Since earning my college degree, I have been searching for strategies on how to get out of debt, but it’s only within the past year that I’ve become serious about establishing a debt management plan.Why did I wait so long to get rid of my debt? As a college student, I faintly understood just how difficult paying off debt could be — to me, it was something that adults in the real world accomplished eventually. It’s only now that I’m at a point in my life where I’d like to take the next step — homeownership, starting a family, grow a retirement fund — that I’ve come to terms with just how difficult getting out of debt can be.
Taking Debt Too Lightly
My misadventures with debt started off rather innocently with student loans.
To help me live “comfortably” while in school, I accepted the maximum student loan amount I was offered every year. I only ever needed about a third of my loans for books and supplies, but I justified the extra cash as “pocket money” that wouldn’t accrue interest until I graduated, nor had to be repaid for another four years anyway.
“Practically free money!” I’d say.
At 18-years-old, I knew very little about loans, but I signed on the dotted line nonetheless. I accepted the funds, and went about my business. I didn’t realise how deep in student loan debt I really was in until I graduated.
College Credit Cards
Interestingly enough, I grew up being lectured about how tempting and dangerous credit cards could be. It’s for that reason that I avoided credit card applications in my first few months as a college freshman.
At the time, my mailbox was flooding with endless credit card offers from major creditors. I never opened them, distrustful of their alluring offers and marketing tactics. But in my sophomore year I got a bit bolder.
I applied for my first credit card account in hopes of establishing a credit history. At first, I was granted a $500 credit limit, but like so many other college students who bought with credit, I went too far.
After continuous credit limit increases, and opening a second credit card, I racked up about $5,000 in additional debt, with only a part-time job at a coffee shop to sustain my living expenses and card payments.
“[Debt has] become normal,” explains financial expert, Dave Ramsey. “It is sold so aggressively that many have come to believe it’s a financial tool. It’s not.”
With such a big misstep on my part, you’d think I’d know when to call my losses. Well, I didn’t.
Congratulations, You Owe Thousands on a New Car!
When my 1996 Mazda Miata began threatening my safety on the road (malfunctioning airbags, broken speedometer and odometer, and transmission issues), I chose to go all out on a brand new car.
In hindsight, I realise it was an emotional purchase; I sat in a 2012 Hyundai Veloster at the LA Auto Show and told myself I had to have it. Needless to say, after just a few months, I already regret my impulsive decision.
My approximate debt tally to-date is as follows:
- Credit cards – $950
- Auto loan – $23,000
- Student loans- $27,000
The amount of debt to my name is almost enough for a 10 per cent down payment on a Los Angeles home — a scary thought. So after struggling to find out how to get out of debt, I began reading up on the debt snowball plan.
Dave Ramsey’s Debt Snowball Plan
When I first heard of Dave Ramsey, I was admittedly put off by the subtle religious overtones of his message. It didn’t take long, however, for me to clear my reservations and really see just how much the Dave Ramsey budget approach made sense.
As I repaid my student loans, I couldn’t help but feel discouraged with the results. I tried tackling the debt starting with the highest interest rate, but hardly saw the balances budge even after doubling their minimum payments — even my $1,000 student loan is taking forever to pay down.
That’s why it’s these little achievements that Dave Ramsey champions in his debt management plan, and it’s his 7 baby step approach that I’m hoping will help me break up with debt for good:
- Save $1,000 as an emergency fund
- Use the debt snowball plan (smallest to largest debt)
- Save enough money for 3-6 months of expenses
- Invest 15 per cent of household income into a Roth IRA and pre-tax retirement accounts
- Pay into a college fund for (future) children
- Pay off mortgage loan early
- Build wealth and give back to others
The steps are sound advice, and they hit all the financial goals I want to accomplish. So here it goes!
Check back frequently to learn new debt-defying tips that can help you pay off debt, and track how well I’m staying on the debt-free wagon.