I saw some people passionately advocating both for and against a new method of paying off debt: The “Debt Tsumani,” which focuses on paying off debt in the order of its emotional impact on you.
As someone who paid off more than $150,000 worth of debt over the course of about four years in the last decade, maybe what I have to say about that matters to you.
I did it a different way. I paid off my car, then I got married, then we paid off my wife’s car, then we went to work on the mortgage. We had a few hiccups along the way, including job losses and having to replace an air conditioner, furnace, dishwasher, and range, but even with the hiccups, we got it done around five years after we decided to get started. We just paid the debts off in descending order: Cars first, because they were smaller, then the appliances because they came along afterward, then the mother of all debts–the mortgage.
It worked because we stuck with it. That’s all.
I agonized over whether it made more sense to pay them off by interest rate or some other means, but the math didn’t matter all that much. The difference between the best and worst order was less than a year, which, considering a mortgage is 15, 20 or 30 years, isn’t much in the grand scheme of things. We didn’t lose momentum because while I was agonizing, at least we kept doing what we were doing. And if you stick with it, as you get raises and windfalls, by applying those to the debt, you can make up that year anyway.
A better plan is of no use if you don’t stick with it.
Regardless of the order you use, the end game is the same. You pick a debt, pay extra toward it (try for 10% of your income, but even $10 helps if that’s all you can do), then the month after you retire that debt, you take what you’d been paying on that toward the next one. In the meantime, you keep making the minimum payments on all your other debts.
So let’s say you have two $400 car payments and a $1,000 mortgage. You pay $410 toward the first car ($400 plus some extra), $400 toward the second car, and $1,000 toward the mortgage. Then, once the first car is paid off, you pay $810 toward the second car and $1,000 toward the mortgage. When the second car is paid off, you pay $1,810 toward the mortgage.
In principle, I have no problem with setting priority by emotion. If I owed money to a family member, I think I’d rather pay that off first, regardless of the amount or the interest rate involved.
What I don’t like about the plan is that there may be too much flexibility in it, and “emotional baggage” is awfully subjective. Which car payment really bothered us more? And can a couple agree on it? I would argue that if there’s emotional baggage attached to a car payment, the family probably has other problems.
That said, if you owe money to someone you’d rather not owe money to, for whatever reason, it wouldn’t be a bad plan to do this, then switch to another method afterward.
So, if you’re wondering, how’d we pay all that debt off in four years?
Well, to be perfectly honest, I’d been making extra payments on stuff beforehand anyway. When I moved into this house, I was in the habit of paying the utility bills first, then either the car or the mortgage, and if there was going to be money left over after paying the last one, paying some extra on it. Some months it was $20, and on a good month it was $150. But I didn’t have a specific goal in mind, just the idea of being able to pay something off a little early.
So in 2004 when we decided to go for it, I’d already been building momentum for two years. It’s just that in late 2004, $150 became my minimum, and having seen the numbers work, I had the motivation to go for more than $150 if I possibly could. So, when I got some extra hours at work, or some side work, or a bonus, we applied at least some of it to whatever debt we were working on at the time. When I lost my job in 2005, I became doubly motivated, because I didn’t want losing a job to ever again mean I might be in danger of losing the house we lived in. So in 2005 when I got a raise, I applied most of that toward the debt we were paying. And in 2006 when I got a raise, we did the same thing. My raises in 2007 and 2008 were much more incremental, but by then we were getting close anyway.
When I was up at 7am every single Saturday working for some extra scratch, I reminded myself that I was buying my family’s freedom from debt, and that kept me going.
It was worth it. Managers know when you need them more than they need you. That day in 2008 I walked in to work and said, “Guess what we did last night? We went to the bank and paid off our mortgage!” things changed. The worst work didn’t automatically go to me–the least-senior guy in the shop–anymore. Same boss, different attitude. I never said missing a couple of paychecks wouldn’t ruin me. My boss just assumed it.
Don’t get me wrong. I’ve had some monster assignments since then, but there’s been a monster raise attached to it as well.