Greetings! I will start out this post by saying I am not a qualified financial advisor. I'm not even particularly well studied in the realm of finances. All of what I am about to share has been read by me somewhere online, advised to me by a friend, or discovered through trial and error.
Use what you read here at your own discretion!
Alright, now that you can't sue me, let's get into it!
You may know a little about me through my profile or social media, but I'll introduce myself with a little more detail so you can get an idea of where I'm coming from. I'm going to share some specifics of my financial information, so if that makes you uncomfortable this is your easy out!
I went to college in Portland, Oregon for five years - about two of them were spent in Community College (some of which was "figuring out what I wanted to be when I grow up" and some was earning my Transfer Associate Degree). The rest was spent at Oregon Institute of Technology, a local school with a good curriculum and reasonable term charges, where I earned a Bachelor of Software Engineering.
You may be curious why a Bachelor's degree took me five years - short story is that the school told me there would be no problem transferring in during the Winter term, but they were wrong. All of the course cycles begin in Fall so I ended up essentially a year behind, to my financial detriment. I almost did not graduate because I ran out of funds at the start of year #5 - I was blessed enough to have a friend who believed in me and was willing to cosign for a significant private student loan to finish out my last year.
I did not make the best decisions during my time in school. I worked some part time jobs, but never enough to fully support myself without the financial aid, and I made numerous poor decisions with my credit cards. Hard lessons were learned, that's for sure!
When I graduated in May 2018 I was deeply in the hole. I had just over $17k in credit card debt and around $93k in debt from college ($12k of which was a high-interest private loan).
The massive pile of debt in front of me was daunting and I knew it would take some time to free myself from it - my goal was five years, to be exact. I came up with that magic timeline by dividing the total amount of debt by my expected leftover income. I don't have any kids and I live with my partner so most expenses are split evenly between us, lowering my cost of living a great deal. I figured I'd have about $1,800 left over most months to go into my debt.
110,000/1,800 = 61.11/12 = 5.1 years (not accounting for interest)
This leads me to the first technique: Pay more than your minimum balance, even just a small amount. When you pay only the minimum, especially on high-interest loans, you may only be paying a portion of the interest each month and never anything into the actual balance. This means the loan will continue to grow... and grow... and grow... even though your hard-earned money is going into it every month.
I knew I needed to form a strategy to make all of my payments as effective as possible. First, I expanded the budget spreadsheet I'd been halfheartedly using. Technique number two: A budget is essential for effective debt pay down. I'd heard of a couple of techniques - the snowball method and the avalanche method - and considered which would be best for me in my situation and mental state:
Pay off your debt from the smallest balance to the largest, regardless of interest rate. Whenever a debt is paid off, that minimum payment is rolled into the next smallest balance to make your payments larger. This method is recommended for people who need a "quick win" and will be motivated by seeing debts disappear. Dave Ramsey
Ignore debt balances and instead pay off debts in order of highest interest rate to lowest. Ideally, this will allow you to pay off your total debt much more quickly because the amount of interest you pay over the entire period can be much less as the highest interest culprits were removed first. As with the snowball method, roll up the minimum payments as you pay debts off and push it towards the next highest interest debt. Using this method is great for people who are patient and driven by a long-term plan. Nerd Wallet
I have no issues with maintaining enthusiasm through slow wins, so I took the long route via the avalanche method.
The credit cards went first. I paid only the minimum on my student loans and threw all of my spare money into the credit card debt. A happy side result: my credit score started going up! I was approved for a couple of 0% APR for 12-18 months offers and balance transferred the remaining balances over. This left me with zero interest-gaining credit card debt in early 2019! A victory! Riding high on this small win, I began shoveling away at the student debt.
The first loan I wanted to dig into was the private loan my friend so kindly co-signed on. With only making minimum payments since it became active, it was up another one or two thousand dollars because the interest rate was a whopping 11.13%! That's about as high as some lower rate credit cards. I leveraged a couple more 0% APR balance transfer offers as my credit standing grows and paid off that loan in June 2019.
I'm currently continuing to pile away at the student loans have picked up a lot of momentum as I got into the swing of things - my cost of living is even lower than I originally anticipated so I modified my pay off goal to three years (accounting for interest this time). By the end of the year I'll have put around $35k into debt and my spreadsheet has a lovely forecast of 2.9 years!
Debt is a terrible thing to be piled under, and it can feel hopeless. But there are a few methods you can use to get yourself out of it more quickly:
- Pay more than your minimum balance, even just a few dollars.
- Create a budget and list all of your debt details including interest rates and balances.
- Choose a method to focus your payments more effectively. Most common are the Snowball Method and the Avalanche Method.
- If possible, leverage offers for 0% APR for 12-18 months to remove high-interest debts early. Do not let these lapse outside of the promotional period!
- Re-consolidate for a lower interest rate. This may not work for all situations, it was not ideal for mine, but it is a valid option to consider to reduce the number of payments per month and lower your interest rate.
Once again, I am not a financial advisor. What I've learned is from reading and my own trial and error, so use any advice here at your own discretion. I am simply sharing my story in hopes it will encourage or inspire someone else.