How Did I Pay Off $80,000 in 3 Years?

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Simple Answer

The simple answer is that I followed Dave Ramsey’s 7 Baby Steps, used a zero-based budget, increased my income, and decreased my expenses.  Once I learned how to live on a zero-based budget, I made the minimum payments on all my debts except one.  I made a monthly mega-payment on the debt with the smallest balance.  Once that debt was paid off, I attacked the next smallest balance.  I repeated this method known as the debt snowball until all my debts were paid in full.

Full Explanation

I did not use a quick fix to get out of debt.  It required a lot of sacrifice, hard work, and determination.  The full explanation of how I got out of debt is below.  Here is an outline of what will be covered:

  • I. Dave Ramsey’s 7 Baby Steps
  • II. Assess the Situation
  • III. Budget
  • IV. Increase Income
  • V. Decrease Expenses
  • VI. Punch Debt in the Face
  • VII. Learn to Say “No”
  • VIII. Motivation
  • IX. Repeat

I. Dave Ramsey’s 7 Baby Steps

A. The Baby Steps

Dave Ramsey’s 7 steps to financial freedom are:

  • Baby Step 1: $1,000 cash in a beginner emergency fund
  • Baby Step 2: Use the debt snowball to pay off all your debt but the house
  • Baby Step 3: A fully funded emergency fund of 3 to 6 months of expenses
  • Baby Step 4: Invest 15% of your household income into retirement
  • Baby Step 5: Start saving for college
  • Baby Step 6: Pay off your home early
  • Baby Step 7: Build wealth and give generously

Since I had over $1,000 in a beginner emergency fund, I was on Baby Step 2.  In step 2, I solely focused on repaying the $80,000 I owed and suspended my other financial goals.

B. Suspend Other Financial Goals

I decreased my emergency fund down to $1,000 and made a large payment using the excess amount towards my debt with the smallest balance.  Depleting my emergency fund down to $1,000 felt like I was kicked in the stomach, but I used that panic to motivate me to get out of debt quickly.

II. Assess the Situation

I used the National Student Loan Data System to find out how much I owed in student loans.  I also requested a free credit report from one of the three reporting agencies to find out how much other debt I owed. Consumers are entitled to one free credit report from Experian, Equifax, or TransUnion annually.

A. Good Standing or Default?

Based on the information I gathered, I was able to determine if I was in good standing or default on any of my accounts.  Default is the failure to pay on a debt when due or meet the debt’s legal obligations, whereas good standing is meeting the obligations of the debt agreement. I was in good standing, but if any of my accounts were in default I would have negotiated the balance due with the lender and received the settlement in writing.

B. Debt Consolidation

Debt consolidation combines the monthly payments of all the eligible accounts and/or creates one loan to pay off a group of others.  Consolidation is most beneficial when the new interest rate is lower than the average interest rate of the old accounts.  However, for federal student loans, consolidation often makes the lender ineligible for repayment incentives offered by the government.  I did not want to forego other repayment incentives and did not pursue debt consolidation.

C. Incentives

A loan servicer is a company that handles the billing and other services on a federal student loan. My student loan servicer Great Lakes offered an interest rate reduction of 0.25% when I signed up for Auto Pay.  I was also eligible for the 10 year Public Service Student Loan Forgiveness Program. After making 10 years if qualifying payments all remaining balances are forgiven.  However, this was not a good option for me.  I did not want to be in debt for ten years and I did not want to limit my career to solely working in public service for ten years.

D. Repayment Plan

Student loan servicers offer various repayment plans that give the lender the flexibility to change the terms of how the loans are repaid. The terms often affect the monthly payment or how long the lender needs to repay the loan.

I was automatically enrolled in the regular 10-year repayment plan for my loans, which made the minimum payments about $800 per month.  I reviewed the various payment options available to me and I switched to an income-based repayment (IBR) plan.  The IBR plan reduced my monthly minimum payments to about $400 the first year and it was set to incrementally increased based upon my income annually.

III. Budget

A budget is a financial plan for a determined period.  My financial priority was to get out of debt and I created a budget to execute that goal.  I used a zero-based budget in which my income minus my expenses equaled zero.  Every single dollar served a purpose and I determined it.

A. Cash Only and the Envelope System

Cash only means using cash instead of credit cards to purchase goods and services. Studies have shown that people spend more when paying with a credit card. This also applies to debt cards, but to a lesser degree. Using credit cards allows people to delay accountability when making purchases. The act of handing over cash forces people to think over the purchase.

The envelope system involves storing cash for expenses in physically separate envelopes instead of relying on a debit card or credit card.

Every pay period, I used cash only and the envelope system to stay on budget. Specifically, I used it for variable expenses such as groceries, gasoline, and entertainment.  Eventually I disliked carrying envelops and used tiny binder clips inside my wallet.  I continued to use my debit card for fixed expenses such as rent, utilities, and auto payments.

B. Track Spending

I used MS Excel to develop my budget and track my spending, including my cash purchases.

IV. Increase Income

I increased my income by selling my gently used household items on Craigslist and EBay.  I sold my clothing, shoes, and bags to local thrift shops and consignment shops.  At my full-time job I concentrated on doing a good job and making my supervisors aware of my accomplishments.  My hard work paid off and I received promotions that increased my income by $25,000.  I also worked as a Greeter at my favorite yoga studio.

V. Decrease Expenses

One of the benefits of my part-time job was a free yoga membership; therefore, I no longer needed to include a gym membership in my budget.  I further decreased my expenses by cutting unnecessary items out of my budget. I downgraded my cable and internet service package and cell phone plan.  I stopped paying for garage parking, cooked more meals at home, and brown-bagged lunch for work.  I decreased my retail purchases and started to shop at thrift or consignment stores.  I used Craigslist or Goodwill to find household items.  When I did make retail purchases I used coupons and promotional codes. I also learned how to negotiate when making expensive purchases.

VI. Punch Debt in the Face

A. Set a Deadline & Create Visuals

Based on my budget and predicted income, I set a deadline to get out of debt.  I also created a visual in my home to track my progress.

B. Monthly Mega-Payments

The debt snowball is a repayment method where all debts are ranked by balance (regardless of interest rate). Minimum payments are made on all debts except the one with the smallest balance. The lender attacks that debt with an additional payment each month until the balance is paid in full. Once it is paid off, the money is rolled into the next debt with the smallest balance.

Here’s how I used the debt snowball. I made the minimum payments on all my debts except one.  I made monthly mega-payments of about $2,700 on the debt with the smallest balance.  Once that debt was paid in full, I rolled the money I was paying onto the next smallest balance.  I repeated this method until all my debts were paid in full.

VII. Learn to Say “No”

I learned how to say “no” to friends, family, and myself.  On a daily basis, I told myself no.  If an item was not a priority or included in the budget, I could not purchase it. Anytime I considered making a new purchase, I always asked myself, “Is the item worth being in debt for X additional days or months?”  Most times, the purchase was not.

VIII. Motivation

I decided to get out of debt when I realized I was unhappy living the life I attained using debt. I stayed motivated by focusing on my why.  I wanted to escape a life in which I was burdened by debt and unable to change my situation because I needed the income.  If I did not pay off the debt the minimum payments would be $1,014.37 monthly.  I wrote that number down and looked at it every day.  By getting out of debt, I could no longer make excuses about why I was unhappy.  Now, I have the freedom to change my life without worrying about making payments.

IX. Repeat

Following these steps consistently was very challenging. When I created my first zero-based budget, I forgot to include several expenses and I under or overestimated the cost of certain items.  I had to redo my budget until I finally got it right.  Despite having a hard time at first, I kept trying to get out of debt.  By getting on a plan and sticking to it, I was able to accomplish my goal.  Now I can live more comfortably and enjoy the benefits of working so hard.

By Simone, creator of Slim Fit Wallet

Thanks for reading!