Update: Thanks to everybody who responded, we picked a winner for the debt scholarship. For those interested to know who it was, please scroll to the bottom of the article. And for those here for the first time, this was the original article highlighting the two finalist’s get out of debt stories.
Many of you emailed me wanting to know more about the Debt Movement after I talked briefly about the initiative here, and I directed you to the actual site to learn more. But now that the 90 day challenge is over, we can really use your help!
As a sponsor for the Debt Movement, MoneyNing is going to help one participant pay off $1,000 in debt! There are over 1,000 initial applicants and we’ve narrowed it down to 2 candidates, and we need your help to pick the one most deserving of our debt scholarship. Please either leave a comment below with your thoughts, or simply contact me to do the same. We will pick the winner on the 17th, and update this page accordingly!
Lilly and Ruben’s debt journeys are familiar to all of us. These are ordinary folks who just fell deeper into debt without even realizing the damages they are doing to their finances. Luckily, they participated in the movement and are now well on their way to financial freedom. Here are their stories:
Lilly’s Debt Story
My journey to debt freedom has been an interesting, and at times difficult, one so far. For a long time, I didn’t understand what dollar meant. When I was a high school senior, I chose an institution that was not exactly inexpensive, to say the least! I had my heart set on going to a private school, and so to make up the costs involved in attendance, I took out $45,000 in student loans, both private and government-funded. Money didn’t mean anything to me yet; all those dollars were simply numbers on a page.
My debt compounded once I graduated from school. I had gotten a student credit card with a small credit line to start building credit; the credit line was $500, and I always made sure it was paid off every month. Then, a friend of mine told me that as long as you make the minimum payment on your credit card, it would not negatively impact your score.
Hearing those words was like giving an alcoholic who is trying to stay sober a handle of vodka. All of the sudden, instead of thinking of paying the balance off every month, my thoughts went something like this: “wait, wait, wait…you mean, I can buy something that I want now, even if I don’t have the money for it, and I can pay it off later? AWESOME!”
I am a bit of an impulse shopper, which has gotten me in trouble in the past. Hearing that bit of information, along with my credit lines being increased once I got a full-time job, just added fuel to the irresponsible shopper fire. Before I knew it, I had thousands of dollars of credit card debt, and still didn’t understand what a dollar meant.
Then something happened. I started looking at this thing on my credit card statement called “interest accrued on purchases.” And I started adding up those numbers, along with the interest from my student loans. I realized that I was being charged hundreds of dollars every month in interest. That’s money I could be putting toward future educational endeavors, towards my retirement, towards my savings account, and towards future big-ticket purchases. And that was the moment I realized I would be slave to my debt unless I really start tackling it.
Until I really started focusing on getting out from under the mountain of money that I owed, I really wouldn’t be able to use my hard-earned money the way that I want. That started my own personal debt journey.
This year, I committed myself to focusing on paying off the debts that I have accrued. It certainly hasn’t been an easy journey; inevitably, the moment you decide to start paying off debt is when all of your friends and family wants to go on a trip somewhere, or go out shopping, or go to a nice dinner. This year especially, I have a lot of friends getting married, so there are weddings to go to all over the country, which means airfare, hotel, meals at restaurants, and other expenditures.
Two of the biggest tools that have helped me to focus on this are my monthly budget, and my boyfriend and other friends. Each month, I am able to allocate my money to different things as needed. Some months, I have to buy a plane ticket, and so there is not as much money left to pay extra on student loans. Other months, I have a surplus and can either put that into savings, put it towards debt, or even use a little bit to give myself a small reward for making progress.
I have been completely honest with my friends/boyfriend about how much I want to pay off this debt, and we have started making some changes to help with this. Instead of going out for dinner and a movie, we all go over to one person’s house and make dinner and rent a movie. When my friend Jamie and I want to go shopping, we will hold each other accountable and make sure we aren’t spending money we don’t have, if we purchase anything at all (we have both acquired the skill this year of window shopping and NOT buying!).
My boyfriend and I do a lot of cooking at home instead of going out to a restaurant, and we have started splitting groceries as well so it cuts down on our food waste and our grocery budget. If I were to give advice to someone on how to get out of debt, I would tell them that a budget is absolutely essential, as well as having someone that you can talk to when things get rough.
Getting out of debt is not easy, and the balance doesn’t just reduce is a linear fashion either. There have been months where I get my credit card balances down, and there have been months where they go back up due to unexpected expenditures. If you get off the wagon, you just have to dust yourself off, and get right back on. Don’t expect perfection and complete financial austerity during this journey. You’re human, and life happens. The important thing is to pick up right where you left off.
I would also say to make sure that you are not bankrupting yourself, and to celebrate your small milestones towards debt reduction. While you absolutely need to pay off this debt, you also don’t want to drain your savings or your retirement account to do so. I put $5 every week into my savings account, and have an automated deposit into my retirement account through work. If I don’t see the money, I don’t even know it’s gone. And when you do put a good chunk of money towards your debt, a small reward to celebrate gives more motivation to continue the journey towards financial freedom. I am absolutely ready to be debt-free, and have gotten a good start on it. Thanks to the Debt Movement for continuing to remind me to focus on my goals, and giving me good tips and tricks to help demolish my debt!
Ruben’s Debt Story
Most of my debt is “good debt,” and therefore, I don’t have a problem.. That’s how I viewed my own situation prior to the Debt Movement. Never mind that $75,000 was in student loans (which, at the time of my 2001 graduation was only $50,000, but increased due to repeated forbearance). Never mind that I took out $494,000 in an interest-only mortgage back in 2007, when my wife and I were making under $90,000 per year. And never mind that the value of that house plummeted to less than $250,000 shortly thereafter. That didn’t matter — I justified my over half a million dollars in debt by deeming it “good debt” – debt used to finance things that should go up in value.
In reality, without the Debt Movement, our lives would have still been okay. Both my wife and I graduated in Engineering (which means we are supposed to be good at math), and for a while we could make the math work out.
We were blessed to have been among the lucky few homeowners to get a mortgage loan modification, which helped ease the stress tremendously. The mortgage principal stayed the same, but payments were essentially refinanced into a 40-year fixed interest with a balloon. So there was no problem — we’d be free and clear by the year 2052! This was our track. In fact, I was planning to have a “mortgage burning party” sometime near my 75th birthday. Debt was just supposed to be a fact of life – part of life’s routine: wake up, brush my teeth, go to work, make money, pay debts, browse the internet, then go to sleep.
During one of those times browsing the internet, I was exposed to the Debt Movement. I was a former member of Weight Watchers, where each week, the coordinator would announce an aggregate total of the group’s weight lost (or gained). Not only was it motivating to hear “the group lost 87 pounds this week,” but it also meant that if I slipped and gained a few pounds, hopefully the rest of the group’s weight loss would offset and hide my gain.
So the idea behind the Debt Movement, and how it would track our group’s debt loss seemed like a good idea, and I figured I’d give it a try. When I started reading the blogs, watching the Google Hangouts, and visiting the sponsoring sites, I was expecting to feel motivated and informed. Instead, I started to feel a bit uncomfortable, because I felt like my take on debt’s role in life was being challenged.
People would refer to student loans as “bad debt,” which raised an eyebrow. Then people would actually refer to mortgage loans as “bad debt,” which raised another eyebrow. With both eyebrows raised, my eyes started to open up and see that my “”good debt” was, indeed, a problem. Once it showed up on my personal balance sheet, it no longer retained its good vs. bad character.
Lenders of “good debt” still charged interest just like credit cards. And, in fact, if one is struggling to pay debt and bills, then in a way all debt is “bad debt.” Even though the loan modification made our expenses go down, the birth of our first child in 2010 meant that it was still challenging to keep expenses below our income. The biggest reason, in my opinion at the time, was that my wife would stay home to raise our kids and not “put her engineering degree to use.” I would constantly get on her case for not getting a “real job.”
But the Debt Movement made me realize that we didn’t have an income problem—in fact, my salary over time had increased to about $120,000, which was more than what my close friends were making. Our problem was that we had too many debt obligations that tied up over 50% of our take home pay. One thing I learned during the Debt Movement was the concept of the “debt snowball.” In the past, I read that the best way to decrease debt is to pay them off from highest to lowest interest rate. The debt snowball pays down debt from smallest to largest balances. This gives us great momentum to start off with, but it also led to another unexpected result—fewer late fees.
Sometimes while traveling for work, due to my own lack of discipline, I would miss a month’s credit card payments. With 5 credit cards open, that meant 5 opportunities for late fees. By paying off the credit cards with smaller balances (despite, in one case, 0% interest), it also meant less stress trying to manage so many accounts, more focus, and fewer late fees.
Another major change for us was that we were getting ready to apply my annual bonus toward the down payment of a new car. I really wanted to get a new 2013 Toyota Prius V, which would cost $27,000. I was planning to put 20% down and finance the remaining amount of over $20,000. I calculated it would be mathematically possible to make monthly payments on this amount. But the Debt Movement changed my thinking, luckily, before I bought the car.
Over the course of 4 weeks of reading Debt Movement resources, my car preference had evolved from:
- 1st plan: Finance a new Prius V ($27,000)
- 2nd plan: Finance a less expensive new car ($20,000)
- 3rd plan: Finance a good used car ($16,000)
- 4th plan: Finance a less expensive used car ($10,000)
- 5th plan: Use whatever would have been used for the Prius V’s down payment, and just buy a decent used car with cash.
After some research and shopping on Craigslist, we ended up buying a 2002 Mazda MPV in great condition with low miles, for $5,900! And we couldn’t be happier with our purchase, knowing that we immediately saved over $20,000 by avoiding a car loan.
The Debt Movement only lasted 90 days, but we plan on applying what we learned over the rest of our lifetime. Even though we’ve only paid down $9,000 and still have another $583,000 to go, we know that the goal is attainable. We know that if we focus intensely, it’s possible to get rid of all debts except the first mortgage in only 3-4 years. That would mean paying down an average of $37,000 per year on an income of $120,000, which I realized is actually reasonable.
We can do all this with my wife not having to earn an income unless she chooses to (I no longer accuse her of not having a “real job”). After we pay off every debt other than the mortgage, it will be much easier to save more toward our retirement, save for our kids college, and take vacations using cash instead of credit cards. It will allow me to leave the corporate world and do my dream job: teach high school (originally, I wanted to teach civics, but now I’d really love to teach personal finance!).
The Debt Movement has also enabled me, personally, to closely look at the priorities in my life. My wife and I now have 2 kids, and my older son is almost 3 years old. I used to take him to Toys R Us or Target for fun. I’d spend money on toy trains and cartoon DVDs to show him how much I appreciated him. But now, I started budgeting after seeing the topic on Google Hangouts. The process of keeping track made me aware of how much I was spending on toys that would only be actively used for 1-2 weeks before gathering dust. Because of this realization, we “re-discovered” the local library as a place to hang out without spending money.
We only started doing this in February, but now it has become the highlight of the week for my son who asks to go to the library whenever we pick him up from daycare. He also asks us to read to him before he goes to sleep. It completely obliterated my former perception that budgeting – cutting costs and paying debt would involve too much sacrifice. On the contrary, I feel more rewarded than ever before, and we’ve only just begun this process.
Help Us Pick the Winner
It’s one thing to pay off your debt but it’s a completely different transformation to change your mindset towards debt. Lilly and Ruben is well on their way to financial freedom and both are very deserving of our help. Who should it be? Let us know below!
Update: The majority of you voted for Ruben, so please join me in congratulating him on winning the $1,000 debt scholarship!