Getting Out of Debt

It’s easy to get into debt and hard to get out of it. Debt ties us down. It can take away our freedom to make changes in our lives. Getting out of debt, and staying out of debt, is essential to simplifying life and escaping the rat race.

I’ve seen a lot of advice for how to get out of debt. All the advice was well-intentioned but some of it isn’t the best, in my opinion. For what it’s worth, and for the benefit of anyone going through the struggle we once faced, I thought I’d share how we did it.

When we got married we bought a house. I had student loans, a car payment, some credit card debt, and essentially no savings. Cherie had a car payment and a little savings. We used her savings as the down payment on our house and borrowed the rest (95% of the purchase price). So we started our life together in a deep debt hole, fairly typical of young families today.

About a year later she was pregnant and I knew I had to get serious about getting out of debt if I ever wanted the freedom to leave my job and do something more satisfying. We were living frugally, but we had very little money left over at the end of each month after we paid our bills. I was about 30 years old. I resolved to be debt free and financially independent in 20 years.

I know that Dave Ramsey (and probably others) recommends paying off the smallest debts first. I don’t think that’s necessarily the best way to proceed. It makes more sense to me to rank the debts according to the interest rate being charged, and to pay off the highest interest debts first. That’s what we did.

Then we made a commitment not only to live frugally but to take any money that was left over after paying our bills and apply it entirely to paying off debt. That meant no savings, and no spending except on absolutely necessary stuff. I’ve seen lots of advice that people should build up a savings balance of at least two months living expenses as soon as they can. But I don’t think that’s the best plan for someone under the burden of high-interest debt. I would recommend applying all your efforts to eliminating that debt before starting to save. Simply put, the interest you’ll be paying on the debt will likely be greater than the interest you’re earning on the savings. For a person whose employer offers a matching 401k program, I’d make an exception to take advantage of that. We devised a savings strategy too, but that’s an entirely different blog post.

Once all debt except the mortgage was paid off (it took 9 years in our case), then we started dividing up any money left over after paying bills each month into thirds. One third would go to savings, one third to spending on things we needed/wanted, and one third toward paying down our mortgage.

Working off the mortgage that way requires discipline and a long-view. Including an extra hundred dollars (for example) in a mortgage payment, when the debt was six figures, seemed a tiny drop in the bucket and it was tempting to spend that money instead. And I can recall a friend who knew about our practice ridiculing it. Why not put that money in the stock market and earn 10% plus on it, rather than paying down a 5% mortgage, he asked. The answer of course was that we wanted to OWN our house. Meanwhile he seemed to be making lots of money buying tech stocks. But when the dotcom bubble popped, I’m sure he wished he’d been paying off his mortgage instead.

It took a long time and there were plenty of days when I wondered if we’d ever achieve our goal. I wondered whether it was worth it to live that way rather than just borrow and spend like most people. But we stayed the course.

Eventually we paid off the mortgage. At that point we started dividing our “extra” money into halves. One half went into savings and one half we were free to spend. But at that point in life we usually didn’t have any need or desire to spend half of the “leftovers,” so we added it to savings and at that point we were able to move rapidly to financial independence.

So that’s how we did it.

I know it won’t work for everyone. Everyone has a unique situation. We had some ups and downs along the way, as everyone will, and we adjusted our goals as necessary. The key to us was making a plan and sticking with it.

Best wishes to all who are on the journey. I know how frustrating it can be to miserable and working for something that seems so distant. I can only offer my experience in response. Hang in there. Someday you’ll be at the finish line.