Deb and I have been very fortunate to have never been in debt. (Apart from our house, and that won’t be for much longer.) We are blessed to have parents who paid for our education through college, which is a big reason why this is true. Nevertheless, we’ve been on our own since then and we’ve continued to shun debt like the plague. So, similar to what we did in our “If We Had a Million Dollars” post, we thought we’d think through the scenario of our life if we were to suddenly discover that we were $200,000 in debt. [Cue ominous music here.]
Debt comes in all different flavors and since this is a purely hypothetical scenario (we’re glad!), we’ll lay out the assumptions of what we’ve got to deal with then we’ll break down our thoughts into 1) what we would do, 2) what we might do, and 3) what we won’t do.
- Car loan – $10,000
- Credit cards – $10,000
- Medical bills – $30,000
- Student loans – $150,000
Total Debt: $200,000
What We WOULD Do
We have such intense hatred for debt that just the mere thought of it sometimes makes our blood boil. (Hence the plan to pay off even our mortgage in less than 3 years.) If this amount of debt “snuck up” on us, believe me, there will be carnage. The war paint is coming out and the heavy artillery will be loaded. Some serious damage is about to be wreaked.
- Make Ourselves Feel the Urgency – To remind ourselves of the heinous nature of debt and to help us to get rid of it as quickly as possible, we would first punish ourselves in such a manner that we would never forget it. We might require ourselves to wear a sticker that says, “I’m a slave to debt” everyday until we are paid off, or maybe we’ll just publicly humiliate ourselves by posting our debt woes on a blog that the world might marvel at our financial irresponsibility. The point is to make ourselves viscerally feel how bad debt is so we’ll have the deep sense of urgency to get rid of it and to never ever incur it again.
- Cut our Budget to the Bone – You may be wondering how people who only eat on less than $60 a month can cut their budget anymore? Well, for starters we would reduce our charitable giving only to the 10% tithe to our church instead of the 20% we currently commit to. Then we’ll stop all saving and investing to redirect the hose entirely to the debt. Then we’ll shave off things from the budget like smartphones, gifts, travel, etc.
- Increase Our Income – We don’t care what it is, we each will be looking for alternative sources of income. Door-to-door sales, tutoring students, walking dogs, freelance writing, delivering pizzas, selling plasma, etc. Until the debt (minus the house) is paid off, there will be NO leisure, NO entertainment, NO fun, NO life. Only gainful employment.
- Sell the Clown Car – We would sell the car immediately to wipe out the car loan and in its place buy a cheap, gas-efficient commuter car WITH CASH. Then I would force myself to transcribe the entire post on “Driving Off a Cliff with a New Car Loan” 50 times. BY HAND.
- Sell Anything Else that Can Be Sold – Books, clothes, furniture, appliances, tools, kidneys (not really), and anything else not essential to living will be sold for loan payments. We would even sell the iPhones and resort to flip phones or cancel the cellphone plan entirely and go entirely with Google Voice for a while.
- Cut up the Credit Cards – I’m not a credit card czar like Dave Ramsey, but if we found ourselves $10k deep in credit card debt, it is readily apparent that we’re totally out of control and drastic measures are needed. So we will be doing “plastic surgery” and going all cash in our transactions.
- Play the Negotiator – We’ll be calling every creditor to try to negotiate some sort of concession with them. It may not always be possible, but maybe they’ll lower interest rates, lower monthly payments, or even lower the balance due. Not a guarantee, but worth a try. Having to resort to beg for mercy from creditors is humiliating, but so is being a slave to them.
- Start the Debt Snowball – The debt snowball is a system for organizing debt repayments. We pay minimum payments on all debts, but pile on as much extra onto one debt at a time until it’s fully paid off from smallest balance to largest. It would go in this order: 1) Car loan (should be done in one fell swoop by selling the car), 2) Credit cards, 3) Medical bills, 4) Student loans. This method doesn’t save the most money because some of the later payments might have higher interest rates, but the point is to help us see small wins to motivate us quicker through the debt repayment process.
What We MIGHT Do
Since this isn’t a real scenario, there are other potential options that we might consider depending on what the reality was. Here are just a few.
- Start the Debt Avalanche – This is the system of debt repayment in which you pay them off in the order of highest to lowest interest rates. I’m normally a proponent of the debt snowball method because it’s more motivating, but if there are huge differences between the interest rates or if the debt amounts aren’t too different, I might opt for the debt avalanche approach.
- Refinance student loans into home mortgage – There are many variables to consider before jumping into this one, but there are potential savings of lowering the interest rate and consolidating payments. Student loans aren’t dischargeable in bankruptcy, but your mortgage is secured with your home as collateral so they can take it away if you don’t pay. Risks on either hand. Nevertheless, this is an option on the table.
- Sell the house – If the situation is dire enough within the big picture, selling the house is also an option on the table.
What We WON’T Do
Given the fact that there’s huge business in debt services, there are lots of ideas out there to “help” people in debt. Here are a few ideas floating around out there that I would NOT follow.
- Use a Debt Consolidation Service – Many of these services simply lump my debts together and extend the time I have to pay them off at a “lower” interest rate. It sounds nice in theory, but I’ll actually end up paying more in interest that way (and that’s how they get paid). I can just do the same thing myself by doing the debt snowball or debt avalanche. No need for someone else to do what I can do myself.
- Count on Student Loan Forgiveness – The US Government has a program that allows for student loans to be forgiven for individuals in full-time public service (or nonprofit) employment after a certain minimums of on-time payments have been paid. There are lots of fine print as you can imagine, but regardless of any of that, I’m not sure I want to count on the government to clear my loans when I have no idea what’s going to happen in the future. Better to clean it out ASAP!
- Plan to Declare Bankruptcy – Bankruptcy is not a “get out of jail free” card. It’s not a good plan for debt reduction, especially when student loans aren’t dischargeable in bankruptcy.
- Continue Life as Usual – Even though most Americans live as though debt is a normal, everyday part of life, we refuse to accept that for ourselves. No matter what the popular opinion is around us, debt is still slavery to the lender, it’s still a flaming emergency, and it’s still a cancer that’s destroying our financial health. We value freedom and peace of mind too much to allow ourselves to continue living as though nothing is wrong. So that’s why the very first step in all of this is to light the fire of urgency beneath us to resolve this emergency.
Of course, this is just a hypothetical situation and is not intended to be an exhaustive “how to get out of debt” guide. Some readers might be thinking, “Pshaw! $200k is tiddlywinks compared with the debt I’VE accumulated! $400k just from school! I’ll NEVER be able to pay off THAT much.” Or others may say, “But I can never make enough money to pay off my loans!” And we’ve all made the statement, “But that’s not MY situation.” Indeed, not everyone’s situation will be the same and the precise steps taken will vary from person to person. But whatever our excuses, are we simply resigning ourselves to a life of perpetual servitude to the lender? That’s like the African American slaves saying, “It’s great down here working on the plantation, I’m NEVER gonna leave!”
The inconvenient and unavoidable truth remains that paying off debt requires making big chunky payments while not incurring anymore. This will require some lifestyle adjustments and also probably some cognitive adjustments too. THAT’s the rub, isn’t it? We’re afraid of change, we’re afraid of the discomfort, and we’re afraid of what others might think of us. As with most things in personal finance…it’s not the “finance” side but the “person” side of that equation that’s the problem. You don’t need to do was we would do, but maybe it’s time to stop doing nothing.
Getting to the Starting Line
We are in a race to financial freedom. As long as we are in debt, we aren’t even at the starting line. It doesn’t matter how much we dream about “the finish line” of financial independence, or how much we read about the “running techniques” of investing, or even hiring the best financial “coach”. If we’re stuck behind the starting line, we’ll never finish the race! So getting out of debt is essential to ever getting out of the starting blocks.
There are many miles left ahead, throw off the debt that besets us, save the crumbs, and let’s finish this race.
So what do you do to motivate yourself to pay off debt? How do you stick with it even when the going gets tough?