Let’s face it, it won’t be easy to BREAK FREE to pursue what you love until you pay off your debt. Have you ever had the feeling that you’re working just to pay off your debt? I sure did, and this is my story of how I paid off $50,000 of debt in two years.
Debt usually starts pretty innocently – maybe a new furniture set for your apartment or house. It might continue with a trip to Vegas sponsored by your credit card (or was that just me??)! Next thing you know, you have creditors calling your phone several times a day asking for money. Don’t feel bad if you’re going through this, most Americans love debt!
If you want to know how to take control of your money, jump straight to this post. However, if you like seeing me in pain, go ahead and read on (sicko)! This is the story of my journey through paying off $50,000 of debt. If you’re in a similar situation of heavy debt or you think you might want to be, I hope my story can help you!
“The Republic may not give wealth or happiness, she has not promised these. It is the freedom to pursue these, not their realization, we can claim.” – Andrew Carnegie
Total Debt: -$22,800
When I graduated from college in 2004 with a degree in Finance, I was excited to start my first job at Accenture. At the time, I couldn’t believe they were paying me so much – my starting salary was $42,500. For a guy who cleaned toilets in high school, this was a nice step up!
However, one year out of college I realized I wasn’t going have my first million a few years out of school like I hoped. My salary didn’t seem so big after my monthly expenses, and my big paycheck didn’t seem as big anymore.
It didn’t help that I was already in debt. My total student loan debt of $19,400 hadn’t budged much since I graduated, and my credit card debt had actually increased to $3,400. I was barely getting by on my salary and any emergency was covered with a credit card.
Then, I made one of the biggest and most common financial mistakes that most of us do – I bought a new car.
My older and experienced self looks back and wishes he could have grabbed me by the collar and shook really hard! “Why are you doing this to yourself??! Your 1993 Chevy Lumina may not look pretty, but you own it outright!!” That explains why my older self now hates new cars.
But I couldn’t control myself, there were stronger forces at work. I thought I deserved a new car, and it was embarrassing driving around in my hunk of junk. My friends and co-workers were buying new cars and it was my turn to look rich. I bought a new car for $28,000, and I couldn’t even afford a down payment. However, I was a college graduate, and I wanted it.
This does remind me of some of the best advice I received in college and didn’t use. My professor said not to buy a new car. His reasoning was if you had an old car and couldn’t pick up the girl, it must be the car’s fault. However, if you have a new car and still can’t pick up the girl, it must be all your fault!
I was lucky to have a great lady – who is now my wife, before I bought the new car!
Throughout the remainder of 2005, I managed to pay off some credit card debt, but I was now $50,800 in debt. College graduation is called commencement, which means to start. This is time when I started to become the average debt ridden American.
Total Debt: -$50,800
In 2006, I finally started to take action and paid off my remaining credit card debt with my tax refund. This left me with the student loans and the car loan, but I still had no clear plan of action. The shock and awe of the real world was finally starting to clear, and I could see what I was doing was wrong.
Then I saw a light at the end of a tunnel.
This wasn’t a light you want to see – it was a light that turned into a freight train! I had my breaking point, and the weight of the piles of debt brought me crashing to my knees.
My car was towed and I had to take all of the cash out of my checking and savings account to free it from the impound; free it so it could again be my master. Life could not go on like this. I knew something must change, and I vowed to start paying off the rest of my debt and save some money.
I’d worked for two years with a great job in corporate America, and the only thing I had to show for it was debt!
As fate had it, around this time my brother introduced me to Dave Ramsey’s Total Money Makeover. It gave me hope and a fighting chance. It taught me how to get out of debt and I was ready to take control of my money. I started to feel blood returning to my muscles. I could flex again.
I describe the complete process in how to take control of your money, but the first objective was to gain control of my spending. I downloaded all of my credit and debit card statements to track where all of my money went.
I looked at every expense from 2005 forward and put it into a spreadsheet with major categories. Today this is easier to track through online sites like Mint.com
It wasn’t pretty, but at least now I knew where my money was going. I continued tracking my spending in 2006, and this is how it turned out:
The scary part was that in 2005 I was making $45,000 a year, which equals $2,561 per month. If you look at my monthly expenses, I was in the hole by $17 every month! I was obviously financing some of my living with debt.
I wasn’t even spending what the average American spends on food because I was traveling for work and food was covered. I almost spent as much at the bars as I spent monthly on food!
The debt attack was now on because I knew where my money was going. I’m talking a full blown attack with my heart beating out of my chest. This was MY LIFE and I wasn’t giving it up any longer!
I started by paying off some additional amounts I charged on the credit card throughout the year. Now, I was now ready to take on the true beasts… the student loan and car loan. At this point, they weren’t even afraid of me because I hadn’t even made a scratch on them!
Every month I spent the money as planned and attacked the debt with any remaining cash. I moved to a full cash budget and used the envelope system to control my spending. This allowed me to spend less than I made, and I started to save money.
To use the envelope system, you need to allocate how much you can spend on major ‘categories’ each month. These could include groceries, clothing, entertainment, etc. You then go to the bank and fill the envelope with the exact amount of cash that you’ve allocated. For example, my budget for entertainment (eating out, going out, etc) was $200 per month and when I ran out, my spending for the month stopped. This is part of the Dave Ramsey method.
I received a raise in September 2006. By the end of 2006, I was down to $20,000 on the car loan and $12,000 in student loans. I paid $18,000 off by paying off my credit card, and then throwing all of my extra cash at the car loan and student loan.
Total Debt: -$32,000
There was a long way to go, and it was taking too long. There was one way to make this happen faster. The car had to go. My prized Xterra. My trophy for graduating from college and getting a good job!
I remember taking it to an empty parking lot to take ‘for sale’ pictures and the Xterra pleaded with me not to sell it. We had an emotional connection! How could I turn my back on my master…
That didn’t matter anymore. In May 2007, I sold the Xterra for the amount I owed on it. $17,000. I realized shortly after that the emotional attachment was easy to get over. To replace the Xterra, I bought a used Volvo for $10,000, and I still drive it today. It had 83,000 miles on it, and I’m now up to 126,000. I love not having car payments!
If I did it again, I would have purchased an even cheaper car, so I could get out of debt faster. As I advocate now, you should try to spend only 20% of your annual salary on a car purchase. I was within this amount in 2007 when I purchased the car for $10,000, but I still had too much total debt to spend that much.
In August 2007, I was down to $10,000 on the car and $9,700 on student loans. Over the past year and a half, I’d managed to save up $10,000 through monthly savings.
I paid off the car.
By September 2007, my total debt was down to the student loan which was $9,500! I really could see the light at the end of the tunnel now!
In November, I received a $4,500 bonus from work, and I sold all of my company stock for $3,900. I had $1,000 cash left in my emergency fund. In December, I sent Fannie Mae a check for $9,300. Student loan, paid in full.
$50,800 paid off in two years.
I won the battle. I was exhausted, but the thrill of the hunt kept me attacking the debt for two years and now it was all gone. It was exhilarating.
Total Debt: $0
As you can see, I received a very nice raise soon after I paid off the debt. It seemed I was rewarded for finally managing my money. Without debt, it’s been much easier to save money every month.
My dad says that sometimes you need to forget dipping your toes in the cold water that you’re afraid to enter. Instead, dive in head first. You feel the rush of cold take over your body, and your breath retreats to some place deep inside you.
You dart back towards the surface and take a huge gasp of air feeling electrified and wide-eyed. You feel life.
This is the best way to fight debt. Don’t dip your toes in – dive in head first and take it out! I created the plan to pay off my debt and take control of my money and still use it today. If you’re in need of financial help, I believe it’s a great place to start.
Have you fought your way out of debt? If so, tell me about it in the comments.