Let’s Talk About Debt

By Melissa

Oh debt, how we loathe you. I’ve already discussed how we found ourselves in a HEAP of student loan debt several years ago. We had my student loan, Philip’s student loans (they were broken down into TEN different sub-loans, varying in amounts between $6,500 and $60,000ish), a mortgage on the condo that we were completely upside-down on, and then our shiny and new mortgage on our new home. It was A LOT.

So what did we do? We Dave Ramsey-ed the shiz out of them.

Debt Payoff Methods

If you are unfamiliar with Dave Ramsey, he recommends a “snowball” method while paying off debt. It means that you list all of your debts, smallest to biggest, and pay them off in that order. He says that the accomplishment that you feel as you pay off the first, smallest one, helps propel you and give you the momentum to roll that same payment into the next biggest one. Again and again and again, until they are all gone! And let me tell you, it works. Or at least, it worked for us. But I’m not convinced that it is the best choice for everyone.

The other popular way to tackle debt is the “avalanche” method, which is to list your debts from the highest to lowest interest rates, regardless of balance, and pay off the ones with the highest interest rate first, down to the lowest. Also can be very effective.

What Do We Recommend?

We like a mishmash of both. We used the snowball method simply because all of our interest rates were between 6.8-8.5%. Which isn’t a small amount, but for us it didn’t make enough difference to start with, for example, a $60,000 loan with a higher 8.5% interest rate instead of focusing on one that had an $6,500 balance but had 6.8% interest. Make sense? So we paid ours off based on the balance of each one, rather than the interest rate.

But enough about us, how should you tackle it?

When I did a poll on our Instagram stories, I asked what kind of debt people were working to pay off. I gave the option of credit cards, car payments, student loans and home mortgage. I know that doesn’t cover everything, but I thought it was a good jumping off point. The results of the poll were incredibly mixed. Some people only had a mortgage, which is AMAZING! Others had a couple of the options, and I got direct messages from a few different people who said, “Is there an E for all of the above???” I get it! Life happens and sometimes we find ourselves in less than an ideal financial situation. Now let’s make a plan to start tackling it!

The Mishmash Approach

First up, WRITE EVERYTHING DOWN! List every credit card, car loan, overdue bill from your dentist, mortgage, home equity line of credit, money you borrowed from family, student loans, ALLLLLL OFFFFFF ITTTTTTT.

Along with just listing all of these loans, also put the total balance, the interest rate, and the minimum payment. You want to be able to have as much information going into this as possible!

Now, where to start? I think that if there is a loan that has a small balance, one that you could pay off within a month or two, just get rid of it! Perhaps your family member isn’t charging you interest on the $400 you owe them, but gosh, it will feel so much better to just have that off your conscience! And then going back to the Dave Ramsey approach, the mental clarity and accomplishment that the first small win will provide will help propel you to the next thing! You have no idea how exhilarating it was to be able to erase an entire line on our white board to get rid of a whole loan! It is great. So I say start there.

Next up, look at interest rates and balances. If you have a car loan and a credit card that have similar balances, pay off the credit card first. Credit card interest will EAT YOU ALIVE otherwise! It is alarming to see how small of a dent a minimum payment on a credit card actually makes! You’ve got to start paying extra towards those cards, and fast! Focus on one card at a time, and put every last dime you have towards it! When it is paid off, take every last bit that you were putting towards it and roll that into the next card.

No Debt Payoff is Bad Debt Payoff

We recently had a friend reach out to Philip asking for advice on debt payoff. This friend was going to be coming into a few thousand dollars after doing some temporary work this summer, and was wondering if he should pay off the small balance on a car, or put it towards a higher balance he had on a credit card. The friend also said that he was hoping to have them BOTH paid off in the next 4-6 months, but just wondered if it would make a difference what he did RIGHT NOW. Philip did some quick back of the envelope math and found that with a credit card interest rate of close to 20%, our friend could save almost $1000 by paying off a big chunk right now. Even though the pay off period for both was just a few months away!

This was interesting to me, because I love the idea of paying something off completely, so I probably would have used a gut reaction to say just pay off the car. But when Philip actually crunched the numbers, it made way more sense to put it towards the credit card! But honestly, this just goes to show that progress is progress! So while there isn’t necessarily a concrete “right” answer, if you are paying off debt, you are doing the right thing.

Paying Off a Mortgage

This is a huge debate in the Financial Independence community! Pay extra towards the mortgage or put extra in investments? And this is why personal finance is PERSONAL. What makes sense to one family might not make sense to another.

We have always been in the camp of just rounding up. Back when we lived in our condo and our mortgage payment was like $550 a month, we would round up to $600. And then after we paid off student loans, had income from renting the condo and had a few less financial obligations, we would round up to $1000. We didn’t throw every penny at it to pay it off aggressively, but felt like we were making more of a dent than our normal payment would.

Since then we have sold that condo, so the only debt we have is our current home. We have stuck with the rounding up plan, and each month have paid a little over $200 extra towards principal. It isn’t a ton, but when I enter those numbers into the Payoff Calculator on our mortgage website, that little step will shave more than 5 years off the end of our mortgage and save us over $30,000 in interest! Not too shabby!

What if We Didn’t Have a Mortgage?

But…those were precedented times. Nowadays, we live in unprecedented times. During the initial stages of the pandemic when there was a lot of uncertainty, Philip said to me, “But what if we didn’t have a mortgage payment? How nice would that be?” And we haven’t been able to get that thought out of our heads.

Add to that, the story that is told by Talaat and Tai McNeely of His and Her Money. They paid off their mortgage in FIVE YEARS! And on the day that they were making their last mortgage payment, they told their kids it was a special day, dressed them up in their nicest dress clothes, took them down to the bank with them to pay off their mortgage. I love that they involved their kids, what an amazing life lesson that is for them! Needless to say, we’ve been inspired by them.

Our New Mortgage Plan

So after playing with some numbers, we have decided to increase our mortgage payment by $500 each month, putting our extra principal payment just north of $700. If we can do that, it will take TWELVE YEARS off our mortgage! We will have it paid off in roughly 15 years! Not only that, but it will save us almost $75,000 in interest! The numbers have blown us away, and motivated us to make this goal a reality. Will we throw all of our extra pennies at it to pay it down ASAP? No. We still need to invest in our index funds, save for emergencies, buy soooooooo many diapers, buy a car or two and fund a large kitchen renovation in the next handful of years. So instead of being all in the “Pay off your mortgage” or “invest” camps, we have a foot in each. (We also have an extra foot in the “live our lives and have fun camp” which is important.) And we are okay with that because our finances are personal to our goals in life.

What do you think you’d do if you just had a mortgage? Pay it off as fast as possible? Or ride it out for 30ish years? Maybe straddle the line between the two, like us?

The Takeaway

Regardless of if you have every kind of debt under the sun or just have a few years left on your mortgage, it is abundantly clear to every financial expert that your debt is a liability. It counts against your positive progress in your personal net worth. In general, you will be able to accumulate more wealth if you have less debt.

So let’s keep working on it! If you have questions, feel free to let us know! We have loved helping friends and family members who have reached out with questions about their individual situations and have worked hard at making their goals feel achievable! Let’s all pay off our debts together!

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