want to buy. By including our Savings in our budget, and transferring that money to the savings accounts first, we can get ourselves into a better position to avoid future debt with an emergency fund and savings for planned purchases. Both Responsible Spending and Budgeted Savings will keep us from further debt while we take any excess money whenever it should appear and making lots and lots of Debt Payments.
August 24th, 2008 | Category: Debts | 
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