When I made the decision to pay off my debt, I not only wanted to pay it off, but I wanted to pay it off as fast as I could. I spent a lot of dreaming up scenarios in which I could pay off $47,000 in a year – when I only made $40,000 the year before. I knew I had my enthusiasm and determination to help me in my journey, but I also needed to let practicality have a seat at the table. I was making lots of lists of possible income streams and ways I could squeeze my budget. I was being VERY aggressive with the debt payoff, and although I knew I could make huge strides forward within a year, I also knew I had to leave room for life to happen.
Life is about more than money, after all. And sometimes it doesn’t go according to plan. But that doesn’t mean that you shouldn’t have a plan – or Plan A and Plan B…and maybe a Plan C. Here’s one way to formulate those plans.
Add It Up
If you don’t know what you’re facing, then you can’t make a plan of attack. Add up your debts, look at your interest rates, and be prepared to face some hard truths. In some cases, it may take longer to eliminate debt than it took to accumulate the debt.
At first, I was angry at myself for letting the debt sit for too long, for not addressing it sooner, for not being more responsible with my money, etc. Wallowing in anger and self-degredation does not pay off the debt. It doesn’t help. AT ALL. Neither does blaming the credit card company or the lender or the university or the government or the company you work for or your spouse or ex-spouse, etc. Even in those situations where you are stuck paying off someone else’s debt, the blame and anger will not move you forward. The blame and anger does not turn into dollars and cents. It turns into depression, and depression doesn’t pay the bills.
Track Your Spending
Whether you use Mint or look at your account online daily or write it down on paper, learn where your money goes every month. Developing accurate budget categories and knowing the amount of money that goes toward each one is the only way to assess how much you’ll have available to pay toward your debt. It might be a hassle at first, but once you see the results, it gets a easier. Like exercise.
Calculate Various Timelines
When I made that first monster payment, I was still thinking that I might possibly find a way to pay off the loans in one year. But, after I saw what it did to the savings that took me two years to accumulate, I realized that I was applying the same magical thinking (and some strong denial) that kept me from starting to pay off the loans sooner. I decided to take a hard look at my financial situation, and I went to the tool that I use whenever I muster the strength to do so: Mint.com. And that’s where I started making my realistic timeline for paying off the debt.
I went to the “Goals” section in Mint and created a “Pay Off Student Loans” goal. When you create your goal, Mint will automatically create a repayment plan. You can use this to try various timelines simply by reviewing the plan once you’ve seen it and changing the timeline. The first time I tried it, I typed in the total I owed ($47,554) plus my minimum monthly payment ($198) plus my interest rate (3.13%). That’s when Mint told me that it would take me 27 years and $20,958 in interest to pay off the loans. I felt my stomach turn. Instead of let myself get sick, I started plugging in different numbers. You can also use a Student Loan Calculator, like the one from CNN Money available here.
Analyze Your Budget
I spent some time playing with various scenarios, and once I had one or two that I liked, I looked at my various budget categories – which would not have been available if I hadn’t tracked my spending. Even if I couldn’t make another monster payment or earn any extra income, I could probably squeeze $975 out of my monthly budget, but only if I didn’t try to save any more money or have to replenish my emergency fund.
Find Your Monthly Maximum (and Minimum)
Without extra income, I could probably devote $975 a month toward my debt, most of the time. I set $975 at my monthly maximum payment. I knew there would be months where I wouldn’t be able to contribute that much, so I asked myself, “What’s the least amount of money I’m willing to devote to the debt on a monthly basis?” I landed on $300, because that practically gets split in half by the lender. It will pay the $125 interest (which gets lower as the balance gets lower) and still pay about $175 to the principal. I’d still be making progress, and that’s what matters. Any monster payments made throughout the timeline will help make up for the small payments (if I ever need to make such small payments.) That said, it is good to know how low I’m willing to go, so to speak, and budget accordingly. I just make sure there is ALWAYS, at the very least, $300 to apply to the debt. But that’s ONLY for tough months.
Revisit the Calculators
I revisited the CNN Money Student Loan Calculator and punched in the current balance ($39,692) plus the minimum payment (my MAXIMUM payment, which is $975) and the interest rate (3.13%). By following that payment schedule, I’ll pay off the debt within 3 years and 7 months and only pay $2,324 in interest. That’s a lot better than $20,958!
Make It a Game
Although it would be fun and exhilarating to pay off the debt in a year, 3 years and 7 months sounds (and feels) A LOT more realistic. But, that doesn’t mean I can’t try to whittle that down to 3 years or so by making monster payments when I can. If I make it a game with myself, then I’m working to beat 3 years and 7 months. Anything before that is a victory. And after a decade with this debt, it’s a victory I’ll certainly savor.