A Reader’s Debt Story – Credit Cards, Student Loans and an Auto Loan

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I received the following email from a reader who wished to remain anonymous. This reader has made some excellent progress with paying off debt and I am so glad I was given permission to share this story. I think it is awesome!!

“About two years ago, I made a commitment to myself to get myself out of debt. I began with my credit cards, because they had the highest interest rate. I was successful in getting my credit card company to lower my interest rate– they gave me some odd months at 2%. About $3000 later, after making big payments on my credit cards and only slightly larger than minimun payments on my other bills, I was out of credit card debt. I’m proud to say I haven’t carried a balance since.

Then I moved on to my other debt. I went to an expensive private college for undergrad and took out a lot of loans for grad school, so I had about $40k in student loans, plus a $10k car loan. One year ago, I turned my attention to paying off my debt with the highest interest rate, a student loan at 5%. After a series of $800 monthly payments, I paid that sucker off. It was a GREAT feeling to look at my account online and see my obligation described as “fulfilled.” I’m down to about $5000 on the next loan, at 3.175% interest. All that will be left after that (I calculate it will take me six more months to pay it off), I’ll have about $4000 owing on my car (2.9% interest rate) and a few thousand on a zero percent interest student loan. No sense in paying that off, as I can put the money away and earn interest.

In May 2006, I had $30249 in debt. Now, 11 months later, I’m down to $16842. In the span of a year, I’ve paid off 56% of my debt.

At the same time, I’ve been saving money. I opened a high yield savings account with ING Direct and have money direct deposited into the account each pay period. I also put “found” money into the account, such as mileage reimbursement from my job. I went from having literally $400 in a savings account earning less than 1% per year to now having nearly $8000 earning over 4% interest. Each month (okay, more like each week), I look with glee at how much money I’ve earned in interest and smile knowing my money is finally working for me!

The most amazing part of all of this is how contagious it is. I think that’s why your site is so successful. I feel so good paying down my debt, I can’t wait until the end of each month to make my various payments. I track my net worth on paper because it’s a joy to calculate how much debt I’ve paid down and how much money I’ve saved each month. It’s an addiction! I’m addicted not to shopping, not to spending on things I don’t need, but to the rush of pride that comes with knowing I’m digging myself out of a hole to the tune of $1500 each month while building a nest egg that keeps growing.

If there’s one thing I’d offer to you as you work your way out of debt, and to your readers, it’s to keep your eye on the prize and try to make it fun. Once the momentum starts, it keeps building and soon it’s out of control– in a good way.”

Thank you for sharing your story…you are an inspiration!


17 Comments

  • Reply CK |

    This is an admirable story and it’s great that this reader has paid off so much of their debt. I would question why one would be in such a hurry to pay off student loan debt at 5% and 3.175% interest? The 5% is a borderline case, but the money spent paying off the 3.175% loan would be better off just being put in savings at 4.5% interest. Even considering in the taxes on the interest, you still come out ahead because the student loan interest is tax-deductible (making it effectively even less than 3.175%).

    I will say, however, that obviously the psychological impact of not having any debt is great!

  • Reply Piper |

    This story was so inspirational and touching that I had tears in my eyes as I was reading it. I am also on a journey to becoming debt free and this just gave me some extra motivation. Thank you!!

  • Reply Jim |

    Paying off credit card debt is a wonderful thing. Credit cards offer no advantage, no matter what the bonus offers are, when you carry a balance on them. I cannot wait to get rid of my credit card debt.

    Now the other low interest rate loans I simply cannot understand what the rush is? It is great to put so much away in a high interest yield account to actually make your money earn more money. Besides paying down debt, how much money is the excess losing? I agree with the things CK said regarding tax deductible interest.

    There is a fine line of getting rid of debt and building wealth. You have to consider everything on both sides of interest. Paying down a 3.175% loan and not earning 4.5% in savings, it will take more time.

    Either way paying down 56% of debt, just the credit cards alone, is a huge accomplishment. It is quite an inspirational story.

  • Reply "Anonymous Writer" |

    I wrote the piece you’ve commented on, so I wanted to chime in. I’m paying off my debt rather than putting the extra money towards savings (though I am also saving at a steady rate) because if I ever lose my job or find myself in other serious trouble, I’d rather be debt-free. That way, I won’t have to drain my savings to pay on the debt and fund living expenses. In that situation, assuming it happens once my debt is paid off, I’d be able to live off my savings without worrying about making monthly payments on my various loans (about $500/month in minimum payments). At any rate, thanks for the feedback!

  • Reply Chris |

    I don’t think the “I can invest my early payment elsewhere and make a better return” works as well in real life as it does on paper. When you have a debt, there is a clear goal and you can dedicate x amount of dollars to reach it. You are also more likely to put more money than you usually would just because you have focused on your goal of eliminating that debt.

    To actually realize a better return you need to go through the process of planning to reduce that debt aggressively, then put that money into the bank/investment every month instead. Psychologically, I think this would be tough and you end up paying more (and saving more) by paying down the debt rather than trying to invest extra cash.

  • Reply Da big D |

    I hate to think this way, but how much money does the writer make a year? If I made $100,000 a year paying off that much in 2 years is really no problem. If I made $35,000 then that would be something to see… I admire them for paying down their debt and they should feel proud of doing it.

  • Reply MVP |

    I totally agree with Chris. While I applaud the writer for working to get his/her finances in order, the mentality that saving money at x percent is better than paying off debt that increases at y percent is simply foolish (“No sense in paying that off, as I can put the money away and earn interest.”). If we agressively work to pay off ALL our debt – including credit cards, car loan, student debt, etc. – without investing or saving anything temporarily, just imagine all the money we’d then have available to save and invest, having NO debt bills!! Someone, please explain to me, how can you argue with that?! You’re only cheating yourself by playing with fire and you’re still completely bound by your debtors. How does that feel?

  • Reply "Anonymous Writer" |

    Good question. I make $70/year. That said, I live in Southern California where that doesn’t get you very much! But I’d be lying if I said I’ve been eating ramen or re-using my plastic sandwich bags. For me, it’s been a matter of putting my mind to it: making the decision that I wanted to pay off my debt and reorganizing my finances accordingly.

  • Reply CK |

    To answer Chris and MVP and the writer, mathematically it is very clear — you certainly do come out ahead just saving money at 4.5% rather than paying off debt that is at 3.175%. It’s the exact same principle as stated in the original story about not being in a hurry to pay off the 0% loan balance, just a difference in the spread.

    Now, of course, with such a small difference in the savings interest rate vs. the debt interest rate, the psychological factor of not having debt hanging over your head may very well be worth it. Certainly, the saving approach requires absolute discipline — you can’t spend the money that’s going into your savings account otherwise you should have just paid down the debt to begin with!

    It’s much easier these days with automatic online bill payment — you can really just set it and forget it. I myself plan to pay off our family’s student loan debt (very low interest) over the full ten year term. That is, of course, until the day that savings interest rates fall too far — and then I will just write a check and pay it off in one fell swoop.

  • Reply CK |

    Let me also just reiterate that I am not being critical of “Anonymous Writer”! She (He?) has done a stellar job and has made a choice that she is comfortable with and that’s all that’s important.

  • Reply danielle |

    I agree that it’s just better to be debt free, regardless of any interest rates. I think the op is doing the right thing by paying it off.
    If 70 K a year doesn’t “get you much” in southern California, I wonder why would anyone want to live there. What’s so special about California anyway?

  • Reply Kristina |

    People really need to get past the symplistic notion that it’s worth “making money” to keep debt that’s at a lower interest rate than one’s saving account. Complex financial formulas include taking RISK into account. Debt involves adding financial risk to one’s life. It’s not worth it to earn some miniscule amount of extra interest.

    Also, time has a value. Imagine the amount of actual time spent managing debt (paying bills) and mental time/space (worrying about debt or managing it). With zero debt, you are free to focus on building wealth and living a more simplifed financial life.

    Finally, there is a huge non-monetary value in being debt free. The Bible says that debt is a form of slavery (and people who aren’t religious can still see the same logic). It’s only in recent decades that debt has become so normalized and marketed. Imagine a total mental shift – imagine what it would feel like if you had zero debt, if your whole paycheck went to building wealth and whatever else you want to spend it on, if you actually owned your house and car outright, etc. All of this is not worth getting an extra few percentages of interest and juggling/”managing” debt for decades.

    And one last thing…depending on one’s point of view, there’s also a principle involved. That’s the principle of going back to how our grandparent’s lived when you only bought what you could PAY for; where people lived debt free and didn’t try to play interest games with smart, massive financial institutions; where we don’t accept debt as a given aspect of life; where we save money and build REAL wealth rather than playing games over 1.5 percent in interest.

  • Reply CK |

    I respect your opinion, Kristina, and I fully understand where you’re coming from. This is a case where each person will have to decide what they’re comfortable with and any decision that doesn’t involve frivolously wasting the money is the correct one.

    Playing these “interest games” is one way to get debt free (as I define it, to have positive net worth) faster. 1.5% on 30K in debt is $450 a year. Over the life of the loan, you save a few thousand dollars. For most, that’s not an insignficant amount to save! Why not have your debt work FOR you?

    As for risk and “debt management”, those are both valid points. But for many, again assuming that you are not constantly incurring new debts, putting money in an FDIC-insured savings account and paying one set amount per month on a defined balance is satisfactory on both counts.

    OK, I’ll shut up now. =)

  • Reply Kristina |

    CK,
    Yes, I agree with you that it is possible to “manage debt” in a way that might earn a little money over time. (Though running a financial calculation that includes risk might erase these gains.) And we agree that the main point is to work toward some form of financial freedom and to generally be responsible with money. However, I suggest that people just try living debt free at some point in their lives. Then you can see what it feels like. And if you don’t like it, I promise that you can go right back into debt with no problem in our country :)

  • Reply Kim L. |

    Congratulations writer! I applaud anyone who makes a decision to change their life and works hard to do it .. no matter what the circumstances! Keep up the great work.

  • Reply Chris |

    CK, I would argue that it is quite different. Creating debt for the purpose of gaining higher interest (borrowing cash at 2% and putting it in a 5% savings account for a year for example) is far different than deciding how to deal with regular consumer debt.

    I believe that you would be more likely to pay more towards paying down a debt than you would if you decided to put a debt repayment plan into a high-yield investment instead, and I think that alone would eat up your actual returns.

    There’s a feeling when you have debt that you must pay it off to get rid of that bill. That motivation results in a higher return as opposed to investing, since you are more likely to sacrifice money otherwise tied up in your budget to pay down debt than you would by simply investing it.

So, what do you think ?

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