Making a good salary, buying a home, and starting a family has long been a description of the American dream. Unfortunately, things such as student loan debt, mortgage payments, and living expenses can make that dream a nightmare.
That’s what happened to Michael Hambrick, founder of The Ate Truths blog, when he graduated from business school at age 30 and owed $40,000 in school loans, $40,000 for a second mortgage, and $20,000 for a car payment.
The low point came just after he got married and realized his credit cards were maxed out. He couldn’t afford to order cheese dip during a dinner with his wife.
“It came down to the $6 cheese dip to make us realize that we had to make some changes,” says Hambrick. “That episode helped us begin to rein in our spending and develop a desire to become debt-free.”
Hambrick wanted to not only rid himself of the burden of $100,000 in debt but also start a family, volunteer, travel, quit his job before retirement age, and start his own business. By age 40, just 10 years later, he accomplished his goals.
5 tips for getting out of debt quickly (and pursuing your dreams)
Here’s how the determined father became debt-free, grew his family, and started his own company — as well as his advice for how you can do the same.
1. Consolidate your debt
Hambrick strongly recommends getting as much financial aid and scholarships as possible to pay for college and graduate school. But if you already have debt, you should consider consolidating your student loans.
“When I graduated, I actually had two different loans at different interest rates, and I found that I could consolidate them at a lower rate,” he says. “So I did. This not only helped save money on interest, but I only had to make one payment toward them each month instead of two, making it more efficient.”
You might be able to refinance your student loans at a lower interest rate and decrease your monthly payment. Things also won’t seem so overwhelming since you’ll only have one payment.
You can use our student loan consolidation calculator to see how much you could save and shop around for different companies to find the best rates.
2. Consider paying more than the minimum
Don’t prolong the agony of having school loans by paying only the minimum. Hambrick’s advice? Try to double the payment every month.
“You can make simple lifestyle changes,” he says. “Rather than getting a lease on the latest 6 Series BMW, buy a used car and put the difference towards your school loans. Also, put any bonuses and tax returns towards outstanding debt. This will make it come down quickly.”
If you have $25,000 in student loans at a 6.00% interest rate and make monthly payments of $280 a month, you’ll pay off the debt in 10 years. By doubling that payment, you’ll have the loan paid off more than five years early and save almost $5,000.
Use our student loan prepayment calculator to find out how fast you can pay down your debt.
3. Adopt the debt snowball method
Popularized by author and radio host Dave Ramsey, the debt snowball method is a debt-reduction strategy that focuses on putting more money toward one debt while paying the minimum on other loans (e.g., car loans or mortgages).
“I focused on paying the student loan first by paying as much as I could towards it, including any money from bonuses or tax refunds,” says Hambrick. “Once the school debt was paid off, I took all the money that was going to the school debt each month and paid off the second mortgage.”
With the snowball method, you start by listing out all your debt — school loans, car loans, credit cards, mortgages, etc. — from the smallest balance to the largest. Once you’ve done that, you target the smallest loan amount to pay off first and build momentum from getting that first loan out of the way.
The money that was going to the smallest loan is then applied to the next one and so on.
Some argue you should pay off the balance that has the highest interest rate first, which is called the debt avalanche method. This does save you some money on interest but doesn’t provide the mental boost of getting a loan off your plate.
4. Cut your expenses
You might want to live the American dream, but living beyond your means could spell a life of debt and squash your future goals.
“Not only did I have that cheese dip realization, but I also sat down and realized that in 10 years I didn’t want to work in the corporate world anymore,” says Hambrick. “So, my wife and I set out to save $2,000 per month to make it a reality. This required cutbacks and a bit of minimalism.”
Hambrick and his wife drive used cars they bought with cash, didn’t buy a bigger house despite increasing their incomes, and don’t go out to eat much.
When the time came for Hambrick to leave professional services firm EY and start his own company, he could do so because he wasn’t drowning in debt.
Do an inventory of your expenses. Where can you cut back? Can you live in a smaller home? Can you cook more? Can you skip buying your morning coffee?
Then take all that money you’re saving by reducing your costs and put it toward savings or paying off debt. This will help with your short-term and long-term financial goals.
5. Plan for future costs
Getting out of debt is a balance between making immediate changes and accounting for future costs or goals.
“When my wife and I found out we were having a baby, we took out a loan to buy a used SUV,” he says. “We knew that when the baby was born in 10 months, we would need to pay approximately $1,800 [for] day care each month. So we figured, why not start feeling the pain of the day care payment early?”
So, nine months before their son was born, Hambrick and his wife started paying $1,800 a month toward their car. By the time the day care payments started, their car was almost completely paid off and they were already used to the monthly payment.
By doing both parts of the equation, you not only reduce your immediate debt but also won’t feel as stressed when you have new living expenses.
Obviously, there are unforeseen costs, such as medical emergencies. But with this approach, you should already have a savings system as a backup.
Don’t wait for your cheese dip realization
As simple as it sounds, Hambrick believes it all comes down to spending less than you earn and saving or investing the difference. It might take some effort upfront, but once you’re in a routine, the debt will melt away.
Using these tips, Hambrick had the opportunity to create his own path and live without the stress of debt hanging over his head.
His new goal is to educate others (particularly children) on the basics of personal finance and teach them to set the foundation for a life of personal freedom, happiness, purpose, and impact.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
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|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|