Become debt free faster

I was talking with someone I used to work with. The topic of conversation was his new car. He told me it has a great ride, so smooth you don’t feel the bumps in the road. The stereo system is awesome; crystal clear sound makes you feel like you’re at a concert. There’s plenty of room for the kids and luggage (or almost anything else). To top it off, he got a fantastic bumper to bumper warrantee—100,000 miles. Needless to say, he was very happy with his new car. “You just can’t go wrong with this deal.”  Now he has a car payment and he wants to become debt free faster.

I asked him, “How much does the loan on this put you back?” Well, that was not a good question to ask. You could almost see the happiness fall off his face. His reply was, “Five years, $414 a month.” He’s financing $23,000. (OUCH! That’s a lot of money, and with the tone of voice he was using, I didn’t want to ask what his down payment was.) Anyway…seventy-two months is not unheard of, so sixty months worth of payments for a new car is far from unusual, but it’s sure going to feel like a long time before he makes the last one.

“Why didn’t you buy a used car?” I asked him, “You do know that the average new car depreciates almost half its value in the first three years?” (That probably wasn’t the most diplomatic thing I ever said. I’m thankful he wasn’t offended.) Anyway, he had figured that a new car would be far less likely

than a used one to need any repairs over the next five years. However, “With that warranty, should repairs be needed, it won’t be me paying for them.” (Really??? That’s how he was thinking???)

You have to know that I don’t agree with that line of reasoning. On some level he has to realize he’ll pay for any repairs through that warranty he’s buying. (No, the warranty wasn’t included in the price of the car. It is, however, part of the cost that was financed, so in addition to paying for the warranty, he’s paying interest on the cost of it, too.)

But…that’s not the direction I’m taking this blog. Right now, I want to address reducing his number of payments, and by extension, the amount of money he’ll pay.

Ok so this is where we are

My friend’s in debt over an automobile. Maybe you are too? Maybe it’s your only loan, maybe it’s one of a few, or many. You know you need to pay this

loan off, so you can get on with life—the sooner, the better.

The car loan is for five years. This means he has up to 5 years to repay the loan, which includes the car and the warrantee, with interest. He’ll be on a schedule of 60 equal payments, one due each month, but not required to take the whole five years to repay the loan…That’s good news.

He can get become debt free faster

To pay off that loan off early, extra money needs to be applied to the payments. (You may say “Well, Captain Obvious, anybody ought to be able to figure that out.” But, keep on reading.) Now, with my friend already obligated to pay $414 a month, the idea of coming up with more money may seem rather daunting to him, but it can be done. If over the next 54—not 60—months, he pays an additional $2,484, my friend can pay off his car 6 months early. I figure the first installment on his loan is due in June, 2018. If he sticks to his payment plan, he’ll make his 60th (the last one) in May, 2023, but he pays that extra, he’ll be done by November, 2022.

Let’s take another look at this: $2484 seems like a lot of money, and it is—to me, to my friend, and probably to you, too. But, let’s break that number down: Divided evenly over 54 months, it comes for $46/month. If he would contribute an additional $46 a month to his loan payment, he’d have it paid off 6 months early.

Note: Adding a little bit more money to the required car payment he will become debt free faster

Have you already figured out how much that $46 is a day? It’s slightly less than $1.60/day. (By the way, for simplicity’s sake all the dollar amounts I’m using are rough numbers. You don’t really want to deal with fractions of a cent, do you?) Now, while $2484 is a lot of money, $1.60/day probably seems more manageable. Most people waste that much on cokes or coffee. My friend is like most people, so getting out from under this loan early would require him to make some small changes, but it will be worth it. Assuming he has other debts, it’d be at least one less payment a month that that he’d have to make. (I think the peace of mind that would come with that could make the small sacrifices worthwhile.)

Also, he’ll save 6 months worth of interest. To know exactly how much that savings would be, I would need to know his interest rate—which I don’t, but my concern here is not so much saving a great deal of money. After all, by taking out the loan, my friend has already indebted himself. Rather, I’m interested in the possibility of freeing up money to do something other than pay off debt—and that’s a frugal concept.

So what if he wants to be debt free faster

The first thing he needs to do is acknowledge that he has to repay the amount he borrowed; that amount will not be reduced by an early payoff. Any money he “saves” will be on interest payments. What he’ll really gain is time. He can use that time to make his funds work for him rather than paying someone else for the use of their money.

Anyone who wants to pay off a debt early needs to find extra money. They should not, however, consider their emergency savings as extra money. If fact, if you do not have an Emergency Account, you may want to find a way to build one as you pay off your debt on schedule. (In a financial crisis where will the funds for living, let alone paying off debt, come from?) For most people who do not have one, funding an Emergency Account should trump paying off debt early. (Note: I did not say “instead” of paying off the debt.)

(DO NOT TOUCH THE EMERGENCY ACCOUNT)

So, let’s assume the person who wants to pay off his debt early has an Emergency Account. He should also have and maintain a spending log. By reviewing your spending log, you can see your spending trends. Do you see where you’re wasting money? It may not be a large amount. You should be looking for semi-luxurious items like the number of lattés you’re drinking. Maybe your indulgences aren’t even very expensive? It might just be some sodas, candy bars, or magazines you could do without. You’re looking for something you don’t need and could forfeit without too much pain. As I pointed out above, even small amounts saved on a daily basis can make a difference. Where could you find $1.60/day?

You can be debt free faster?

My friend picks up his lunch at a drive-thru three or four times a week. That expense probably comes out to at least $25/week (close to $100/month). I will say that this is not just a “I have to eat” issue. He enjoys doing this, so—maybe—he doesn’t have to give it up completely. If he would bring most of his lunches from home and only do takeout once a week, in a month’s time I’m fairly sure he could lay his hands on at least an extra $60. (Remember, he’s still buying lunch once a week and he may have to pay for more bread, lunch meat, chips, etc. to take from home on the other days.)

He could also opt to ride the bus??? (I bet you’re scratching your head on this one. I mean, he did just buy a new car, didn’t he?) Well, given the cost of gas and the cost of a bus ride, he’d save money on gas if he rides the bus—provided the car isn’t used by another member of the family while he’s at work. Also, if he can legitimately say that the car is not driven often or far, he might be able to get a break on insurance.

He could also, try putting together a carpool and have the other riders pay for his gas. Unused money in his fuel allowance could be applied against the loan.

There are a lot of options. Look at your spending journal (how much do you budget and how much do you really spend) if it doesn’t yield much, take a look at your budget. (The money in the carpool suggestion would come from a budgeted fuel or auto fund.)

The budget

Look at your budget. You’re looking for the same kind of things you were looking for in your spending journal. Look for waste. Most people waste an incredible amount of money on food, electricity, and gasoline. Look at where your money is going. You might consider reducing or eliminating recreation, vacation, or any category that is over-funded on a monthly basis. Remember, you’re only looking for a few extra dollars a week that could be regularly available to pay toward the loan.

Note:

Sarah the creator of iheartfrugal.com wrote an awesome article 75 Frugal Living Tips That are Surprisingly Easy.  Read Sarah’s article, see what she has for you. 

Or

You could get a part-time job. Part-time jobs can provide additional income. Just remember part-time jobs come with the hazards of taking time from the family, making you too tired to perform your regular job adequately, and more to pay in taxes. It’s important to not allow the part-time job to interfere with your “day job”. When you get tired of working all the hours a part-time job adds to your schedule, it’s important to remember why you took them on and balance the additional income against the inconveniences. (If you’re deeply in debt, you may not have that luxury. You may need to bring in all the money you can; hopefully, we aren’t talking about that need.)

One more option

You could find a side gig. The difference between a side gig and a part-time job is that you’re working for yourself. Side gigs can be practically anything you can get paid to do: lawn care, house painting, house cleaning, running errands, dog walking, house sitting. The list is endless. Anyone, including my friend, could come up with something to bring in some additional funds. (I’m not sure what he’d do…He’s pretty good at organizing, or at least at moving things around.) He might be able to make a side gig getting rid of clutter in garages, basements, storage units, etc.

The nice thing about a side gig is that you line up the jobs and can work as much, or little, as you wish. Of course, the responsibility is all yours, also. You do all the planning and executing. And you have to do what it takes to be legal. That said, for some people, what starts off as a side gig can turn into a profession. For others it’s just a way to get some money and become debt free faster.

conclusion

To become debt free faster you have a lot of options.  You can find a side gig, part-time job, or look for waste in your budget.  It doesn’t take a lot of money to speed up your debt free goals.

 

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