How To Get Rid Of Your Debt Disaster

Most people take on some form of debt in their lifetimes. I think a lot of people see debt as just a part of life. Sure for most of us a mortgage is probably going to be the only way we can afford to own a home. Generally speaking a mortgage is seen as a good type of debt. For one you are purchasing something that will at least maintain its value over time. It might even appreciate cancelling out some of the interest you paid over the years when you sell. Certainly some people may have taken on a mortgage that is killing their ability to save, invest and avoid debt. This I would consider a debt disaster but for the most part a mortgage is ok debt to have.

The Car Loan

The average car loan in 2022 looks like this…(numbers from here)

Do these numbers make you jump out of your seat? They should. The average Salary in the US is $54,490. Meaning that there’s some people who are taking a car loan that is almost a years worth of salary! That doesn’t even count the interest! The Interest paid on the new car loan is $5,332! The interest on the used loan is $7,634!

I bought a very high tech car in 2019 for $21,000. It’s a Kia Forte. For 11 years before that I owned the first model Kia Forte. The reason why I say its high tech is because it has most modern safety technologies, heated seats, a Harmon Kardon speaker system. I’m not bragging I’m just trying to show you that I don’t go without. It’s super luxurious compared to my last car. For those that might argue about winter weather and sedans. I live in the northeast and have driven a sedan since 2009. I have a job in a hospital that requires me to be there. Ive never had an issue. I did get winter tires on my last car which were awesome. Haven’t got them for the new car yet.

Instead of someone buying a new $40,290 car they bought a new Kia Forte for $25,285 (I didn’t add in the deal the dealer gave me in 2019). I’m not going to change anything else but for the record I think financing a car for 69 months is crazy. Interest paid is now $3,274. A difference of $2,058. Your payment would also be lower at $420.

All together you have $19,101 more in your pocket or $277/month over the 69 months. If you have credit card or high interest school loan debt you should apply that money towards those to get them paid off. If the rest of your debts are paid off you could invest it.

Let’s say you invest 277/month in the S&P 500 for 69 months. Check out How To Start Investing The Easy Way to find out how. Over the years the S&P 500 has averaged a 10% return. After the term of the loan you might have $25,352. Now instead of losing money in interest you have made $6,239.

BUT WAIT THERES MORE!

If you decide to keep that money invested until retirement age of 65 (lets assume you’re 30). That initial $19,101 would now increase to $712,452!!!! To put this in context the average American only has $221,451.67 in retirement by the age of 60. Which makes sense because they are wasting all their money on depreciating assets and interest!

To be fair the stock market can have some large fluctuations that might not reflect these numbers in the short term. Meaning that at the end of the loan term your return may be lower or higher than what I presented. In the long term there is a greater chance for the estimate to be correct.

This is just one example of a debt disaster taking away money from your future self.

The Credit Card

These days you can finance almost anything. Credit cards having been around for a long time. The average Credit card interest rate is almost 20%. If you would buy something for $5000 (the average American has $5769 in CC debt) with a credit card and pay the minimum payment of $100 a month. It would take you almost 8 years to pay it off with interest costing you almost $5000. If you have a good track record of paying off your credit cards in full then taking advantage of their rewards can be lucrative. I get about $2000 a year back from my credit card strategy.

Luckily there’s these new finance tools that show up when you check out that lets you break your payments up with no interest! They usually say something like “buy now, pay later with no fees”. My opinion. If you can’t afford to buy an item that you don’t need with cash in hand then don’t buy it. It might be ok to have one of these things charging you once a month for 6 months but if you have 5 of them doing it you might get into trouble. These companies are not doing this out of the goodness of their hearts. They are banking on people needing more time to pay and that’s when the high fees start.

Student Loans

Student loans have had some bad press as of late. You hear countless stories of people hardly being able to pay them. Parents that were still paying off their student loans as their kids go to college.

There of course is the flip side of those stories. Like mine. I took on $180,000 of student loans for graduate school. This was a very calculated decision for me. I crunched the numbers and my income and benefits would increase dramatically by going back to school. If I completed the program I would be all but guaranteed a job, and could find one relatively easy anywhere in the US. After graduating it took me 5 years to pay off that loan and my income has increased 5 fold from my job before graduate school.

I’m not sure what the current climate is now but the Grad Plus loans I had were charging 8% interest. I was able to refinance with Earnest loans for a much lower rate. It might not make sense for some to refinance with a private company because you are giving up some federal benefits but for me it worked out well.

My point is student loans are not all bad. They give you the ability to increase your earning power and to do something you enjoy for a living. They become bad when you have no clear path of what you want to do and accumulate debt while taking random classes that are not fine tuned to any goal. There is no reason to go to school to “find yourself”. You can find yourself for free while you mull over what path you want to follow in life.

I will say that when I was 18 I had no perception of how money worked. If a parent is reading this you can’t expect your child to make good financial decisions. It’s your job to sit them down and crunch the numbers with them. If a state school near home provides the same degree as a private school in another state, go to the state school! Your kids might be pissed off initially but they will thank you for it later.

How To Get Out Of The Debt Disaster

Don’t get in it in the first place! I’m really hoping that there are some people that start reading this blog before they make any big money choices. Once you’re in a debt disaster it can be difficult and take a lot of time to get out of it.

For those that have something extreme like $50,000 of credit card debt and make $25,000/year you may want to consider bankruptcy. I’m not going to pretend I’m knowledgable about the topic but it might get you to place where you can start over and apply the money stuff of this blog to your life (and maybe some of the Deep Thoughts as well) and avoid getting yourself into trouble again.

For the rest. You’re going to have to change your perception of debt. Treat it like it’s a disaster. Something that if you don’t get rid of it’s going to ruin your life. Basically you’re now prioritizing getting rid of your debt. The reality is most of the stuff we buy in life we don’t really need. Having the diasater perception will make you rethink buying things and instead applying the money towards paying down debt. Once you have this mindset you’ll find that you’re debt gets smaller and smaller.

In terms of actually paying it off there are a couple well known methods. One is the Avalanche method and the other is the Snowball method.

The Snowball method started by working towards paying off your smallest loan as fast as possible. Once you have that loan paid off you take that payment and roll it into the next smallest loan. Ideally, this process would continue until all accounts are paid off. As you roll the money used from the smallest balance to the next on your list, the amount “snowballs” and gets bigger and bigger and the rate of debt being paid off gets faster.

The Avalanche method starts with paying off the loan with the highest interest rate first. When the higher-interest debt is paid off, you put it towards the next loan with the highest interest rate. Paying high interest first means that you should save more money with this method. The snowball method may be psychologically more gratifying.

The only way for either of these to work effectively is to prioritize paying your debt off. If you’re busy Bringing Fun Back To Your Life and Getting Rich Tent Camping maybe you won’t even notice not your not spending the money that you used to! When your debt is paid off and you have the financial freedom of being debt free the feeling will be priceless!

Thanks for reading. I am truly humbled. I would love to hear from you in the comments. If you would like your finances presented as a case study on this site then click the contact button up top and leave me a message. I’m looking for people to share their budgets, good and bad, and I’ll analyze how they could improve or present them as a positive example for the masses. No personal details will be presented on the site.

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