I owe almost $30,000 in debt.
That number terrified me the first time I saw it. I don’t even make $30,000 per year; how can I possibly pay off that kind of debt? In my past, as a money-stupid Canadian, I would have shrugged my shoulders, grabbed a bottle of wine, and said “Meh, taking ten years to pay off debt is no big deal, lots of people live like that”. That, my friends, is the definition of money-stupid.
I like to think I’ve grown as a person since I held that particular attitude. My response this time around was to grab a bottle of (cheap) wine and a calculator. This time I said “It’s possible to pay off $30,000 in less than three years — lots of people have done it”.
The first step is admitting the problem. I needed to concisely know what I owe, to whom, and the cost of each. I came up with the following:
|Debt||Principal||Interest Rate||Minimum Payment|
|Future Shop Credit Card||$520||29.99%||$20|
The minimum payments are $585 per month alone! And let’s not forget that, by making the the minimum payments, I’d be in debt for a full 10 years (and that’s assuming I don’t amass any more within that time). This is totally unacceptable. The credit cards ALONE would take five years to pay off at their current interest rates.
(Editor Joe’s Note: I did a quick calculation; Sara spends roughly $200 a month on interest. By eliminating all four of her non-student loan debts – which are less than 20% of her total debt, a very manageable $5,300 – Sara will cut her interest expenses by almost 45%. At that point, the remaining $110-ish a month in interest payments will, at least, be tax deductible because they’re payments on her student loan. Go Sara!)
If you want to find out how long it will take to pay off your debt, there are many great debt calculators out there on the web. I used this one.
Last week’s post received many comments with awesome advice. In that advice, I think there were a few key principles related to debt:
- Recognize the problem, commit to its resolution, and stop going into debt
- Reduce interest rates as much as possible
- Pay the highest interest debt first
- Destroy debt as fast as possible
I’ve created a plan of attack based on this sensible advice.
Obviously the debts with the highest interest rates that I listed above are the most critical. Unless there’s a guy out there with a baseball bat coming for your kneecaps, your priority should always be to blow as little money as possible on interest. So goal number one is to lower the rates on my MasterCard, Visa, and most especially my Future Shop card. I’ve got some homework (I actually started on the weekend but we’ll save the results for next week). Keep in mind, if I’m successful, it will change this post’s math (in a good way).
I need to pick a number for debt repayment in my budget. Obviously, it needs to be higher than the total of my minimum payments, $585. Based on my current income (and I’ve started trying to increase this figure), I’m choosing $875.
I put all of my debts in order from highest interest to lowest. In my case this list is:
- Future Shop
- Car loan
- Student debt
I’ll make the minimum payments for debts # 2 to 5 (equaling $565), and put the balance of my debt repayment amount ($875 – $565 = $310) on the Future Shop card. Once this card is paid off, I’ll take that $310 and add it to the $50 I’m currently paying to Visa, and make $360 the new monthly payment for that bill. This process will repeat until I am down to paying $875 a month on just my one, final, debt.
This plan is fluid. My topic for next week will be lowering credit card interest rates, and how that will affect my long term goals. When the rates change, the payment priority may as well.
I hope everyone likes my plan to attack my nearly $30,000 in debt. As always, I appreciate feedback, so if anyone has any tips or tricks they want to share, please do!
(Editor Joe’s Note: my advice is to get your three credit cards consolidated as soon as possible onto a “teaser rate” credit card deal. Since you don’t have a ton of principal on those cards, the 1% or 2% interest rate after fees will make repayment of these debts much easier. Also, I’d look into the repayment terms on your car loan. Can you prepay, or are you locked in? If you can prepay without incurring disastrous fees, I’d also try to consolidate this $2000 debt, at 14%, into a cheaper teaser rate. Finally, I’m not sure which of the three credit cards is your oldest – Visa, MasterCard, or Future Shop – but keep the oldest card after you’ve paid it off, assuming it won’t tempt you to go back into debt. The average age of accounts is part of your credit score. Older is better. Normally credit scores are irrelevant, but over the next couple years you will need to access cheaper forms of credit to help in your debt journey so optimizing your score is potentially valuable.)