How To Pay Down Your Debt
As my daughter Jennifer says, “Debt is growth’s biggest enemy.” If you have a mortgage, credit card debt, car payments, or consumer loans, you are paying an additional 6-18% annually versus paying cash, just for the “luxury” of paying in installments. Obviously, most people cannot pay cash to purchase a home, but I will show you how to pay the house off sooner than later in a moment. I had debts totaling $250,000 many years ago. I wanted desperately to pay everything off. Not wanting to file for bankruptcy, I contacted each company to which I was indebted. I explained my predicament[1] (a humbling experience) and told them I wanted to start a repayment schedule. Each company accepted different amounts, from $5 to $100 per month.
The bottom line was each company worked with me. I prioritized my debt and made a list of everyone to whom I owed money. Those charging the highest percentage rates were on the top of the list, and lowest rates were at the bottom. The list was five full pages. The exercise was depressing, to say the least. I taped page one to our refrigerator to constantly remind me of my commitment and started to write out checks, as I was able. If any extra money came in, such as a tax refund, birthday gift or Christmas cash, I would pay extra on the debt highest on the list. Believe it or not, it took us 18 months to pay off number on the list. I then took the money I was paying toward number one and applied it to number two on the list, which took just six months to pay off. I then took the money I was paying toward numbers one and two, plus any extra income, and applied it towards number three, and so on.
It was extremely satisfying to cross off the last bill eight years later. When all the debts on the list were paid, I took the extra cash flow and paid off the cars. Once the cars were paid off, I went after the mortgage. It took seven more years, but I was completely debt free.
Did you ever take the time to calculate how much your house will cost you? Take your monthly mortgage payment times the number of payments you’ll make. The total is usually 2.5-3 times the actual purchase price of your home. That’s a total cost of $300,000 paid on a $100,000 home! The first time I did the math, I felt ill. I strongly suggest you pay down your mortgage sooner. In other words, make extra payments or increase your monthly payment. Your mortgage company or bank will not refuse your money. If your payment is $830/month, make it $900 or $1,000 when and if you can. It makes a huge difference. One hundred extra dollars per month paid towards your principal can shorten a 30-year mortgage by almost seven years! Can’t afford an extra $100/month? Try using your tax refund, Christmas bonus, or birthday money. (Most of us blow our extra money on depreciating assets or “toys” anyway.) Imagine the peace of mind of not having a monthly mortgage payment! Good stewardship now pays big dividends later!
A word of caution—most CPAs and tax advisors do not recommend paying off your mortgage early because you lose the tax deduction. I never understood that logic. If you spent a dollar on your mortgage interest, and you got 27%[2] back on your tax return as a deduction, your net benefit was 27 cents. On the other hand, if you earned a dollar and paid the income taxes on that dollar at 27% with no tax deduction, your net is 73 cents. Which would you rather have in your pocket, 27 cents or 73 cents?
What can you do with all of the extra monthly income if you have no bills to pay? Anything you want! Being debt-free and financially independent is joy unspeakable. It’s ten thousand times better than you think it will be!
A final piece of advice—when I finished paying off our last car payment, I took the monthly car payment and saved it. By the time we needed another car, I was able to pay in cash instead of starting car payments all over again with all that nasty interest. Also, never buy a new car. You can buy a pre-owned, fully warranted, two- to three-year-old car for nearly half the price of a new car. New cars lose too much value as soon as you drive them off the lot. “Living life to its credit limit” should not be our personal motto. Get out of debt now, and start enjoying your life!
It’s Not Hard to Meet Expenses—They Are Everywhere
If you are interested in getting out of debt and getting your financial house in order, you need to order a copy on greatinvestor.org—the only site dedicated to helping the Christian community learn the art of investing.
If you have a financial question you can email me at info@greatinvestor.org.
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Thanks and Blessings!
[1] I was broke
[2] Assumed tax bracket