I know I got ahead of myself with my post yesterday, so I thought I’d take a few steps back and talk a little bit about how I got to where I am today.
A little over ten years ago, I got married. We had a relatively simple (and inexpensive wedding), and it was lovely. Frankly, even that was more than we could afford, because we were over $100,000 in debt.
That debt came from a combination of lifestyle maintenance, low wages, and lots of education.
Shortly following our wedding, we move to our current city where I’d gotten a decent job paying at least double what I had been making previously (probably around $65,000). My partner was finishing up some contract work, but would be under or unemployed for probably the better part of our first year.
We struggled. We lived on a tight budget, paying off as much debt as we could on essentially one salary. We travelled a bit to see family, something that was tough because we really didn’t have the money to do it.
Fortunately, my partner soon landed a good job, and I also got promoted within about 18 months of our move. We were off to the races after that! Here’s a snapshot of what our debt picture looked like:
Our debt reduction was pretty slow and steady, but around 2011-2012, my partner got a significant promotion at work and started travelling lots and working a lot of overtime, which meant more money. Most of that extra money (in excess of our funds allocated for debt reduction) ended up going towards out house downpayment.
Was it smart of us to buy a house while still carrying so much debt? Probably not. Did it work out for us? Absolutely. We bought at a time when housing prices in our area were significantly lower than they are now (we estimate that our house has increased in value by between 20%-30% over the last five years) and interest rates were at an all-time low. These factors, combined with our well-paying, steady jobs meant that we were able to afford a house much sooner than I thought we would, and the real interest rate on our mortgage is basically zero.
We also did not buy a house at the top of our budget, and we don’t have any intention on moving, which in my view makes the house a good purchase. Given the cost of rent in our area, plus the increase in housing prices, I think we’ve made out like bandits.
Anyway, back to the debt story. How did we reduce our debt? We chipped away at it, allocating any “extra” funds we could find. We did do a few smart things in the process though:
1)We categorized debt as follows: by interest rate, by amount, and whether or not the interest was tax deductible (some of the debt was in the form of student loans).
From there, we paid off the smallest amount at the highest interest rate first, basically to get a sense of accomplishment, then moved on to the next amount with the highest interest, and finally to the debt that had tax deductible interest.
2) We got a consolidation loan for a lower rate of interest than we were paying for the remaining debt.
This helped us streamline our payments, reduce interest payments, and see faster progress.
3) We allocated any extra money to whatever debt we were focusing on at the time.
This money went directly to the loan. I still remember sending emails saying “please allocate $327 to the loan from chequing”. Sometimes that amount was only $75, but we still did it. It may sound silly to do that, but getting the money out of our account and onto that loan was absolutely critical.
4) No heroics.
During this time, we still went out to eat occasionally, bought some new clothes, and did a bit of travelling. But we did this all on a budget, and I will say that I was pretty strict about it. I worried about money a lot, and really only relaxed about it once that $100k was paid off. I was absolutely one of those people who budgeted down to the dollar.
We could certainly have paid off our debt faster. Maybe in about half the time? But those four years would have been really tough. We would have had few luxuries, little travel, and it would probably have created a lot of tension and struggle in our relationship. We have different philosophies towards money so we met in the middle, with very good results.