It started six years ago. I was 40 and had been blogging about personal finance for a year. I vividly recall listening to an episode of the Dave Ramsey show and vowing to be debt-free by age 50. A nice goal, but wildly optimistic.
At the time we had $250,000 in non-mortgage debt and a mortgage of about $600,000 (gulp!). Today the $250,000 is paid in full, and we will retire our mortgage over the next few years.
So how did we do it?
Let’s start with our debt
We had debt from the purchase of our home in 2004. Most of the debt was on our first mortgage, of course, but about $50,000 of it was on a home equity line of credit. We also had about $160,000 on the line of credit from a major remodeling project.
We also had about $40,000 in credit card debt. This debt came from a number of major purchases. As I recall, we even paid for a portion of a car with credit cards.
Our strategy was simple:
1. No new debt: As the saying goes, when you are in a hole, stop digging. We stopped digging. We even turned down 0% financing from a furniture company and paid cash instead. One concern was that we’d buy more furniture than we really needed if we financed the purchased. And we just didn’t want any more debt.
2. We used our home equity line of credit: As noted above, most of our debt was on a home equity line of credit. While this created one serious problem for us (see “Our Mistake” below), it had two really important advantages.
First, the interest rate was really low because the line was secured by our home. While this presents the theoretical risk of a foreclosure, the upside in today’s market was a great rate. Once you add in the tax benefits of a home equity line, the effective rate goes even lower.
Second, I felt comfortable living without an emergency fund in a savings account. We could always tap the home equity line of credit in a true emergency if need be. [Jackie's note: this isn't something you can always count on. Those lines can be frozen or revoked.]
As we paid down the debt, the amount of available credit increased. The result was that we could put 100% of our excess cash toward our debt, without locking some of it up in a low paying savings account.
3. We used 0% credit cards: I know this is a hot-button topic, particularly with the Dave Ramsey crowd. But it’s a part of our story. We put as much of our debt as we possibly could on credit cards that offered 0% balance transfers. In some cases we were lucky enough to find no fee offers, but in many cases we paid the standard 3% transfer fee. In either case, we not only saved a ton in interest, but we also paid off our debt faster.
4. We used the debt snowball approach: As Jackie recommends, we used the debt snowball approach. Simply put, as either debts were paid off or our minimum payments decreased, we kept paying the same amount (or even more) on our debts.
As I alluded to above, there was one big hiccup in the whole process. Several years ago we attempted to refinance our first mortgage to a lower rate. We were denied, and the reason was simple. With the fall in housing prices, our home was worth less than our first mortgage and home equity line of credit combined. As a result, we lost out on a much lower interest rate for a period of time.
Since then, we’ve managed to refinance our mortgage twice as a result of paying off our home equity line of credit. In the end it worked out, but this is one clear disadvantage to having a second mortgage.
So far our debt story is unremarkable. We didn’t go into any new debt. We lowered the interest on our debt as much as possible. And then we threw all available cash at the debt monster. So what’s our secret?
In 2007 I started the Dough Roller. At the time it was just as a hobby. I enjoyed learning how to set up a blog, and I love writing about personal finance and investing. It was a perfect combination.
Here’s what I didn’t expect—the blog started making money. It didn’t make much at first. And in 2008, we gave half of the income away to charity. But eventually the blog became a second income, surpassing how much I was making at my regular job.
As you might have guessed, we took every penny the blog made and did one of three things with it: (1) paid taxes, (2) gave to charity, and finally (3) put everything else on our debt.
The point is that if you really want to get out of debt fast, find a way to make some extra income. Blogging is just one approach to making money, but there are others. The key is to find something that works for you. Even a few hundred dollars a month can go a long way to climbing out of debt.
One result is obvious—we got rid of $250,000 in debt. But it was much more than that. We achieved financial freedom. With no debt and some money in the bank, I can quit my job and go work somewhere else, without worrying about how we’ll pay the bills. I can get job without making the salary the number one factor. And I can even quit my job and blog full time, something I’m seriously considering now.
As a child, my family never experienced financial freedom. My wife and I didn’t either for many years. But looking back, the freedom that comes with getting out of debt has been well worth the sacrifice.
Rob Berger is the founder of the Dough Roller, a personal finance and investing blog.