I started off the week talking about living a balanced financial life and gave some practical steps on how to achieve that balance. Had it not been for the huge marriage news midweek, I would have posted this case study on paying down debt a little earlier. But it works just as well as a Friday read.
One of my and Ben’s early goals in our money relationship was paying off our private student loans.He had almost $50,000 in private debt from undergrad and graduate school, and I had $110,000 from law school.
We chose this goal because the debt consumed us. During a time when our friends were vacationing in Thailand or buying their first home, Ben and I were spending over $2000 per month on student loan payments. Having that amount of debt really stifled our ability to do other things with our money.
Setting a goal
In order to pay down the debt, we started with the steps that I highlighted on Tuesday. We began with setting several goals, including taking a vacation to Germany, buying a house, and having dinner at one of the finest restaurants in the country.
However, we knew our number one priority was getting the dangerous debt out of our lives. I say dangerous because our private student loans had a variable interest rate (my loans were up to 9% at one point) versus our federal loans, which we still have, that have a fixed rate of 1.5 to 3%.
Budgeting for the goal
We gave ourselves a specific time frame (we chose the end of last year), and figured out how much we would need to pay within that time to achieve the goal. The concrete figures helped us determine just how much extra money we needed to allot monthly towards our debt repayment.
In addition, every time we got a raise or bonus, we made sure to contribute the majority of that to our goal (while still holding a little back for the occasional splurge or shorter-term goals).
This focused spending helped Ben especially because it gave him direction and a purpose with his finances, where he otherwise wouldn’t have kept track of his monthly disposable income.
Sharing our goals
The best part about trying to achieve our goal was doing it together. We often asked each other:
“How much do you have left on your loan?”
“How much extra did you pay this month?”
“Are you going to be done on time?”
We even involved our friends in our conversations to hold us accountable. While they were spending their money on on much more fun things like a house or trips, we made sure to let them know why we couldn’t do those things quite yet. We even found out some of our friends had the same goal of paying of their student debt, so we held them accountable as well.
We made it!
It took discipline, overcoming some minor set backs, and a bit of good fortune to meet our goal. But we did it.
While I sometimes think we could have made more money had we invested the extra cash we paid towards our loans (interest rates were lower after the recession and the stock market has been on a tear), the relief we feel from being free of that debt far exceeds the money we would have gained. In addition, we can now focus on new goals, knowing that we can achieve the ones we set out to.