Saturday, January 17, 2009

debt snowball

I've been doing a lot of soul-searching in the past year or so about finances and debt. I have talked a bit about money on the blog, but I don't usually say much except to complain about not having enough. Then I recant and say that we do have enough and I should just shut up and be grateful we're not sleeping on the sidewalk.

Here's the thing - I obsess about money. I really do. Not because I want lots of it to buy stuff, honestly, that is NOT it at all. I really don't even like shopping, I avoid malls, and grab steals online from Old Navy a few times a year to clothe my family. I obsess about money because I have come to hate debt with a raging, fiery passion.

With the latest economic news being so grim and bleak, I have just become angrier and angrier that some fat cat at the top of the heap is taking home millions of dollars while we scrape up student loan, mortgage, and car payments every month. Yes, we have enough to pay them. However, at the rate we are paying them, we will finish paying off our student loans - are you sitting down? - one year before Daughter starts college. That is disgusting!

I will go further and disclose somewhat accurate financial info for reference. Hubs and I are both paying off just over 20K in student loans each. Mine is from graduate school, his is undergrad. Mine has a better rate, so is disappearing almost twice as quickly, even though the amount paid on mine is lower than his each month. Our car was purchased new last April at 0% financing so we could avoid paying interest on a loan. It is now 1/4 paid for (yay!) but the monthly payment to achieve this is very high.

I wish I had come to my current feelings several years ago, before we had children. I wish I had shoved more money towards paying down those damned student loans. Now I literally cringe each day as I think of the interest piling up between payments. I've started throwing a little more toward the principal payment on Hubs' loan since his is at the higher rate, and it's helping a bit, but progress is glacial.

Enter...the debt snowball. Have you all heard of this? It's pretty cool. You can tailor the calculations to your own situation, put in the amount you have available to pay towards debt, and the website will calculate the amount of time it will take you to pay everything off. The basic idea is this: you pay off the highest interest loan first, then when that falls away, take that money and add it to the minimum payment on the next-highest-interest-rate loan. You carry on like this, paying the same amount of money each month no matter what, until your debts are all gone.

In my case, we would pay only the minimum payments on the car and my loan, but put any extra we can towards Hubs' loan. Once the car is paid off in two more years or so, we have to take the amount of the car payment and add it to Hubs' loan payment. Make sense? Ostensibly, this should be no problem because we will be used to paying that amount each month anyway. Then, once his loan finally goes away, in just a few short months mine will be gone also, because the car payment and his loan payment will become a part of MY loan payment.

If we do it right, and stick with the current amounts we are paying, we will pay all three debts off in 65 months. That's 5 years and 5 months! Sounds a lot better than almost 15 more years. It's still depressing when I think I will be 38 years old at that point, and 12 years away from having received my master's degree (which got me into stupid debt in the first place). But Daughter will only be 9, AJ only 5, and we can start to have a better life for all of us at that point, with less scrimping and saving and denying ourselves experiences and things.

I used to think the only kind of "bad" debt was credit card debt. I've never had any, even though I've been using credit cards since I was 18 and went away to college. I've paid my monthly balance in full without fail for 15 years. I thought that made me so awesome. I thought that made me so debt free! I would look down my nose at all those poor suckers who run up huge credit card balances and then can't get out of trouble. Not me! I'm so great, I only have one card and I pay it off! Look at me! SO AWESOME!

But it's not true. I mean, yes, it is good to pay off the credit card every month and I will continue to do so. But I've come to a place in my life where I believe the only acceptable debt is a mortgage payment. It's a rare family that can pay for a house in cash, so I don't feel bad about having a mortgage. But I do feel horribly, terribly bad about paying hundreds of dollars each year in interest on those effing student loans. Thus the dumb ads on the blog. And the etsy shop. And the reselling of diapering accessories. And hopefully a successful yard sale this spring with my mom. Every extra penny I find goes toward knocking down that principal so "the man" can't have any more of our money. Hubs goes to work every day and deals with so much B.S. and for what? We don't have a fancy house or fun vacations. Our children don't have college funds started. There just isn't any extra right now. And that sucks!

I am aiming to dig out from under this debt heap within those 65 months. And when I can find a little more here or there, I will send it off to reduce that time period. My dream is to get it to 48 months, but I'd have to find around $400 extra each month for that. Don't think I can sell that much on etsy just now!

So if you are in debt, no matter what kind, check out that debt snowball site. I'm curious what people feel about their debt. Do you have any? None? If you climbed out, how did you do it? And please, keep the comments kind. I'm not saying anyone is better than anyone else for having or not having debt. Just sharing my thoughts and perspectives, that's all. Please feel free to share yours!


Mrs Lemon said...

I do hope you deduct your student loan interest on your taxes :)

Rebekah said...

My husband and I have been working through the debt snowball too. It's so nice to be able to make large payments and knock another payment off the list. Good luck with your goals!

Lucia said...

We are extremely fortunate to have no installment-loan or credit-card debt. This is due partly to our general mindset (we don't like being in debt), but mostly to an incredible amount of luck. Here are some ways we are lucky:
1) Our families could afford to, and did, put us through college. I had one small student loan which I paid off in the year after I graduated using money I earned at my first job.
2) I lived with my folks in the year between graduating from college and getting married, so my expenses were very low, so I could easily pay off that loan.
3) My husband and I both have talents and skills that command good salaries in the software business, which didn't even exist when we were born. Had we been born 30 years earlier, we probably wouldn't have done nearly so well. Recall also that good jobs for women were hard to come by until fairly recently.
4) My husband has never been out of work.

There are lots of other accidents of birth involved with #1 and #3: we were born in the US, for instance, at a time when family planning is both possible and socially acceptable.

Most of the stories I see about debt and people who are drowning in it concentrate only on the consumer: people shouldn't take on more debt than they can afford, they get taken to the cleaners when they don't read the fine print, we've forgotten how to do without, etc., o tempora, o mores. There is no longer a stigma attached to bankruptcy.

Rarely have I seen a news story pointing out that there's no longer a stigma attached to rapacity, either. It used to be that credit grantors wouldn't let you get in over your head; now it seems to be the cornerstone of their business model. Get people in too deep to climb out during their natural lifetime, but not so deep that they'll throw in the towel, and make that a lot harder by changing bankruptcy law.

To say nothing of union-busting and deregulation and all the other incremental changes that have accelerated the standard rich-get-richer-poor-get-poorer game.

(breathes deeply) I got a little carried away there. I love that snowball site, and it sounds like you have a plan and a goal, which is a great place to start. Please keep us informed: I love stories of progress and happy endings.

HangerMom said...

Ever since I took Dave Ramsey's class a year ago, I've given a lot more thought the Debt Snowball concept. Our story is pretty similar to yours - thinking we're perfect because we have no credit card debt, but not counting the student loans and car payments as REAL debt. I love ND and all, but Nathaniel and I both have student loans hanging over us from those good old days of college, and we have years still to go for all that I pay a little above the minimum payment every month. I liked reading your post, it made me want to take a closer look at what a huge difference it would make if I paid even just a little bit MORE extra each month. Because the difference really can be huge. But first I suppose I should double check whether the interest is higher on my student loans or the new car we had to buy when our family size doubled overnight a couple years ago.

My info is none to useful here. Just mostly commiserating. Good luck to you in paying it all off and living debt free!