Five years ago when Aaron and I got married we sat down and tabulated our combined debt and realized that we had $446,000 in debt. Crazy huh. In our defense $405,000 was in land and homes, but that still left us with $41,000 in consumer debt.
Today five years later we have paid off $293,000 in debt with a remaining balance of $153,000 on our primary residence.
I like to think that Aaron and I are pretty normal. We had the typical consumer debt of cars, boats, credit cards and student loans when we got married.
- Amy’s Nissan Murrano – $5,000
- Amy’s Student Loans – $5,000
- Aaron’s Credit Car – $11,000
- Aaron’s Car – $3,000
- Aaron’s Boat – $17,000
Total Consumer Debt – 41,000
We were a bit unique because we had a lot of additional property debt:
- Amy’s Home – $105,000
- Aaron’s Land – $75,000
- Current Home – $225,000
Total Property Debt – 405,000
I have always been very conservative with my finances. Prior to getting married I was living on 50-60% of my income and had been saving and paying down on debt with the remaining money. Based on my calculations prior to marriage I would have been completely debt free in 8-10 years.
Aaron was semi-conservative, but didn’t have the same focus on debt reduction. He wasn’t an extravagant spender, but had the typically debt mentality.
So how did we pay off 293,000 in debt in 5 years?
Fortunately when we got married a highly respected friend gave us a copy of Dave Ramsey’s book, “The Total Money MakeOver”. I had read the book previously and was already mostly on board. Aaron read the book with minimal convincing and was instantly on board.
For those unfamiliar with Dave Ramsey, he is a write and speaker who advocates debt reduction. He believes that your income is your greatest wealth building tool and that by paying off debt you are freeing your income to become your greatest asset.
After reading his book Aaron and I decided it was time to make some changes. For a step by step guide on how we got started I recommend reading How to Start your Debt Reduction Journey.
I added up all our monthly debt payments which totaled $4,175.
I seriously choked when I saw this number for the first time.
That is a lot of money to be paying each month. Even worse, almost half of that amount was just payment on interest. So each month only $2,200 worth of payments was actually reducing our debt.
Between our realization that we had almost ½ a million of debt (yes that number is correct) and then seeing the amount we were wasting each month on interest ($1,975) we decided to hit debt reduction hard.
Dave Ramsey recommends a seven-step process to financial freedom.
His first step is to build an emergency fund of $1,000 to help cushion against the unexpected. The second step is to use the debt snowball to pay off consumer debt. The goal is to pay everything off as quickly as possible except for your primary residence.
Aaron and I both had a decent amount in savings, so we pulled out enough to pay off our two vehicles, his credit card and my student loan. This decimated our savings, but really freed up a lot of our disposable income.
Since Aaron is in sales and our monthly income is partially determined by his commission we kept a 3 month emergency fund in place. I’m the type that needs emergency funds for my emergency funds, so I just couldn’t handle only having a $1,000 emergency fund.
With $24,000 in debt wiped out we decide to focus our energy on setting up our debt snowball.
What is a Debt Snowball?
A debt snowball is when you list your debt smallest to largest. You ignore interest rates and all the conventional stuff you learn in business school and throw everything you can at the smallest debt while making minimal payments on everything else.
Once the smallest debt is paid off you start working on the next debt. You take the amount you were paying towards the first debt and combine it with your current payment and then throw anything extra you have at your second debit.
So in our case, we had an extra $1000 to play with after paying off the first few debts with our savings. It is amazing how quickly you can pay off a $17,000 boat debt when you are paying $1350 each month.
Once we finished up the boat we started working on the land. We had it paid down to around 48,000 when we were finally able to sell my old house. Fortunately I had purchased the home back in 2003, so we had a decent amount of equity accumulated even in this market. With the sale of my home, we paid off the remaining balance on the land.
So after five years of marriage we were finally debt free except for our home. We paid off $293,000 worth of debt. Of the $293,000 we were able to cash flow $156,000 and the remaining $137,000 came from the sale of my house.
We averaged monthly debt reduction payments of $2,600 each month.
I’m sure some people are going to think it is all about income. And yes, we do have a pretty decent income. However, during this time period we had a very sporadic income. Aaron is in the construction industry and ended up jobless two different times. He was able to rebound pretty quickly, but when you are in sales it takes 3-6 months to get back on track.
We also made a very bad investment decision and lost slightly over $50,000. You can read about our experience here – “What I learned from the failure of my business.”
There were months when we couldn’t pay extra and I had to pull money out of our emergency fund to get by.
It wasn’t always easy, but now that our monthly payments have dropped from $4,175 to $1,100 per month all of the sacrifices were totally worth it.
5 weeks ago the company Aaron was working for went out of business unexpectedly. If this had happened five years ago we would have been in trouble. I can’t even begin to imagine how scared and stressed out I would have been.
My husband is a rock star and had four job offers within two weeks. After a lot of research he is completely changing industries and leave construction. It is a great opportunity, but it will most likely take him 6 months to get back to his previous income.
Because of our decision 5 years ago to get out of debt we have the freedom to allow him to make a drastic career move. Because the debt is gone we can easily survive on my income alone. Also, after getting out of debt we focused on Dave Ramsey’s 3rd step which is a 3-6 month emergency fund.
We finished our emergency fund the week before Aaron’s company went out of business.
I love the fact that our financial freedom is allowing us to make meaningful decisions about our future without being stressed about paying the bills. There were times when I wondered if all of the scrimping and saving was worth it. Five weeks ago, I knew that our sacrifices were invaluable.
Over the last couple of week I’ve thought a lot about what we did to actually accomplish this goal. There isn’t any one answer, but for us the following steps needed to happen.
1. Budgeting, Budgeting, Budgeting
There is not way we could have managed our finances and kept ourselves on track without a budget. I’ve written three previous post about budgeting and highly recommend reading them to learn more about budgeting. They are here, here and here.
2. We had a common goal
Our number one goal over the last couple of years was to pay off our debt. Virtually every decision we made was done with this overarching goal in mind. We got sidetracked here and there and didn’t always make the best decisions, but knew that ultimately debt reduction was our priority.
There is no way we could have done it without working together. I may love to budget and manage money, but I couldn’t have done it if Aaron was out spending money right and left. We had our own spending money, but any large purchases had to be approved by both parties.
We did this together!
3. We continued to live life
We set aside money to do the things that we love. We just shifted our focus slightly. Our vacations were all centered around either family activities or climbing/canyoneering trips. We focused on inexpensive trips that left memories rather then crazy trips around the world.
We carefully reviewed our wants and our needs and used this to control our spending.
We stayed social but limited our eating out to special occasions. We did BBQ’s and potlucks and lots and lots of home cooked meals. We focused on creating memories rather then spending money.
We involved the kids and let them know our goals. They knew what was in the budget and understood that they wouldn’t be getting name brand clothing from us.
Multiple times we thought about selling the boat, but ultimately decided it was the one thing our teenagers would always be willing to do with us. Was it the best decision financially no, but well worth it for the memories we created.
4. We dreamed about our future life
When we started this process we knew it was going to be a lot of work and that we both needed an image of our future life to keep us moving forward.
We both wanted the financial freedom to be able to help our kids, to travel and to serve missions for our church. These dreams are all well and good, but we also needed something a bit more immediate to work towards.
For us it was becoming scuba certified for a trip to Bonaire this fall. Having a future trip to plan for really helped us get our plans into high gear.
We constantly set short and long term goals that would be rewarded as we accomplished milestones. Having something to work towards really helps to solidify goals.
5. We gave
Throughout our journey we have continued to tithe to our church and help friends and family in need. I firmly believe that helping others is the way to true happiness. We have always set aside funds to help others and include that as part of our budget. My goal in the future is to increase this amount significantly as our financial situation improves.
6. Self Discipline & Sacrifice
You will never become debt free without self-discipline and sacrifice. The old phrase, “you have to want it to win it” is 100% applicable. You will not succeed unless you are willing to work, work and then work some more. Aaron and I both worked a lot of extra hours to be successful at our jobs.
We continually educated ourselves to be valuable employees and were always looking for additional opportunities for success. We feel off the wagon occasionally, but overall just kept continually moving forward.
We sacrificed as well. We have a beautiful home, but our furniture is old, we have three paid for vehicles but all of them have over 180,000 miles. We turned down numerous vacations and random activities that would have cost more money then we had budgeted.
We made do with stuff or just did without. Of course I do have to mention that this is all within the perimeters of a middle class lifestyle. Our sacrifices were nothing compared to some people I know.
We chose to put a goal before “stuff” and although it was hard every sacrifice has propelled us in the right direction. Our marriage is stronger as a result of working towards a common goal. Our relationship with our kids is stronger. They have seen what we’ve accomplished and all three of our girls are making financial decisions that make me proud.
There is no one answer to getting out of debt. You have to flip your internal switch and decide that you are done with debt and are willing to do anything to pay it off. Trust me when I say it is going to be hard and there are times when you want to just give up. Don’t do it.
I’m so thankful that Aaron and I made the choice five years ago to reduce our debt. I’ve always known it was important, but having his company go under so unexpectedly really brought home to me the importance of being financially prepared.
Instead of being scared we were able to take this experience and turn it positive. I’m really excited for Aaron and his career shift. Life is good!