How We Paid Off $250,000 in Debt in 5 Years

by Rob Berger

How we paid off $250,000 in debt in 5 years

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.

Our mistake

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.

Our secret

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?

Blogging.

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.

Our results

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.

Posted in Debt Free Stories | 10 comments.

10 Responses to How We Paid Off $250,000 in Debt in 5 Years

  1. Olivia says:

    I’m glad you’ve reduced your debt. It must be a huge load off your mind.

    Usually your articles are encouraging or can be applied in some way to our own situation. However, as the U.S. median household income is $50,100, this one is not terribly helpful. We’re right there mucking around with “the average guy”. My sister once put it succinctly, “We can’t afford to go INTO debt.”

    A while back my mom gave us a Parade article on how a bunch of people saved massive amounts of money each year. It’s as if the magazine was saying, “And you can too!” No one listed their incomes. Just a cursory look at BLS figures for their careers showed they made far better than average. The article was deceptive because it didn’t include essential information.

    I’d like to know how the “median family” does it. Can you help with that?

    • Jackie says:

      Hi Olivia,

      Every debt story (and situation) is different, but they all generally have a couple of key factors that will apply to anyone: the decision to get out of debt, sticking to it, and either reducing expenses, increasing income, or both. I think this guest post is interesting because it goes to show that even people who are earning an above-the-median income can get into debt.

      There are more debt stories here, with a variety of incomes and situations:
      http://www.thedebtmyth.com/category/debt-free-stories/

      I’ll definitely continue to try and help with the “median family” though!

    • Rob says:

      Olivia, you raise an interesting point. I guess I’d say two things. First, when I made the commitment at age 40 to get out of debt by age 50, it was frankly a ridiculous goal. It was impossible given the amount of our debt and our income. I think impossible goals though are a good thing. If we had “failed,” and it took me 15 years instead of 10, would it really have been a failure?

      Second, although the amount of our debt may be a lot more than others, I think the steps we took to get out of debt do apply to many situations. Whether you have $5,000 or $50,000 in credit cards, (1) lower your rates as much as possible, (2) put all extra cash toward your debt, and (3) work like heck to earn more money to speed the process along. Easy? No way. But I think the process is generally the same for most folks.

    • Olivia, you raise a very valid point. We too are a U.S. median income family and are working out way out of debt. Our journey is fairly new, and it’s going slowly (we started our debt journey with a 65%DTI), but we are winning. Head on over to our blog – you might find some helpful tips!

  2. Jim Astor says:

    Key points in your article: don’t take on more debt and find extra income, if possible. Too many of us think nice-to-have items are necessities. As a mortgage lender, I often pointed out to applicants that they could reduce their debt-to-income ratio by consolidating debt, getting a less expensive car, etc. I also advised them to accrue more savings, for a down payment or closing costs, by minimizing unnecessary expenses such as: monthly gym membership, all-inclusive cable TV packages, etc. Amazingly, so many of my customers had no clue as to the total amount of credit card debt they had outstanding. They always said they were comfortable with the minimum monthly payment. I always told them they were a creditor’s dream.

    • Rob says:

      Jim, I couldn’t agree more. One key aspect that I only alluded to in the article is this–as my blog started making some money, we didn’t change our lifestyle one bit. We live today exactly as we lived when we made a lot less money. By keeping our lifestyle in check, it allowed us to tackle the debt quickly.

  3. Sabrina says:

    Hey Olivia, I was thinking along similar lines. Paying off $250,000 in 5 years is $50,000 a year. I love Rob’s blog and I have benefited greatly from it, but if you would like to read more about paying off your debt at ANY income level, I recommend any of the books in David Bach’s “Finish Rich” series. Bach is brutally honest and will tell readers that many of them don’t have an income problem, they have a spending problem, and he shows readers how to live within their means AND save for a rich retirement at any income level.