When Brandon and I got married almost 10 years ago, we had a combined debt of roughly $125,000. Most of that was school loans. About two years later, we bought a house for $52,000. When we were struggling to find jobs in the area and then ended up moving to a different state, we racked up about $6,000 on the credit card (credit card interest rates are evil! Avoid a balance on your card at all costs! Or, better yet, cut your cards up like we did). And then we had a baby who ended up being very sick for a while and I had complications related to birth which resulted in medical bills totaling around $20,000. We were struggling just to make the minimum payments each month. We were drowning. We had to do something. And so, we needed to get creative and we knew holding a few garage sales or reducing our budget in some areas (we had already slashed everything we possibly could) was not going to work. Here’s what we did instead.
*Disclaimer: These are the things that we are doing and that have worked really well for us. Please seek advice from your financial/accounting professional before you make any investment/financial decisions*
1) Shop around for better interest rates
One of Brandon’s school loans (his highest balance) was at a whopping 9.6% interest which is extremely high for a school loan. The amount of that loan was right around $80,000 which meant the monthly payments on a 30 year loan were near $700/month. School loans can be hard to refinance, especially if you have no collateral. Still, lenders which much rather have your loan than have you making your payments to one of their competitors so it’s worth looking into. If you have a mortgage, car payment, or another payment that involves collateral, it is much easier to refinance.
Call around and explain that you have a loan with so-and-so, you’ve been paying on time, and you’re looking for a better interest rate and you’re wondering what they can offer you. Call a bunch of competitors and write down the interest rate, how many years the loan would be for, and the monthly payment of that loan to see who can give you the lowest interest rate. Then call everyone else back, including your current lender, and tell them that so-and-so has offered you such-and-such an interest rate and ask them if they are willing to beat that. Repeat this process and keep making those calls until you have gotten the absolute lowest interest rate you can and then lock in your new loan at your new rate, paying off the original loan if you switch lenders.
2) Get a refinance loan through a family or friend
This is similar to #1. Sometimes it is hard to get refinanced through traditional lenders, especially if your credit score isn’t great or if the loan has no collateral attached. If you know someone with cash to spare, you might consider approaching them about a loan at a lower interest rate but make sure there is legal paperwork to protect both your and them. Also, take into consideration if you want to risk changing the dynamic of the relationship by entering into a business deal with them. You’ll lower your interest rate and they’ll be able to collect some passive income. Win-win! With a lower interest rate, you will have a lower monthly payment or you could shorten the term of your loan and have it paid off faster instead.
We were able to get lower interest rate on our credit card and paid it off as fast as we could and stopped using our credit card long before that. With Brandon’s loan, we were able to get an interest rate of 3.5% (down from 9.6%) and we shortened the term to 15 years. Even with shortening the term, our monthly payment is now less than $500 a month. We took $200 off our monthly payment and we’ll pay off the loan in half the time!
3) Call your medical offices!
Did you know that medical bills do not collect interest? And medical billers are willing to work with you to set up a monthly payment plan to help you pay off your bills. Every medical service is different about their policies but they all are extremely helpful and will work with you to come up with a plan. The first thing I did when the ER, doctor, home care, and hospital bills started showing up was call the number on the bill and explain that I could not afford to pay the bill all at once and asked if I could set up a payment plan. They were all friendly and helpful and I received a bill from each place every month with the minimum amount due and paid on time. No interest. No negative affect on my credit. No collection agencies.
4) Tax refunds
We have never counted on receiving a tax refund and we never make any plans for any possible refunds we might receive. Sometimes that check has been almost nothing and other times it has been surprisingly substantial. When these substantial checks come in, it is oh so tempting to run out and buy something we have been saving for or use it to get something we would never otherwise be able to afford for ourselves or the kids, or splurge on a family vacation. Instead, we’ve already agreed to place that check in savings or towards paying something off until we are debt free. No, it’s not as fun, but the payoff will be huge when we are debt free and can do as we please. This year we paid off the remaining balance on my school loan and the rest went into savings. Last year the entire check went into savings (good thing because a month later I totaled our van and we had a few other unexpected expenses pop up, too. Instead of having to use a credit card, we were able to use our savings and stay on track towards becoming debt free). The year before that, we paid off the remaining balances on our medical bills that we had already been aggressively paying down.
6) Create passive income
Passive income is a payment that comes in with little to no work on your part. This could be interest you collect on money you loaned to a friend, rent you collect from a property you own, or royalties from a book you wrote, for example. Currently, we are focusing on passive income from rental properties. We were lucky enough to kind of stumble into becoming landlords when we had to move and were unable to sell our house. If you currently own your own home, you could look into finding a way to rent it out. Have you been thinking about moving and buying a different house? Instead of selling your current house when you move, consider renting it. Of course, you would want to research the rental market in your area to see if it’s a logical area to invest in. We are currently living in an area that is prime for investing in rental properties so it makes sense to focus on this for now. You could also consider renting out a portion of your house while you live there (do you live near a college?) or maybe rent out a portion of your garage or pole barn for people to use as storage. If you would like to learn more about passive income and investments, Rich Dad, Poor Dad is an excellent place to start.
7) Roll your payments
When you finally pay off a bill (isn’t that such an amazing and satisfying feeling?!), take the amount you were paying on that bill and add it the amount you are already paying on the next bill you want to pay off. I know it is so tempting to just work that payment back into your regular budget or view it as extra money to be used however you would like now that you’ve eliminated that bill but stay strong! By rolling your payments, you will see the principal balance on the loan you are attacking drop rapidly and you will be out of debt before you know it. Keep rolling those payments together into one larger and larger payment until you are debt free! Now you get to decide what you want to do with that large monthly payment – save, invest, or spend! I recommend a little of each 🙂
Trust me, it is all easier said than done. We have had to say no to a lot of things we wish we could have said yes to. We also get a lot of sideways and confused looks from people for some of our financial decisions (owning two houses while paying rent for the one we live in, for example), but it is all worth it when you look at the big picture and reach your goal of debt freedom. We are sooooo close to being debt free and then we will be able to say yes to so much more than we ever dreamed of before we started our war on debt.
What about you? What are some creative things you’ve done to reduce your debt or save money? What are you looking forward to saying yes to when you are finally debt free?