by Ashley
Have you ever heard that the definition of insanity is doing the same thing over and over and expecting a different result?
Welllll, does it count as being insane if you are doing the same thing over again and expecting a different result, but you’ve learned something new throughout the process that hopefully changes the outcome you’re anticipating?
Does this even make sense at all?
I think so. I’ll just think of myself as crazy like a fox.
So here’s the deal (and, please, refrain from the exasperated sighs until I finish)…..
I’m changing up my debt-repayment game plan.
Again?
Yes. Again.
I’ve been calling my car loan repayment my race to 20K (because the loan balance was approximately $20,000 when I began). This was back when I was making $3,500 monthly debt payments (last summer) and thought I could reasonably expect to pay off the car within 6 or 7 months. I soooo had my eye on the prize for a March 2015 payoff.
But, alas, things have changed.
Our income went down. Our debt payments went down. We’re only a few weeks from March and nowhere near paying off the car.
That’s not to mean we haven’t made good progress. When I started the race to 20K back in July the full balance was actually $22,742. As of last month I had just dipped below $16,000 owed (averaging over $1,000/month toward the payment).
BUT….
I need some quick wins. And with a balance that high, there’s not going to be anything “quick” about paying off the car.
That, plus comments many of you have left, have made me reconsider our game plan a bit. So here’s the new debt plan of action:
We’re re-adopting a modified snowball approach (aka: attacking lowest debt first) so we can re-gain some traction and feel a good boost when a debt is conquered. Here’s what’s up on the chopping block:
- License Fees. I made a massive payment on the license fees this month, bringing the total owed to $1344. The goal date to have it eradicated is April 2015.
- Medical Debt #1. Note that I’ve always grouped our medical debts together for ease, but we are actually making 2 separate monthly payments (one for $25/month and one for $50/month). The $50/month payment will be done in 3 more payments, by May 2015. Although this isn’t a huge deal from a goal perspective (this will be gone simply from making our regular $50/month payments, no extra), it will be nice to free up that extra $50/month to apply toward other debts. Plus I still consider it a win to have the debt behind us!
Aaaaaand, that’s as far as I know now. My next smallest loan is for a federal student loan (balance = $4347), which also happens to have one of my largest interest rates (8.25%), but I just can’t let go of my desires to pay off the car. My rationale is that I can increase my student loan payments to keep the balances from growing (since my minimum payments don’t even cover the interest), but by May I could refocus back on the car as my #1 priority. If I do that, I’d have a solid 8 months to work on chipping away at the loan, with a tentative goal of having it paid in full by the end of December 2015. Remember that we bought the car (original balance $30,000) in March of 2013, so I would LOVE LOVE LOVE to have it paid in full in under 3 years from purchase date. It would be so lovely to begin 2016 consumer-debt free, with only student loans (and that one low-payment interest-free medical debt) remaining.
We’ll see. I can’t commit yet to what will be #3 on the chopping block. But I do know that it will feel oh-so-good to get those license fees and the one larger-payment medical bill behind us. Especially with the license fees, having them paid off will feel like the closing of a terrible, long-ago chapter of our lives that has been hanging around for entirely too long (over a decade, but whose counting?).
Only one other teeeeeeeny thing I need to mention that may serve as a competing interest for our debt payment funds. But that will have to wait for another post. (CLIFF HANGER!) Check back on Thursday for the juicy details. ; )
What debt are you currently focused on? What debt(s) motivate you the most?
Hi, I’m Ashley! Arizonan on paper, Texan at heart. Lover of running, blogging, and all things cheeeeese. Freshly 40, married mother of two, working in academia. Trying to finally (finally!) pay off that ridiculous 6-digit student loan debt!
honestly,
i know you are looking for some quick wins but I can not for the life of me figure out why you don’t get rid of your Navient loan. it’s not a huge balance based on the amount you have to throw art your debt every week. The interest rate is ridiculous. You could get rid of it in 5-7 months.
The license fee is 1200 and has a 2.5% interest rate. If you made token payments to that, it would be gone so much faster.
I would suggest, pay off the navient $4000. keep the minimums on the license fees. once navient is paid off, do one big payment and pay whatever is left on the license in one lump sum.
You can’t get zero percent interest anywhere else, so i would just put the medical bills on some auto payment and forget about it…think of it like a cable bill or something.
That’s just me – i can’t get away fro the math
I totally agree about the medical debt. I know it will be hanging around forever (and, eventually, I’m sure we’ll start making larger payments….way, way, way down the road once all the other debts are gone).
One thing to clarify about the license fees, though. They don’t actually have an interest rate. The 2.5% is a service fee per transaction. Because of that, it would actually be equivalent to a much higher APR. I haven’t done the math to look at conversions, but basically I’m paying 2.5% on top of my payment every single month (versus more traditional loans where the interest rate is a percentage of the entire balance, averaged across the life of the loan). Not sure if I’m explaining this adequately, and maybe if someone is a math person they can help me out a bit on this one, but I know I’m paying a lot more than just 2.5% of the overall balance. (By comparison, my $4,000 loan isn’t accumulating 8.25% – or $330 – every single month).
I knew it – ha ha – you’ve been hinting for awhile about changing your focus…..so here’s my two cents.
Pay off your $50 a month medical bill next (in the next month!). Then finish those pesky license fees (with your April payment). THEN laser focus on that car debt and get it gone!!!
I know the student loan makes more sense to focus on, but you have never wavered in your determination to get that car loan paid off and I think that’s what’s motivating you the most…. so use your determination and get that sucker gone! I bet you can pay it off way before December!
It’s so true! I know mathematically it makes no sense, but I think part of the problem is that the student loans feel so daunting still that I need something that I can pay off sooner than that. Another issue is that I feel like I have nothing to show for myself after paying off a student loan. When the car is paid off it is OURS!!! 100% ours! But when a single student loan is paid off it feels like nothing has changed. It will be a HUGE deal when ALL the loans are gone, but that’s still years away (probably 2-3). Paying off one (of the many, many) student loans doesn’t feel very gratifying.
I’m an accountant so some of the “snowball” stuff just doesn’t make sense to me mathematically but the reason people are so successful using it is because it works.
If you lose your focus, what difference does 2.49% vs 8.25% make if you aren’t actually going to follow through.
I would take care of the medical debt that can essentially go away with one payment, move on to the license fees that is maybe 2 payments after that and then start the work on the student loans.
Personally, I would focus on the student loans that are at a higher interest rate for several reasons:
1. You can’t wipe out your student loans in bankruptcy.
2. Mathematically, you lower your overall debt by paying more balance instead of making interest payments.
3. Your car loan and license fees are at a meager 2.4%.
4. For tax purposes, you can only deduct up to $2,500 on your student loan interest payments.
Huh, I had no idea about #4 (I don’t do our taxes and know very little about tax laws). Check out where I replied to debtor in regard to #3 (basically, our license fees actually amount to much more than a 2.4% APR). And, whereas you’re correct in #1, I would argue that this isn’t even a consideration for us (no plans to ever, ever file bankruptcy) and, meanwhile, I see value in owning an asset (like the car) outright. If we were to get into financial trouble and get behind on payments, no one can take away my education (like they could seize a car).
Kill the student debt. It is both smaller and a higher interest rate, so whatever method you are using it should be the next one to die.
Debt is debt. While it would be fun to be consumer debt free, it does not actually make you any better off. Why dont you do a simple calculation and figure out what the actual difference in money would be, and see if its worth it to you to pay that much to be able to say you ate consumer debt free.
Can you tell us what your last payment and fee amounts were on your most recent license fee payment? Without that information, it’s hard to calculate what the true cost of that debt is in relation to the stated interest rates on your other loans.
If your license fees are a 2.5% processing fee. Then no matter how much you pay it is 2.5%.
You pay $1000, $25 fee. Pay it in two installments $500 each, you’ll pay two fees of $12.50. In that way the interest rate is way less than 2.5% because it is not compounding. So unless there is some interest going on in the background in addition to the processing fee then someone explained it to you wrong.
Regardless, I would advocate ridding yourself of them!
Ashley,
One of your posts from several weeks ago lamented how much interest you had paid last year (almost 6k if I recall). This sum more or less represents true “wasted money”, e.g. money you paid just to have access to money.
Thus, for the life of me, I don’t understand why you are not tackling your highest interest rate balance, especially when it is such a manageable amount.
As far as I can tell, the usual arguments don’t apply in this specific context:
1. the idea that smaller balances keep your motivation up: Ashley, you do not seem to be lacking motivation in any way shape or form.
2. They can’t take your education away from you but they can take your car, etc: we are not talking about tackling all of your student debt at once, just a modest chunk that has a much higher interest rate than the rest.
One last comment from a few threads ago: debit cards are super scary to me as they give direct access to your checking account. One stolen card or one mis-keyed extra 0 on a transaction and poof, there goes your cushion until you have undergone a potentially lengthy process to resolve it.
And you had asked about where I go for financial advice: actually mainly my parents. I follow some very basic principles:
1. Spend (a lot) less than you make. This means that we still drive a 1998 Toyota, for instance.
2. Save a 12+ month emergency fund and invest in staggered CD ladders or similar low risk fund.
2. Invest most extra money in low-cost ETFs (80% stocks 20% bonds) with a small percentage in “riskier” investments.
Sounds like your parents are wise people, particularly to teach living well below your means! Our culture is so about “keeping up with the Joneses” but guess what – The Jones family has no money!!!! I’d way rather live below my means!
Hi Ashley-
I agree that if you only owe $150 on the medical debt, then just get rid of it ASAP; same with the car license fees. Even though it is interest free, it is silly to carry it for three more months. As far as the high interest student loan, I totally understand where you are coming from as far as not having anything tangible to show for it when you pay it off so I have a suggestion. I know it is silly, but what about breaking your student loans into something somewhat tangible? Example, when you pay off that first, high-interest loan you can say you have officially paid off your first semester of grad school! Give each loan a task; a semester, a year, all books and fees for a semester/year. Then, when you have paid them all off you have “officially graduated” from grad school. I know it is kind of cheesy but the lack of a visual “tangible” item seems to be holding you back from kicking these high-interest debts to the curb. Also, Adam is right that you can only deduct $2500 or less in student loan interest each year so if you and your husband itemize on your tax returns you are only getting a small benefit from paying all that interest.
As far as the car being in danger of repossession, I understand that as a fear, but you have a pretty hefty emergency fund and the point of that is to pay for things in an emergency; if something were to happen to make it difficult for you to make a car payment, I would call that an emergency!!
I would suggest looking at how much extra every month you would be able to put toward the car when you pay those three off and then see that (while I haven’t run the numbers to be sure) you would still wipe out the car debt within three years as well as three other debts!
Cheers,
Meghan
I really like the idea of breaking apart my student loan fees into something that seems more tangible (books, a semester, etc.). I can run some numbers, but my lowest balance/highest interest student loan only has a minimum payment of $16/month. I’ve been putting an extra $100 toward it the past couple months ($116 total), but, at a minimum we’re only talking about a very small amount of money every month ($50 for the medical debt that will be gone + $16 from the minimum payment on the student loan = $66 total monthly payment). I don’t know. I’m not trying to argue or be combative because I really do appreciate everyone’s input, but I’m just so stuck on paying off the car first. Like, I see the student loan as a competing interest that will get in the way of paying off the car. Also, ALL of my student loans have much higher APRs compared to my car loan, so even when this one is gone, the next debt up will still be another student loan (and after that, another student loan, and another student loan, and so forth)….so it just kind of feels moot. Like, if I’m going to skip over the next student loan to go back to the car, why not just skip over this current one too? Not sure if any of this makes sense as I’m in a hurry and kind of rambling, but those are my true feelings on the matter. Again – we’ll see what happens when I get to that point in the debt repayment process. I’m definitely taking everyone’s feedback seriously so it’s not just going in one ear and out the other!!!
I definitely feel you on this- it’s an awesome feeling having no consumer debt (having paid off my car back in September). But…quick wins is great for keeping motivated and with each win the snowball builds.
I think sticking to 1 plan is going to benefit you the most- regardless of which route you take. With the bouncing around, you won’t have the car paid off nor any quick wins. What do you think?
O and knowing your husband is in construction I’d imagine you’d see a big bump in your income again like you did last year, once the jobs pick up and the invoices start rolling in. I’m in the construction industry too (commercial plumbing and HVAC, industrial piping) and it typically picks up like crazy around March/April once the ground thaws (it’s pretty slow right now). That’s the cycle in Erie, anyways (is Tucson the same, or does it get too hot there in the summer to work?). Do you have a tentative plan if the same thing happens this year?
We do expect our income to go up again in summer. I always want to cross my fingers when I say that because, well, nothing is guaranteed, but that’s the typical trajectory. If it does go way up I’m not really sure what we’ll do. By then our license fees and medical debt should already be paid in full so it’d be a decision between the student loan(s) and the car loan. As always, I’d be tempted to throw it all at the car loan (though I know that’s not the popular, nor the generally recommended choice). But I just don’t know. If we have an extra $4,000 to throw at debt in a single month then why not knock out the entire student loan? Basically, I have no idea yet. We’ll have to see when we get to that point.
If you are looking for motivation, I suggest you track “interest / fees paid last month” per loan. Compare the latest amount to the amounts for when you started this journey and amounts for January, by loan and in aggregate. Over the course of 2015, if you can reduce the amount spent on interest by 20% that’s a big gain – it’s >$100 per month you’ll have next year that you don’t this year.
The money is spent, you can’t do anything about it. Interest is now the thing you want to eliminate because that will flip into assets and savings in future. Track your net debt or net worth for motivation.