Lesson Learned: My Secret to Debt Reduction

Scott CostelloAll, Blog, Lessons Learned 18 Comments

Debt to me is the ultimate four letter word and I hate it with a passion.  I always used to admire the people who could purchase a car or even a house with all cash and then be done with it.  Growing up, my parents financed every car, mortgaged their house and never thought twice before plopping down a credit card to pay for something.  It was a way of life for me growing up, and I’m sure many of you had the same experience.

When I got my first credit card back in college I never really used it much, but to buy books.   The limit on it was only $500 and after buying all the texts I was pretty much maxed out.  I even remember getting rejected while purchasing some books because I was up against my limit.  That was back when you would actually get rejected, now credit card companies charge you an overage fee for going over your limit unless you call them up to opt into the hard limit.

The story became different after getting my first job and getting some more credit cards.  I quickly built up about $20,000 in debt before I realized I was in trouble.  I could barely make my payments and was playing a dangerous balancing act that routinely left me with no money in my bank accounts after my bills.  If anything had gone wrong with my car or something else unexpected I would have been screwed.   I needed to pay off these credit cards and fast.

There is no real secret to paying off debt, no system that really works.  You just take what money you have extra and put it all towards one card and focus on that until it gets payed off.  In total I had 4 credit cards, 3 of them maxed and the last one I was about 50% of max.  I started paying $500 + any extra I had to the card with the biggest balance and the minimum + $20 to the others.  Let me tell you it took me over 6 years to pay off every single scant scent on those cards.  In fact I finally did it the month before I got married.  The last $3000 took me the longest because I started to feel safe again and put more on the card.

What I learned

I learned a lot from this experience and one of the main messages was to follow through and finish what I start or it all could come unraveled.   I was lucky not to have every missed a payment and I came out the other side with about an 820 credit score.  But if you have a debt free life, who the hell cares about your credit score right??

My wife is great at keeping us credit card debt free, she has always paid off our credit card (we only use one, and cash in the points each year for gift cards) each and every month.  I love her for that, but we still had some more lessons to learn when it comes to other debt sources like car loans and mortgages.

One of my goals is to completely eliminate our debt, even the mortgage.   We had just bought cars in the fall of 2008 and racked up over $40,000 in loans.  At the time we didn’t think twice about it, all we cared about was being able to make the payments comfortably.  Terrible Idea!  I finally realized this.  Last May 2009 I made it a point to start paying off our car loans.  The rates were about the same, the terms were 5 and 7 years (another terrible idea, but it got the payments where we wanted them so we took it..*shaking head*) but the payments on my car where a bit more so that was going first.

The Payoff

We quickly threw an extra $5000 on our next payment and then added as much as we could over the next 9 months and dwindled the payoff total to just under 11 grand.  Not bad, but the great news is that we got a pretty large tax return and I’m proud to say we are paying off the remainder of the car balance next week.  I’m so psyched!

We will then take the monthly payments we normally would have made for the car loan and pay us!  We would do this by placing that amount into our ING account.  That amount will up our total to about $900 a month savings to us.

My wife’s Rav4 is next on the list and we currently have $17,100 left on that, so by this time next year that will be off the books as well.

Saving in Reverse

Surprisingly it wasn’t easy to convince my wife to pay off our car loans faster then called for.  She liked the idea of having money saved up in our accounts, even though it was false money because it was already spoken for by our loans.  Once we bought our house and had a mortgage we weren’t really saving money, but rather standing still.  We would spend almost exactly the same amount of money we had coming in.  I needed to find a way that would force us to save money, and then I came up with the concept of paying off debt as away to save money.

Even though it would require us to pay more money out of pocket per month, it was reducing our debt, which meant our debt to income ratio was falling.  This increases our net worth and once we get the debt removed our net worth will grow exponentially.  This is how I convinced my wife that it was a good idea to get rid of the debt.  By “spending money” to pay off debt, it’s like placing that money in a bank account you can’t touch.  I look forward to reporting when we pay off the other car and start working on our mortgage.

Has anyone else paid off a lot of debt?

Scott Costello
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Comments 18

  1. Way to go Scott! Isn't it an awesome feeling to pay off some debt that's been such a heavy weight?

    I felt that way before when I had a crap load of debt. Lots of credit cards, student loan, etc. (No car loan, I had paid that off within a year. It was when I was a full time agent and I put a lot down on it and just paid it off within the year.)

    But the credit cards and student loan were making me really angry. I finally went on a mission to pay them all off. I was getting chunks of money from closings so I would eventually call 2 of the credit cards and negotiate with them. They both agreed to take 50% or less off of what I owed. One didn't count the discount as income and the other did (ya know for tax purposes.) But ya know, I didn't care because my debt was gone.

    Of course that was then and this is now. I was completely debt-free for a while until I met Kathy. 🙂 Then we bought a house which was a foreclosure which needed work….and yada yada yada. I'm not blaming anyone but myself here but I gotta tell ya I am pretty pissed with myself.

    We had a mission to pay off the Lowe's card within 12 months because it was interest free and we did that. But now my credit card is pretty high. Why? That's the worse part…who the heck knows? The only good things on my credit card are a course and atm stuff….other than that I have no idea what's on there (10k) and I have lines of credit. 1 on my rental property and 1 business line. They are a lot too. 24k for rental and about 10k for business. The rental one was used for atm's a lot but other than those charges I have no idea what's on there. And the business line….well I just took 3k to pay myself for 3 months because well I'm not working I'm just working on trying to get an apartment deal……so it's tough not having decent money coming in because well I can't pay off my debt the way I want and need to.

    I gave myself a 3 month dead line for finding a deal otherwise I'm going to have to figure out a way to make reliable money because I NEED to pay off my debt. It's a heavy weight on me and knowing what it's like to be debt-free makes the weight even heavier.

    I have no one to blame but myself for my newly found mess but ther's also no one that can get me out of it except me 🙂 And I'll do it again. (Btw, I read Dave Ramsey's Total Money Makeover and have used his concepts successfully. I like his ideas.)

    Kathy….well now she's a lot worse than me where credit cards and debt are concerned. And I can honestly say that probably would have never changed if she never met me. Now, she doesn't take her credit cards with her anymore and she pays so much extra every month to get them paid off. She's on a mission to pay off all of her debt now and to never be in debt again.

    I get on her nerves a lot with saying I want us both to be out of debt and if it means sacrificing something now for it then oh well. She's not use to that type of thinking. I would tell her “you may be pissed at me now, but when you're out of debt and realize what it's like to live debt-free you'll sooo thank me!”

    Good post Scott. You got me thinking about this heavy burden I got. I feel extra action taking coming my way because of it!

  2. Thanks for sharing your experiences with debt Carey. It's a very stressful thing for sure. Just like everything else, you have to change your habits in order to be successful in keeping debt away. It's fine and all to get rid of debt, but the true work comes in changing your spending habits and adjusting the way you think about what you need. Many things you think you need you actually just want. Which are ok to get, but you have to be able to afford it with your own money.

  3. You're absolutely right Scott when you that the real work comes in “changing your spending habits and adjusting the way you think about what you need.”

    Well said.

  4. Now that's what I call “Reclaiming Your American Dream” – we're bombarded with advertisements and media trying to get us to spend – too many are addicted to DEBT – I can only say “congratulations” for making a stand and a plan, and executing it!

  5. Thanks Dana. It so true that everyone is trying to get your buck. Even the get out of debt schemes are asking you to up your credit limits and buy their stuff. How about for once not looking for the easy way out and throw some hard work at a problem?

  6. Debt sucks… My wife and I had $0 credit card debt… until I spent too much money on real estate investment courses from a guru…. (oh how I wish I would have shopped around more, but whats done it done). Other than that we only have student loan debt, which is a lot. We pay $2000 above our minimum payments extra per month towards all of our debts. Although we are not saving money directly, we are saving money indirectly by paying down debts. Unfortunately, even paying all the extra we still have 7-8 years before we can get everything payed off… and we want to purchase a home.

  7. Keep at it like you are Chris. I find when I get my debt down to a manageable amount I like to pay the rest of in one big payment. As along as I can swing that payment, my bank account might be low but I'll be saving so much more each month going forward.

  8. In no way do I mean to detract from your significant accomplishment, but I hoped to bring to light another side of the situation. Have you considered the fact that you might be able to leverage your debts with low interest rates and invest that money to earn you the difference between your rate and a larger interest rate? For instance, rather than pay off your low-interest (and perhaps tax deductible debt), you could invest it so long as your were earning a higher rate. I was lucky enough to graduate college when the interest rates on school loans were incredibly low (under 3%), so rather than pay off that interest, I have made the minimum payments and invested that money to earn a higher rate. If I borrow $10,000 from Joe at 4% and invest that $10,000 with Bill at 5%, I'm earning 1%, right?

  9. Scott,
    You found my favorite topic. Congrats for taking decisive action. Not that you needed it, but my respect for you has grown.

    I despise debt. 2.5 years ago I was debt free. Now I owe on 3 mortgages. I hate it. Love owning my house, but do I really own it? I bought right for significantly below what I could afford, but its still debt. I'll sell my rentals within 1-2 years and stay rental free until I have much much better cashflow or I can pay for it free and clear.

    I'm taking my fiance out to dinner soon. She just paid off her 6k credit card debt. I want to show her what an accomplishment I think that is and how excited I am for her. Next she will be paying $500-$1000 extra on her car payments. Its awesome. She caught the debt free bug.

    We have all our debts (the three mortgages and car) written on the whiteboard. Each month we mark off our progress. We have vowed to never owe more then 100k on a personal home. We will take the equity from this one when we sell and the equity from her townhome and pay down the next house mortgage as much as possible. (Btw do the math, its better to pay down the mortgage then to put money down on an amortized payment). I honestly believe we may be able to get that mortgage down to 100k less then the property is worth (on a 150k or less property) if we buy right and pay down. With our incomes we should be able to pay it off quickly.

    As far as the real estate investing goes. I plan on taking 1/3 profit and paying down any debts and building a nest egg. The final 2/3 is held back for taxes and to build a bankroll. I want to flip houses without having to borrow any money. The thought of giving up 25% or more of my profits to service a hard money or private loan makes me want to puke. It may not be the fastest approach, but I'll be able to sleep much better at night.

    Phew, long reply. Did I mention this was my favorite topic?

  10. Thanks for the advice Michael and it seems like a sound approach, but I want nothing to do with debt if I can help it. I know leveraging your debt has gotten people into trouble in the past. There is more to juggle and more to keep track of. I want things simple. Pay with cash, own a house, sell a house. Simple.

  11. I can talk all day about this topic as well. I had to really cut my post down after my first writting cause I just rambled on and on. We are a lot alike Jason, looking forward to meeting up with you someday.

  12. Thanks for bringing this up, Scott! I love talking about debt-free living, budgeting, spending habits and the like. My husband and I feel the same way. We have zero credit-card debt, but thousands in student loans, a mortgage, and a van. We work hard to live below our means and pay extra toward our debt. Before the kids came, we managed to pay off one of the three student loans, but things have slowed down with children, house-buying, van-buying, etc.

    Our goal is to pay off our students loans and van in three years. Thanks for the extra boost to keep at it – debt IS horrible! “The borrower is the slave to the lender” Prov. 22:7

  13. Scotty, I love this topic as you know 🙂 You and your wife are doing great! Congrats on paying off your car and I know that you'll have all that debt obliterated in no time! A couple wholesale deals this year and you can kiss the Rav4 debt goodbye 🙂

  14. I agree with Michael. And I understand why you feel that way Scott, but lets think about debt differently.

    The goal is to become financial free, right?

    Debt, when used property actually helps you achieve that. Let say that you go super aggressive and used an extra 20k a year to pay down the mortgage sooner. (this could come from your wholesaling) But with 20k a year and some real estate investing passion, can go along way.

    In 10 years of 20k, every 2 years (40k), you could buy an apartment building (with debt), that shoots off 1000/month to you (if you are smart and selective, trust me people they are out there). So thats 5 of those at the end of 10 years. You are at $5000/month. Plus, the tenants are paying down your mortgage. Someone else is paying off the mortgage on your investment properties, plus paying you.

    So in 10 years, you own 5 buildings that are worth on the low end 150k each. So in 30 years, you have 5 buildings totaling 750k (without appreciation) and make $5000/month……….. for the rest of your life. You just created a pension and a nice nest egg. Oh and by the way, your monthly income goes up as the debt is paid down.

    If you had just paid off your mortgage sooner, 10 years is 200k, probably would pay down 150k. So in 10 years you created only 150k. And in 30 years there will be 150k. (remember, I did not use appreciation in the apartment example as well) Some of you just said “yea but the house will appreciate” so will the apartment buildings then.

    At the age of 42 (you said you were 32 I believe). You could have 5000/month coming in forever with 750k in assets when you are 65. At 42, can you quit your job and retire if you want. Maybe. Its your choice isn't it.

    Or at the age of 42 you can have 150k in extra equity in your house and have less of a mortgage payment. What happens if you want to switch careers? Will you have to take out a heloc in the amount of 150k from your home to survive and start your new business?

    Now my question is, is debt bad?

    (braveheart voice) Freeeeeeeeeeeeddoooooooommmmmm!!!!!!!!!!!!!!!!!!

  15. Excellent post, Scott! Very interesting story, and very true about debt – it can really hurt you. I hear of so many investors wanting to get started investing, though they are so buried in debt that they may never get to their financial goals. I've learned that it's not how much money you make, but how much money you keep that counts. Too many people out there talk about leverage and using other people's money. Though, leverage can really hurt – and when it does, it hurts bad. Too much leverage can backfire and can really devastate one's finances.

    I think it's great you're working on eliminating your debt. By eliminating debt, it does free up cash which helps towards the road to financial freedom. Thanks for sharing your story, looking forward to reading more of your posts!

  16. I completely understand what you are saying Chris and have read about your arguments about using debt to gain wealth. I still maintain that debt does not allow for flexibility because you are always tied to the bank.

    If you have no debt, you won't need nearly as much money to live. The freedom is endless.

    These are just my opinions and there is no doubt your way of using debt can be successful, but I think many things have to go right in order to achieve it.

  17. Thanks MHG 🙂 it's definitely an interesting argument between investing with debt and trying to go debt free. Chris brings up some good points about using debt to quickly create your freedom in 10 years, but I don't like that risks involved.

  18. I know this if off topic but I’m looking into starting my own weblog and was wondering what all is required to get set up? I’m assuming having a blog like yours would cost
    a pretty penny? I’m not very web savvy so I’m not 100% sure. Any recommendations or advice would be greatly appreciated. Many thanks

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