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Warning: These steps take full commitment from both spouses if you are married. Some spouses will want to commit to this in writing via a signed agreement to each other simply to strengthen this commitment. (I'm not suggesting this agreement so that it can be enforced in court...I'm suggesting it in case you need to hang this agreement on the mirror to remind each other daily of the commitment made to get out of debt...because these steps take discipline from both.)
That being said - here's where my wife and I were when we started.
Debts:
Car Loan #1 - Balance owed: $18,879 ($464 monthly payment)
Car Loan #2 - Balance owed: $8,997 ($306 monthly payment)
Student Loan - Balance owed: $6,406 ($108 monthly payment)
Property Loan - Balance owed: $12,156 ($406 monthly payment)
Total: $46,438 ($1,284 monthly payment)
Luckily - we have been disciplined enough during our entire marriage to avoid the much higher interest credit card debt. If you are starting with high-interest credit card debt, then that debt will be your highest priority to eliminate because the interest rates work against you so much harder. Here are the steps we followed:
Evaluate the vehicles you drive and consider alternatives.
In my case, Car Loan #1 was for a pretty nice truck I was driving at the time. I loved it and I loved everything about owning a truck. However, my primary use for the truck was for commuting to my office every day and very rarely used it for what trucks are made for. I determined that for the one-time per year or so that I needed a truck I could simply rent one and be thousands of dollars further ahead. Hence, I traded in my late model Chevy Silverado Crew Cab for a used, late-model Honda Accord (same year as my truck.) The used car cost about $5,000 less than what I owed on the truck, so I had a smaller loan on the car. On trade-in, my truck had about $2,500 of negative equity, but it was partially offset with some sales tax credits on trade-in. At the end of the day, I replaced my $19K truck loan with a $15K car loan with no cash out of pocket...the $15K became my new Car Loan #1. Roughly $4,000 of debt vanished during this transaction. I didn't care about negative equity, I only cared about being $4,000 closer to debt-free life. The Honda also saved me about $100/month in gas, which I applied directly to my remaining debt payments. The payment on the new loan loan was also about $225/month lower than my truck payment; hence, I not only was $4,000 closer to my goal, I had an additional $325/month to put toward my other debts. (Car Loan #1 was still the largest, so I wanted to pay off the others first.)
Raid the savings accounts, but leave some emergency cash.
When I began this process, I had $10,000 in liquid cash savings accounts (These were non-retirement savings - leave retirement savings alone.) I raided $9,000 of this (leaving the other $1,000 in savings for emergencies) to further begin my get-out-of-debt campaign, and I immediately paid off Car Loan #2. I don't know why I hadn't thought of that sooner since that cash in savings wasn't earning anywhere near $306/month...this should have been a no-brainer.
Free up some additional monthly cash.
There are many areas you can examine to come up with additional monthly cash. First, I noted that for a few consecutive years, I had been receiving a tax refund of around $3,000 (which equates to $250/month) so I modified my employer's Tax Form W-4 to reduce the federal income tax withholding on my paychecks and stop paying that extra $250/month to the government. Additionally, I temporarily reduced my contributions to my employer's 401(k) plan during this get-out-of-debt campaign. (Now that I am out of debt 10 months later, I have extra cash to catch these contributions back up.) Reducing those two withholdings from my paycheck provided an additional $450/month, which went straight to debt payments. My wife and I also found several areas in our monthly budget where we could trim $10 here and $20 there -- which resulted in another $100 or so.
Evaluate other sources of income.
I found a class I could teach at a local college. The time commitment on average was about 6 hours/week, which during a portion of this 10-month period gave me an additional $6,000...and I applied almost all of it directly to debt.
Prioritize debts and begin payment stacking.
When I paid off Car Loan #2, it eliminated a monthly payment of $306. Instead of spending that money, I took that $306 in subsequent months and applied it to other loans. This is called "payment stacking." When I free up cash from other sources (such as in step 3) and apply those dollars toward debt, I am including those dollars as well when I use the term "stacking." Thus, when I immediately paid off Car Loan #2 and began payment stacking onto my student loan, it only took about 3 months to pay that off. (The extra income from teaching helped here as well.) Usually you will want to pay off the smallest debt first since that is the fastest route to freeing up a monthly payment that can then be "stacked" onto other debts. However, in my case - I chose to first pay off Car Loan #2 since its monthly payment was almost 3 times more than the student loan -- which meant three times as much cash available for stacking.
Negotiations
A couple of years earlier, I had a property loan wherein I had speculated on the price of a vacant lot, anticipating some significant appreciation when a planned golf course was put in. The development slowed, then sputtered out. In light of the economic circumstances surrounding that development (along with the developer's lack of action in that community, which I considered to be a breach of their contract) I was able to pressure the developer into settling the balance of this loan for less than what was owed. I had made nine additional monthly payments on this loan at the time, which left a remaining balance of about $8,500 - so I offered to pay them $3,000 in full settlement of the $8,500 that remained on the loan. This was not a fun process and took about two months of negotiating, but they finally agreed - so this eliminated $5,500 of additional debt. In my case, I had structured this particular debt through an LLC so this debt settlement did not impact my credit; however, most debt settlements will show up on your credit report and will adversely affect your credit. Be careful with these.
Continued, persistent discipline over time.
These steps are simple, but they are not easy. Once you commit to get out of debt, you will have plenty of opportunities to take money away from your debt payment plan and spend it on something you want at the moment. Do not underestimate how much discipline this process will take over time. It takes a lot. Once you or your spouse start making exceptions to your get-out-of-debt plan, it is amazing how quickly your plan unravels and falls apart. Commit to this fully (and do it in writing if you have to.)
Freedom from debt is a very invigorating feeling...and it is a very strong step forward on the path to financial independence.
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