This post will be the first of a four-part series that will chronicle the attempts of the Everhart family to crush a few different types of debt.
The Purpose
I decided to write this blog post for a number of reasons; first, in an effort to hold us accountable for this goal, I thought it might be helpful to broadcast our intentions publicly so we don’t lose steam and chicken out. Second, with the dust of the financial crisis now settling, and the mountains of student loan debt shouldered by us and our peers, it is clear that many Americans are saddled with different types of debts that stand to cripple us if left unchecked. I’m hoping that people can learn from our experiment and take what works (and what doesn’t work) and apply it to their own situations.
The Context
Before we start, I want to share with you all the different types and amounts of debt we are trying to slay.
All of these figures are accurate as of 01/2014.
Car Loan: $3,300 at 5.09%
30 yr Mortgage: $143,000 at 3.875%
Private Student Loan: $8,674 at 4.75%
Private Student Loan: $11,574 at 7.15%
Federal Student Loans: $37,000 at varying rates (3.5-6.8%)
Grand Total: $203,548…..and growing every day (ahhhhhh!!!)
The Plan
After looking at these figures, we sat down and started to prioritize our different sources of debt. We realized that the vast amount of this grand total was the mortgage on our house, so we breathed a sigh of relief. For most people, housing expenses are a sunk cost, something that they would have to pay no matter their situation. For some renters, this monthly figure would be calculated into an expense column, but since we are actually indebted this amount to the bank, I decided to include it here. However, we identified the mortgage as our lowest priority and resigned to pay the minimum monthly payment for the time being.
30 yr Mortgage: $143,000 at 3.875%
Prioritizing the other debts was not as simple. The federal student loans are comprised of at least a dozen loans for varying amounts with different interest rates, some subsidized, others unsubsidised. With the possibility of either Courtney or I being enrolled at least part-time as a student again in the next 10 years being high, those factors also weighed into our decisions about what to pay off an when.
There are two main strategies to tackle debt elimination.
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You could focus any additional monthly payments on the debt with the highest interest rate. Using this method, you would pay less money over the life of the loan. In my case, that would involve targeting the 11K private loan with 7.15%. This loan is still in grace until May, so I’m not actually paying anything on it yet. Using this logic, it would be a good idea according to the one popular debt elimination theory. Try using a debt calculator to see how adding additional monthly payments to a loan can lower your payments over the life of the loan.
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You could target the smallest amounts of debt with additional monthly payments, which would free up additional capital. By targeting the smallest debt amounts, you lower the total monthly payments faster. You could then redirect this newly freed money into other loans. For example, paying off the car early, which is scheduled for November 2014 anyway, would free up an extra $309 a month. I’m in favor of this idea, especially if we are trying to maximize the amount of debt that will be payed off in 2014. Some financial personalities like Dave Ramsey recommend this method, or a variation of it.
For Q1, we decided to take the second approach with an eye on implementing the first approach in Q3. So, for now the plan is to focus additional payments on the car and the smallest federal student loans.
The Tactics
We all wish that we had more discretionary income to allocate toward debt, but that is unlikely to happen without either reducing expenses or producing more income. Often times, both are necessary to fully achieve debt elimination. Below, we will examine some of the tactics we are going to use to boost our monthly payments.
Reducing Transportation Costs
Late in December 2013, my trusty station wagon died in the driveway. Instead of replacing it and taking on another car payment or shelling out cash to buy something outright, we decided to go down to one car. We live in a small college town where this is feasible, with the possibility of buying a bicycle or a small scooter when it warms up.
After doing some careful calculations, we realized how big of a cost savings this would be. Just calculating the cost of gas, insurance and a parking pass, we realized that we could save over $ 200 a month by doing this, not mention the savings on maintenance and possible loan payments that would come from owning a second car.
Already, we are beginning to realize what a challenge this will be, but it seems manageable with some careful scheduling and communication. For many of you, eliminating a vehicle may not be feasible, but you can always look for other ways to reduce your transportation costs. Explore the options of car pooling or working some hours remotely.
Producing Extra Income from a Hobby
Turning a hobby into an income producing pastime can be very rewarding. For the past several years, I have taught music lessons (mostly guitar) at a local music shop. It has never been my primary focus, but it a fun a rewarding way to make a few extra dollars a month. Before the YoDD, I would just lump this income into the rest of our discretionary spending, but now I will apply this solely to debt elimination.
There are also some tax benefits to having an income producing activity if your itemize your deductions, but that may not be the best decision for most.
The Results
Really, the results are TBD at this point. I think we have a good plan in place, and hopefully we follow through. I urge you all to make this your YoDD! Share your ideas on how to save more, earn more and eliminate debt here. We will keep you updated in Q2!