Getting out of debt can seem like a difficult task and can even seem impossible depending on your level of indebtedness. If you went to college anytime recently you probably have a pile of student loans that you need to pay. If you live in America you probably have a pretty hefty car payment and you almost certainly have a credit card of some sort. According to NerdWallet the average U.S. household is carrying $16,883 in credit card debt, $182,421 in mortgage debt, $29,539 in auto loans, and $50,626 in student loans.
What that means is that with an average interest rate on credit cards at 15% your minimum payment would be $337.66, assuming a 2% minimum payment amount which is average meaning you may pay more or you may pay less, but either way you will pay. If you only make minimum payments and do not go further into debt that credit card will stick around for over 30 years and you will pay $43,177.42 total for the $16,883 you borrowed costing you $26,294.42.
With an average auto loan interest rate at 4.4% with an assumed 4 year term you will pay $374 a month and the loan will cost you $1054 over the term of the loan. Your student loan will cost you an additional $16,779.38 in interest assuming a 4% rate on a 15 year term. And lastly your mortgage will cost you an additional $131,104.92, almost the same as your mortgage, assuming a 4% interest rate on a 30-year fixed rate mortgage with a minimum payment, without escrow or PMI, totaling $870.91 a month.
Wow! That was a lot of numbers. Let’s simplify it really quickly. The average American has $279,469 of debt that will cost an extra $175,232.72 or $44,127.80 if you do not want to count the mortgage by trying to justify that you will have a house payment whether it is a mortgage or rent.
Debt is expensive and it will not help you get ahead in life, in fact as the numbers dictate it will only help you stay where you are and possibly even bury you further. If you read How to Stop Living in a Financial Emergency and have stopped going further into debt by reducing your lifestyle and/or increasing your income then you should have some extra money at the end of the month after you have made your minimum payments on everything.
With a starter emergency fund of $1000 in place or whatever you decided that you reasonably need to keep from going into debt should an emergency arise you can now start tackling your debt. There are a couple of different ways to start this, but either way you will be creating a debt snowball to get started.
Creating a debt snowball means that you will list your debts from largest to smallest and make minimum payments on everything except the smallest debt. Then with every penny you can crunch from your budget and your life you will pay as much as you can on the smallest debt. You will continue doing that until the smallest debt is paid off and then you will begin to do the same thing on the next smallest debt except for now you will be able to pay even more on that debt because you are making one less minimum payment each month.
For the math wizards out there who are concerned about interest you could do all of the calculations and figure out that you could probably get out of debt a little bit faster by switching a couple of debts of the same basic amount with differing interest rates, but remember that we need to see progress. What I mean by that is that if after calculating interest one of your larger loans is showing to be the first one you should pay off then you need to realize that we are not talking about a long term repayment program here. What we are talking about is paying off all of your debt as fast as you possibly can by living as inexpensive of a lifestyle as you can and working as much as you can.
If you are serious about getting out of debt you can do it, but it will take commitment and it will take sacrifice. If you are not truly serious about getting out of debt then you will likely fail and instead of just paying what you borrowed in the first place you will pay tens of thousands in debt to the people who loaned you the money in the first place and if you do not get serious and decide to pay off your home early you will find your wallet $175,232.72 lighter due to your investment in your debt.
By getting out of debt and staying out of debt you will be able to start using interest to your benefit by investing for retirement, but that will happen at a later date, after you get out of debt and build up your full emergency fund of 3-6 months of expenses. Your minimum payments, not counting your mortgage in this scenario are $337.66 for credit cards, $374 for your car, and $374 for your student loans equaling $1085.66 a month in minimum payments and $13,027.92 a year.
With $13,027.92 a year you could invest your maximum of $5500 a year into a Roth IRA to grow tax free plus an additional $7527.92 into an additional investment account. If you were able to achieve a 10% rate of return on your investment and you were able to invest for 40 years you would have roughly $6.3 million in your account. If you were able to do that for 30 years you could have roughly 2.3 million in your account. Your numbers will vary depending on your investment strategy and the length of time you are able to invest, but even someone who cannot do math can see there is a huge difference between the interest that debt costs you vs. the interest you could earn on your money if you were not in debt.
Getting out of debt is not mandatory for anyone, but it is wise. Living in debt only costs you money and while it may allow you to live a life that appears to be comfortable now it is likely only an appearance unless your debt does not stress you out. We had about $80,000 worth of debt that we paid off and I can tell you from experience that I will never go back in debt, Lord willing. We truly feel free to be able to give as we are led to give and we are able to live without the stress of debt bearing down on us.
If you are ready to create a plan for getting out of debt then I can help. You do not have to do it alone and you don’t have to do it on someone else’s plan. I can help you create a plan that works for you and your family based upon what matters to you. Contact me today and let’s work together to change your future so that you too can experience financial freedom.
“Owe nothing to anyone–except for your obligation to love one another. If you love your neighbor, you will fulfill the requirements of God’s law.”
“Just as the rich rule the poor, so the borrower is servant to the lender.”
“Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty.”