If you’re joining me (and my family) for our journey towards debt freedom in 2014, here’s our update:
It’s pretty depressing, actually. Our total debt has actually gone up slightly, rather than going down. Here are the reasons:
New Credit Card Charges: I had to make a couple of essential business purchases on a credit card, and the interest compounded from last month added even more. We’ll be tackling this debt soon, though. More on that in a minute!
Lower-than-Low Student Loan Payments: Because of our financial struggles, we’ve been paying very low student loan payments for a while now. On a couple of our loans, the payments are actually less than the interest owed for the month. So we end up owing more rather than less each month.
This is obviously not ideal, but it’s helped us sort through our financial issues in the past few months. As soon as we’re a bit more stable, we’ll be bumping up student loan payments so that we’re actually gaining traction.
The Car: We’re still working on selling the car, and have it listed on AutoTrader and Craigslist. Still no bites, though. We’re going to start socking away cash to pay down the car so that we’re no longer underwater on it. And then we’ll get rid of it through a dealer if we need to.
The Credit Cards: As soon as the car is taken care of, credit cards are next on our list of things to tackle. With super-high interest rates, we’re not getting anywhere with these cards’ minimum payments. So we’ll be using the money we would have put towards car payments (and then some!) to pay down our credit cards – highest interest cards first.
The Caveat: One problem we’re currently having with snowballing our debt is that we’re still mid-renovation on our new home. We’re pushing to get into the home by the end of this month because that will save us $450/month in rent, plus the double utilities payments we’re currently making. (Even though we aren’t living in the new home, we still have to keep it minimally heated and use plenty of electricity when we’re working on it!)
Obviously, being able to move into a mortgage-payment-free property will be huge for our debt snowball. But we’re also having to split extra funds, for now, between finishing the house and paying off debt. So we may be paying down debt more slowly during the first few months of 2014, only to accelerate our payments later in the year once the house is finished.
Our Out-of-Order Debt Snowball
Let’s talk about our debt snowball for a minute.
There are a couple of different ways to set up a debt snowball. One, popularized by Dave Ramsey, is to pay off debt in order of smallest balance to largest balance. The idea behind this method is that paying off a small debt first will give you motivation to keep going.
Another option, the debt avalanche, has you pay off debt in order of highest interest rate to lowest interest rate. This is the most mathematically correct way to pay off debt, since it can save you a ton of money in interest over the long term.
But, in accord with my quirky nature, our debt snowball doesn’t look exactly like either of these. Here’s how I envision that it will work:
- First, we’ll pay off the car. Really, we’re just selling it (and paying some money to get out of it). This is first for us because getting rid of our $480/month car payment will really help us start off our snowball!
- Next, we’ll work on the credit cards. This is more in line with the debt avalanche method. Because we have very high interest cards, they’re next in line for being paid off. Also, we want to pay off our cards quickly to get our credit score up. This time next year, we’ll be applying for a home equity loan in order to finish our home renovations. Higher scores mean better rates on a loan.
- Then, we’ll tackle the remaining debt in order of smallest to largest balance. Once our credit cards are taken care of, we don’t have any high-interest debt left over. And, I have to be honest, I think that the satisfaction of paying off small debts quickly will do a lot for us psychologically. So we’ll start by paying off smaller student loans, and work our way up from there.
- Eventually, we’ll take a home equity loan. I know, I know. This is not the right solution for everyone. But most people also don’t owe $0 on the home they own, either. Our situation is unique, to say the least. We owe nothing on the home we just “bought”, which is probably worth $40,000-$50,000. Next year, we’ll likely take out a home equity loan for no more than 70% of our equity to consolidate our remaining debt and finish our renovations.
This is certainly not the debt payoff method I’d recommend for everyone. (Especially if you haven’t been blessed with 100% equity on your home!) But I think this will work really well for us.
I know the updates don’t seem major this month. Our debt actually went up, after all. But we are taking steps to sell the car within a couple of weeks, which will seriously get the ball rolling.
Here’s to sticking with New Year’s Resolutions in 2014!