Monday, July 9, 2007

My debt free goal

We have been chipping away at our debt for a while now, trying to find as much money in our budget to become completely debt free (with exception of the mortgage for now). Finally we have come up against a brick wall. We are still managing to eat and keep the electricity on while affording a few luxuries to keep us sane, but doubt that we could afford to hit the debt any harder. Our debt consists of a car loan and a student loan. At our present rate of minimum payments it will be paid off by October of 2009. With our debt repayment plan, we're projecting April of 2008! Looking at this graph is all the more satisfying.



I hate my debt. I loath it. It's like a termite infestation eating away at your house that you just can't seem to get rid of. Since we bought our house we have gone from paying the minimums on these debts to paying over 20% of our income in extra payments. Finally it looks like we're getting somewhere.

When I ran the numbers I was even more pleased. The regularly matured loans would have cost me $1,543 in interest. But by prepaying it we pay only $862, a savings of $681 over a year or so! Then I got to thinking about or opportunity costs. Our minimum payments on our debt eat away at $595 of our monthly income, with a whopping $1,670 including our debt repayment. Where's that huge chunk of money coming from? Mostly it comes from our Roth IRA contributions (5% of our income) and our general savings (10% of our income). With a nice contribution already going to a 401k and a decent emergency savings fund in place, we put the Roths and saving on the back burner until we get out of debt.

Once we are free and we can put all that money back into earning for us, we get an opportunity to have over $33,400 in our combined Roths and savings accounts (though some will be earmarked for purchasing our next car in a few years with cash) by October 2009. If I took my debt repayments and just kept saving instead of paying it off, I'd have around $31,000, a $2,400 difference. Just brainstormed fanciful numbers.





3 comments:

Jim said...

I hate to say this but I'm glad you stopped saving so aggressively and are pressing the debt more. It always hurts when you realize how much money you’re sending out the door instead of sending to the bank and have it later. I know it's important to save for retirement, but if you put off doing it to pay off debt in a few years, which makes more sense. You wouldn't borrow money to invest it, so why save money when you could pay off debt? My wife and I are looking at somewhere in 2011 that we'll be debt free. Then all that money to pay credit cards, student loans, etc can be saved in one way or another and we can enjoy spending money, not feeling guilty about debt. I hope your projection works out though.

Beyond the Consumer said...

When my wife and I started out in this debt repayment plan, we didn't have a single dollar in our savings account. That scared us more than our debt; after all our debt was basically structured closed loan payments, but any emergency meant resorting to credit cards!

Personal finance is such an emotional thing. Once we had $2,500 in our savings account, that scare went away. Suddenly paying off the debt looked a lot more attractive, so we started moving our savings plan over to it. First 10%, then 15%, then 20%.

I hope our projection works out too, thanks! We've got a bottle of champagne waiting to be opened when we click away that last payment.

Lindsay Ray said...

A few years ago, I thought that we had to spend money to have any fun. I have really opened my eyes to the joys of living a simple life. We don’t buy any fancy clothes… we drive a 2003 vehicle… we hardly ever go out to eat, but we are happy to be together. I gotta tell you, it feels good to know your visa credit cards don’t have to be your ticket to happiness. Today I m living a debt free life. So pack a lunch and spend some time with your kids. Not shopping, but having some free high quality fun time together. That’s what I plan to today myself.