by Adam Dawson
I’m always playing with the calculator. It’s kind of embarrassing, actually. I’m still waiting on my first paycheck from my new job and I bet I’ve run the numbers a hundred times.
Late last week, monkeying around with the raise and debt numbers revealed something very intriguing. If we put essentially all of the additional income I’ll be earning toward debt, as well as most of my anticipated annual bonus, we could pay off the entire debt in 2 years flat. It would require increasing our debt payments to about $3600/month, as well as an extra $7000 annually out of tax returns and bonus checks. It would really exhaust our cash flow, but it would only be for 2 years. And just think, you’d be rid of our insufferable selves that much faster!
In the past when I’ve experimented with the result of throwing extra money toward debt, it’s only changed the payoff schedule by a couple of months, and the sacrifices needed to accelerate by 2 or 3 months didn’t seem worth it. But accelerating the schedule to only 24 more months really piqued my interest. It would mean we have to live on the income I was earning before the new job, which should be totally doable, if we keep working on the budget. It would also mean boosting the emergency fund or any other savings further beyond $5000 would have to wait. And it would probably slow down our home improvement and other plans. But it would mean being debt-free at age 33! And this burden off our shoulders sooner.
I talked it over with Emily and we both agreed we need to think about it a little. It should be easily doable, but not without its sacrifices. We will have to be a lot more careful on spending, and I know that holidays and travel will become a bigger stress during the 2 years. But still, it’s tempting.
Discuss.
Before I can comment, I need to know if you lost your job, how long would it take for you to find a new one of comparable income?
you can never predict that, but in general, the market here is very strong with less than 5% unemployment.
I would sock away all that extras you are thinking about applying to your debt for 6 months to see 1. if it is really doable, 2. to bring your EF to a better level, 3. to get a real understanding of your new job and how sustainable it will be.
In 6 months, if you find it doable and if you feel pretty secure at your job, I would start upping the payments. I wouldn’t touch the EF though. This way, you can get rid of your debts in 2,5 years with a much healthier EF. It shouldn’t be too bad.
I am considering a method like this. instead of making bigger payments now, start putting the extra away.
I like this idea. Float the extra debt payments in the EF and then start making the payments with an offset of say, six months. Then when the remaining debt payment is just sitting in the EF, pay it all off down to zero in a balloon payment. The extra interest may move things by a month but you will have the extra “payments” in hand until right before the end, in case that makes you feel better.
As long as you don’t have any emergencies, you can clearly speed off the process. Even if it’s in 2 years and a half, it’s still a GREAT DEAL. Keeping fingers crossed 😉
Hmmm, interesting. I would want to be free of that debt ASAP, but I think your emergency fund still needs a boost. Can you make 2 years the goal AND boost your emergency fund by cutting in your current budget? We haven’t seen a lot of posts about things you’ve done to cut back on expenses. Glad you’re working on the meal planning, and the hair issue, but what else? If you can free up more money that way, you may be able to do both.
Or, you could split the difference between paying off the loans and boosting the emergency fund by shooting for debt payoff in 3-4 years.
I like the idea of socking the “extra debt payments” away for a few months to see how things shake out with the new job. At the end of the time period you’ll have a chunk of cash to either put towrds debt, emergency fund, or both.
yes, I like that idea too.
In your discussion with Emily I think I would factor in your plans to start a family – whatever they may be- and the car situation. How long do you think your current cars can hold out? I believe they are both have fairly high mileage. And I know you have a commute that requires a vehicle. It is my preference to go all out in debt pay out. That has worked for me in the past. But it doesn’t work for my spouse.
These are very good points. The cars should be fine for a while. One of them is high mileage, over 180k now. But amazingly it’s still humming along like it’s new. I think it’s more likely we’ll wreck our cars before they die of old age.
Love this! I am constantly analyzing my amortization tables for each debt and deciding which is the best path for payoff. I like to sock away extra money into a savings account for purposes of a debt sinking fund. This is really helpful if I’m 98% sure I don’t need the cash to meet other financial obligations but not 100% sure. Within a couple months I usually have certainty on other financial obligations (holiday travel, property taxes, a garage door that’s on the fritz – all current unknowns for me) and I’m able to drop that lump sum as an additional payment.
Another strategy that I use is cash flow projection. Since I charge most of my expenses to a credit card that I pay off every month and I know that my budget for all those expenses is ~$1500, I then project out all of my inflows to my cash outflows over a 3-4 month period. This helps me plan for months where my car insurance comes due or months where I receive that elusive extra paycheck. If I end up with an extra $1000 in my checking account, I can check to see how applying that to debt or transferring it over to savings will effect my next few months.
One final comment on the two year plan. What’s the worst that can happen if you shoot for two years, but then realize it’s not quite doable? Maybe it ends up taking three years – but that’s still faster than your current timeline! Plus, once you’re able to get a few consistent months to snowball payments and perhaps a loan or two paid off in full, you’ll feel that burning desire to get rid of the rest will only grow.
thanks for this. I think we are going to go with the idea of this debt sinking fund. keep the cash on hand in case of an emergency but if not, then make a big payment all at once.
Also, you guys are non insufferable! You’re in the early phases of (this round) of debt payoff. With time, you’ll grow to hate this debt SO MUCH that you’ll end up taking measures and making sacrafices you didn’t think you would. Check out ‘No More Harvard Debt’ and read his story from the beginning. Things he never thought he would do suddenly became viable options as his hatred of his debt grew.
yeah, I actually think the debt sinking fund is similar to that guy’s warrior mode. one of the student loans is at 8% because almost all financing dried up during the financial crisis. I am growing to really HATE that one. every time I see how much interest is going toward that loan. when I went to school in 2008 they promised financing at 3%, which they then broke when SHTF.
YES – finally you are talking about gazelle debt payoff! DO IT! 2 years with no vacations, no extras and it’ll fly by!!! You need to live like no one else now so in 2 years you can live like no one else! 5k emergency fund is plenty for 2 years – after that, you can throw your money in savings and up it to 6 months expenses. I say YES – do it!
I’m with Janelle. DO IT!
I say DO IT!! If you had this paid off before you start a family you’d be SO much better off! Make the sacrifices NOW rather than later. We’ve been on our journey 2 years and trust me, it flies by faster than you think. Absolutely loving to hear the gazelle bug hit you!! Buckle down and get it done!!
I’m kind of fan of the theory that, if you are in debt you should act like the house is on fire. You have an emergency. You can not save and invest and create financial independence when you are in debt. Its really doesn’t seem like you are there yet.
It appears that you’d like to get out of debt, but not to the point that it interferes with vacations, causes strict budgeting, etc.
Personally, if I had $100K in debt, the idea of holiday spending would be out the window. Trust me, they’ll understand. The same with vacations and such. You never know how a new job is going to work out, or what other life events may be in store.
yeah, Jay, I do want to be out of debt but I think we have a little different perspective on it. We’ve made lots of sacrifices but definitely don’t make ourselves miserable.
Understand. Its just a different perspective. For me, I would be more miserable owing $100K in debt. Using my life energy working to give someone hundreds of dollars per month in interest would make me go bananas on that debt.
I would definitely go for it. If you fail, you still win. I just hate getting paid and having to pay somebody else a lot of my money. I want to keep my money.
I think it’s a great idea. I think you should go for it. Paying off debt is hard and something always comes up. Think about it, on a daily basis, everyone is bombarded with things and places to spend our money. What is amazing, will be the freedom you will feel when that debt is gone. Also, you never hear anyone say, “I wish I would have taken more time and paid my debt off more slowly.” Good luck.
I think accelerating payoff is an excellent idea. The sooner you are debt free the sooner you will be free of the burden weighing you down.
I am not a big fan of the sinking fund concept. You end up sitting on the cash, in the bank earning 0-1%, while paying several % more on your outstanding debt. When you finally have enough saved up to pay off the debt, you pay it off, but by then you’ve lost all the benefit of the interest saved on early payments!!!
I would suggest as aggressive a approach as you can stomach, tempered only by opportunities to set aside long-term investment money where compounding pays off for you. You are young enough that compounding can work in your favor if you set aside the right assets. In other words, once you have taken care of emergency funds [check] and really high interest loans [check?] you choose between additional cash to principal vs. funding things like 401k [for the match], IRA [for immediate relief on taxes], Roth IRA [for the long term tax deferral], 529s if you intend to have kids and your state allows a tax benefit [name yourself the beneficiary for now and start putting money away, with tax advantages, you can change beneficiary to a child later with many state plans], in that order. Model healthcare HSA/FSA options at your jobs, it’s open enrollment season and you can set aside a few dollars tax-free that way too.
But now that you have the “we can do it in 2 years bug”, challenge yourself to being debt free by no later than Jan 1 2016 – for example -, which gives you some wiggle room but also a milestone to beat. Set a stretch goal too… you might be surprised.
If I were Emily, I’d worry that come two years and zero student debt that Adam would say, hey, honey we can clear this mortgage in 5 years if we just keep going!
Believe me I’ve already had this thought in my head.
It depends on the rate of interest you’re paying on the debt. For example if it’s debt fixed for inflation (some student loans are like this, but very few now-a-days), I’d suggest building the emergency fund first.
Regardless of what you do, don’t put ALL of your new income towards your debt. Save 10% for fun expenses like a weekend away or something similar, otherwise you’ll resent the new job because you’re not seeing any immediate benefit from it.
I think you’re on the right track, just suffer and get rid of the debt and then you can start to enjoy life. Paying more than $3000 towards debt might seem insane however once you’ve paid everything off you’ll feel free and liberated with a very big cashflow to play around with. Hope everything works out for you. Excellent Blog by the way.