Unfinished thoughts from yesterday

I talked yesterday about what I did about my debt and why I have the attitude I have, but I didn’t talk about how to get started.

The best thing to do is punch some numbers into a debt repayment calculator such as http://www.calcxml.com/do/det07, run some scenarios, and see for yourself just what it will take to retire that debt. I like that calculator because it gives you summaries on each debt, including an estimated repayment date AND just how much of what you’re paying each month is going toward interest.

You can even see what the difference will be between ordering the debt payoff based on balance or interest rate, which is a frequent argument.

You can also play with numbers to see how little you can kick in per month and still make a difference, or what would happen if you dumped your entire salary into it. That latter scenario is unrealistic but could be eye-opening.

If that link goes dead, just do a Google search for “accelerated debt payoff calculator.” You’ll find something.

I frequently hear people say that they plan to get started on a specific date. I understand the need to plan and the need to give yourself time to knuckle down, and maybe some time to read some books and get some opinions, but the best thing you can do is send in a little extra on the very next bill that comes in. If, say, getting out of debt is your new year’s resolution for 2011, that’s great. Let January 2011 be the time you put a plan in action and stick to it. But that leaves November and December 2010 to take a couple of baby steps, and there’s really no reason not to do that.

I didn’t jump into this with any great plan. A couple of different people, including my sister, told me when I bought my house that it was a good idea to pay $100 extra on the mortgage every month, so I made a habit of doing that. Then sometime in 2004 or so, my church brought in a financial guru to speak, and implementing his plan really helped. The circumstances of 2005 gave me the determination to really knuckle down, cut some expensive habits, and get it done faster. But that extra $100 sent in aimlessly every month for a couple of years certainly didn’t hurt anything.

Most popular financial gurus say to try to use 10% of your income for debt repayment, but smaller amounts help too if you can’t manage that at first. You can use the financial calculator to see. In my case, when I was starting out, $10 extra per month was all it would take to pay off all the debt a month early. Pumping that up to $100 knocks off years.

It also means that it’s worth sending in $110 instead of $100 if you’re thinking about skipping a couple of trips to Starbucks every month.

So there’s not much to think about or plan. You can do a whole lot worse than just figuring out what you could spare this month, sending it in, planning to do the same thing next month, and using the time between now and then to cut expenses in order to free up more.

I recommend accelerated payoffs over refinancing. The problem with refinancing is the closing costs. You may knock down your monthly payment, but you rarely knock the interest down enough to recover those closing costs. Use the financial calculator above to look at what making a one-time payment of $3,000-$4,000 instead does to your payoff outlook.

Paying it all off isn’t the end of the journey. My accountant has seen people pay off their mortgage, then buy a new car to celebrate. So they’re right back in debt, only this time, it’s on something guaranteed to only decrease in value over time.

The real key is to retain the financial discipline to pay cash for things. Want a new TV to celebrate? Buy it when you have the cash. Want a new car? It may very well take a year to pile up the cash to do that, but then at least you aren’t paying a ton of interest, which usually works out to $4,000-$5,000 depending on the car.

Is it hard? Yes. I’ve had a couple of months where I had less than $100 left in the bank account after paying the bills. That’s what happens when you aren’t vigilant. And it’s a lot easier to not be vigilant.

And, in closing, there will be months where you fall. I ran out of money one month this year and had to carry a credit card balance for the first time in years. During 2005 when I was out of work, I just made the minimum payment on everything since I didn’t know how long my savings would last or how long I would be out of work. In both cases, the solution was to get right back on the plan as soon as the next paycheck came in.

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