We are debt-free today!
And you are looking at an expensive bottle of Cabernet Sauvignon I brought back from Chile. It is empty. We drank it last Friday and it was outstanding wine.
Even greater was the occasion – John and I had decided to share this bottle when we are consumer debt-free.
Last Friday, February 1st 2013, at 9.32 am John sent me a text saying ‘done and dusted’.
We paid off £100,000 worth of debt in three years…well, three years and three weeks to be exact.
How did we do it? How did we pay off debt so much debt?
This is how!
(I also wrote a book about it – ‘Never Bet on Red: How to Pay Off Debt and Live Debt Free‘ – check it out for guidance and inspiration.)
#1. We consolidated our debt (yes, we went against the grain and expert advice)
Debt consolidation is not always a bad idea and could be useful.
Our debt was on seven different credit cards and two of them from MBNA (ie BoA) had jacked up their interest. Considering the interest and the logistic nightmare of managing so many cards we approached our bank for a consolidation loan.
We had been with our bank for decades and are excellent customers. During the first year of debt repayment, we single-handedly kept one junior employee in a job from the interest alone.
Hence, our bank was very good and we took out an £80K ($126K) consolidation loan secured against the house at 7.7% interest.
On January 4, 2010, we had a consolidation loan to run for ten years, approximately £16K on credit cards and an overdraft.
Ten years! Talking ultra-marathons; though at the time it felt to me more like a prison sentence.
#2. Learned about money and then some
Most people go through life not understanding what money is and how it works. Some don’t even mind.
I am not one of those – I believe ignorance is an infliction to be eradicated.
The first thing I did after the emotional crisis abided and rationality returned, was to start learning. I learned from websites and blogs, self-help books and academic literature on finance and economics.
We found that our lives were substantially over-insured with the wrong insurance, our house insurance cost twice what it should, car insurance could be trimmed and we checked all our utility bills. Most recently we more than halved our water bill by moving to a water meter.
We didn’t stop with the learning and we acted. We tried things, when they didn’t work we modified them and when this failed we thought of and developed completely different approaches.
The Money Principle was a result of, and a platform for documenting our learning and experimentation.
#3. Our income took off like…
Spending less than you earn is a well-established mantra in personal finance. At its most basic is a very simple matter of first-grade arithmetic.
Where it gets exciting is the implementation.
For years, I mistakenly believed that what we bring in every month – my salary – is not enough for us to live on and we could not survive without John’s consultancy pay. Since it was the consultancy failure that got us in trouble I thought that we cannot make it.
When we looked at our spending we realised that we can live on our monthly income even including the close to £1,000 ($1,577) monthly debt payments.
We needed to change some things, true. We changed our insurance. I stopped having so many coffees and over-priced, nutritionally challenged meals at work. We started cooking and eliminated waste. Hey, presto! We not only could live on our regular income but also put £500 ($788) aside every month.
This meant that everything earned above our monthly income could go on debt repayments. When consultancy picked up again we used it all to pay off the loan. The Money Principle started making a bit of money – it all went on the loan. Gosh, even the £500 per month we were saving for a rainy day went on the loan – paying this loan off was the rainy day.
And in case you are wondering, we had such large accumulated historical losses in our company that the taxman didn’t get a bite! Well if we hadn’t had the losses, we wouldn’t have been in debt but that’s another story.
And it was so satisfying to see it go down!
#4. We had a strategy to become debt-free
You don’t have to be very observant to have noticed that the strategy was ‘throw everything at the loan’.
But there was order in our debt-busting frenzy and this came through realising two things.
First, no payment is too small to have an effect. Most people waste their lives waiting for the ‘big break’ – they wait for this big promotion, for the inspiration to write an award-winning book and for the large windfall of money. But in all matters the old adage of long-distance running training still applies:
What makes you fit is not the seven miles you run on the weekend but the one mile you run every day.
Translated this means that even a large debt starts crumbling when you make regular payments, even small ones.
The largest payment to the loan we made was the last one at £8,430 ($13,300); the smallest payment was £4.87 ($7.67).
Our second realisation was about the tipping point of the debt payment. When you start paying debt off – and for quite a long time after that – you pay much more interest than principal.
Just as an example, during the first year we made 12 payments of £956 ($1,507) to our loan or £11,472. How much lower was our loan do you think?
Are you ready for it? Our loan was £3,950 ($6,225) lower – the rest went on paying interest.
To pay off debt fast you should race to the tipping point when you start paying more principal than interest. Once there, the repayment stops being a Sisyphus task and the ‘stone rolls easily downhill’.
#5. We never felt deprived
One of the best things we ever did was to set up our ‘so worth it’ fund early on.
To remind you of the rules, this is a sum of money (in our case £300/$473) that went into a separate account and was specifically designated for having fun. It must be used fully every month.
This fund kept us sane – having some fun in our lives made us focus more completely and calmly on the rest of what we had to do.
During the last three years, we went skiing and spent time in the sun (we used our apartment in Sofia as a base so we could get a good price). And I could have my expensive haircuts and chase marathons. We felt happy and positive!
#6. We had a bit of good luck
In this kind of mammoth task, a bit of luck is always welcome. In our case, it came as a substantial payment from MBNA (the Ombudsman judged in our favour) and a bit of backdated payment of child benefit (altogether about £13,000/$20,500).
We are debt-free: final thoughts
…I don’t have to tell you that John and I feel ecstatic to be debt-free.
I am not sure whether I have ever felt as proud of myself as I feel today. Because from now on we can start building wealth seriously, consistently and without the pressure of paying off debt.
And you know what? You can become debt free as well.