A recent report by the Federal Reserve Bank of New York revealed household debt has hit a new high. Collectively, Americans owe $12.84 trillion in student loans, credit cards, mortgages, and auto loans.
Although increasing household debt can be a good sign for the economy, it’s not so great if you’re the one in the red. Deacon and Kim Hayes learned this lesson the hard way after realizing they owed $52,000.
Not wanting their debt to take over their lives, the couple made strategic moves to pay it all off in 18 months. Now, Deacon and Kim share their personal finance tips on their blog, Well Kept Wallet.
Here are the changes they made and the methods they used to kick their debt for good.
They had more money going out than coming in
It took Deacon and Kim a few years to realize they were spending more than their combined income of $70,000.
“We accrued debt … from our everyday decision-making process,” says Deacon. “We wanted to go on a honeymoon, so we put it on a credit card to get the points. I needed a reliable car, so I thought buying a new car was the way to go.”
It wasn’t until they took a hard look at their finances that they saw the error of their ways. “[Our debt] included $27,000 in student loans, an $18,000 car loan, and $7,000 in credit card debt,” says Deacon. “In hindsight, our decision-making process was flawed and it is what got us in the mess to begin with.”
For the couple, marriage was a financial turning point. “Getting married was what prompted me to change the way I handled money,” says Deacon. “My wife and I combined our finances and saw that we had too much debt for being so young.”
Not only did they have high monthly payments, but their debt stood in the way of their long-term goals. “I knew we needed to develop a plan to pay it off so that we could do the things we wanted to do in life, like travel and start a family,” he adds.
Once this realization struck, they made a plan to pay off their debt as fast as possible.
The couple used the debt snowball method
First, Deacon and Kim took a close look at all their debt. They figured out how much they owed and to whom. Then, they got to work paying down their loans with the debt snowball method.
“We used the debt snowball method and found that was very effective,” says Deacon. “This helped us focus on one debt at a time, paying off our smallest debt first and working our way toward paying off the largest debt.”
The snowball method involves paying off your debts from smallest to largest. If you owe $5,000 in student loans and $10,000 in personal loans, for example, you continue to make minimum payments on both, but put any extra money in your budget toward the student loans.
Since you’re paying off your smaller debts in full, you can see more immediate results — which hopefully motivates you to keep aggressively paying down debt. But even though the debt snowball method can give you a psychological boost, it might not save you as much money as the avalanche method.
Instead of focusing on the smallest debt first, the avalanche method focuses on the debt with the highest interest. If your $10,000 personal loan has a higher interest rate than your student loans, you will put extra money towards the personal loan first. That way, you reduce the amount you pay in interest overall.
Both the snowball and avalanche methods can be useful, depending on which resonates with you more. The important thing is that you make a plan to pay off your debt — and stick to it.
They cut spending and increased their income
To find extra money they could put toward their debt, Deacon and Kim made some major lifestyle changes. First, they drastically cut their spending.
They stopped eating out, got rid of their gym memberships, and cut off their cable subscription. Plus, they didn’t pay for anything with credit, preferring to make purchases with the cash they had on hand.
“We would have monthly meetings to go over our finances and we learned to adjust the budget when necessary,” says Deacon. “This helped my wife and I to become more aligned not only with our finances but in our relationship in general.”
As they cut their spending, they also sold a bunch of their possessions on Craigslist and eBay. They even sold the brand new Nissan Altima they’d owned for just a year. Plus, Deacon would scour garage sales for more items he could sell online.
“I would do garage sale arbitrage,” says Deacon. “This is where I would go to a garage sale and buy items like a router for $5 and then resell it online for $50.” Any profits he made would go straight toward paying down their debt.
Finally, Deacon picked up a second job delivering pizzas on nights and weekends. They knew to pay off their debt they needed to decrease their spending and increase their income, so the couple took steps to accomplish both.
Now Deacon and Kim have more control and less stress
After 18 months of careful saving, spending, and selling things online, Deacon and Kim had completely paid off the $52,000 they owed. By taking control of their finances, they feel like their goals are once again in reach.
“Now that we paid off our debt, we have more control over what we can do and have a lot less stress,” says Deacon. “We have been able to travel to cool places like Singapore, Hong Kong, Paris, and London.”
Besides traveling, Deacon and Kim now have enough discretionary income to donate to charities. “We have been able to give more to worthy causes, which is something else that brings us a lot of joy,” he adds.
That said, Deacon and Kim aren’t completely debt-free. As homeowners, they are still paying off a mortgage each month. But they’re just as proactive about paying their mortgage as they were about their other loans.
“Our latest goal is to pay off our house in the next four years,” Deacon says. “Then we will be completely debt-free in our 30s and experience the true freedom that being debt-free brings.”
Create a plan to pay off your debt early
When you’ve got a massive amount of debt, it’s easy to feel like you’re drowning. But it’s never too late to take control of your finances. And the sooner you pay off your debt, the less money you’ll waste on interest.
“If you are saddled with debt, you need to create a plan to pay it off early,” advises Deacon. “The best way to do this is to set a deadline and then work backwards.”
Deacon suggests that you figure out exactly how much you need to pay off your debt within a specific time frame. A prepayment calculator can help with the math — enter your loan amount, interest rate, and how quickly you want to pay it off; the calculator can tell you what your monthly payment should be and how much money you could save by paying your debts off early.
“Figure out how to decrease your expenses by a few hundred dollars and figure out ways to bring in extra income,” says Deacon. “Work overtime, get a second job, or get some sort of side hustle to bridge the financial gap.”
Find the debt payoff method that works for you
Not everyone can crush through huge amounts of debt in a short time frame, but we’re all capable of reducing our spending and increasing our income.
By creating a budget, you’ll gain control over your monthly cash flow. And if you can take on a part-time job or start a side hustle, you’ll gain an additional income stream.
The best approach is whichever one will keep you motivated toward your goal. Come up with a plan that suits your strengths, and you’ll be that much closer to financial freedom.
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|Lender||APR Range||Loan Amount|
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2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.95% to 35.89%*. The origination fee ranges from 1% to 6% of the original principal balance and is deducted from your loan proceeds. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at the time of application. The average origination fee is 5.49% as of Q1 2017. In Georgia, the minimum loan amount is $3,025. In Massachusetts, the minimum loan amount is $6,025 if your APR is greater than 12%. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months. Borrower must be a U.S. citizen, permanent resident or be in the United States on a valid long term visa and at least 18 years old. Valid bank account and Social Security number are required. Equal Housing Lender. All loans are subject to credit approval. LendingClub’s physical address is: LendingClub, 71 Stevenson Street, Suite 1000, San Francisco, CA 94105.
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