POST OF THE DAY
Credit Cards and Consumer Debt
125K in Debt -- Gone!

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By jthrelkeld
February 16, 2006

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Woo Hoo!

This is the post I've been looking forward to writing for a long, long time.

I write this after having confirmed that our last payment on our non-mortgage debt has cleared. My significant other and I are now officially free of all consumer, familial and student loan debt. No longer do we wear the squawking albatross of reverse compounding interest around our necks.

In summary: We paid off close to $125,000 in a little over seven years. Even with 2.5 years of financial hardship smack in the middle of that period. If we can do this, you can do this. This post is long. But if you want the gory details, read on...

The Wake Up Call
I have been a registered Fool since shortly before Christmas, 1998. I don't remember how I found the Fool -- probably in my Internet wanderings for debt reduction information.

I had already become something of a debt reduction junkie by then, having acquired Quicken in early 1997, which enabled us to see for the first time how much our finances resembled a Sam Peckinpah movie -- we were in the red and bleeding copiously each month.

We didn't panic, but we did feel a profound sense of unease and knew we needed to turn things around. By the time I'd found Fooldom, we'd already made the commitment to (and good progress toward) paying down the debt -- to the tune of about $12,000. We "only" owed $113K when I registered. *shudder*

The Hideous Truth
Since I know you people love to see the numbers, here were ours. Ready? Strap on your seatbelts and get your vomit bags ready...

Student Loan 1     $39,473
Student Loan 2     $11,033
Student Loan 3      $9,719
Visa Card 1        $12,972
Visa Card 2         $6,500
Visa Card 3         $5,485
Visa Card 4         $5,375

(Brief intermission. Sponsored by Visa!)

Visa Card 5         $3,747
Visa Card 6         $2,935
Visa Card 7          $221 (this one's almost funny)
Car Loan           $14,847
Familian Loan      $12,000
Bank Overdraft        $442 (no mystery there)

Hideous Truth     $124,749
Why why why?! Why and how did this happen?! Well, the pursuit of higher education accounted for roughly half of it. Much of the rest was related to the purchase of an older house (closing costs and huge repairs killed us the first few years, since we'd drained our savings to come up with the down payment) and starting a small business with plastic. The rest was residual debt incurred from "charge today, worry tomorrow" behavior -- the "I work hard and I deserve this" mentality that spawned vacations, shiny electronic doodads and way too many boxes arriving from Amazon ("It's like Christmas every day!").

The Commitment to Change
We began really cutting back on expenses and paying much more than the minimums in 1999, and taking advantage of balance transfer offers. We made lots of progress on the credit cards and one student loan. Then a protracted period of un- or under-employment hit (9/11 in New York, anyone?) and lasted from fall 2001 through spring 2003. Our debt retirement efforts were put on hold while we focused on survival.

To add to the nautical metaphors: Though our little fiscal ship was tossed by the winds of misfortune, we had managed to build up some emergency savings to rely on and our rusty scupper only sprang a few leaks; we racked up a few thousand in additional debt for living expenses over that entire period. But we resumed the frantic bailing and patching leaks once that storm passed.

Although the economy turned up a bit in early 2003 and the freelance work began to flow again, we've still been living more or less on around two-thirds of what we used to. The difference is we've learned to live quite well on that reduced income and managed to take about a third of it and snowball it on the debt to boot!

The Miracle of the Snowball
Over the years, our snowball grew from a modest $300 a month to $600 to $1200 -- all the way up to a rotund $2800. Holy snowflakes, Batman!

During that time, we've also quadrupled our retirement nest egg and rebuilt our emergency fund up to about six months' worth of living expenses. Although we played the balance transfer game, it was always done strategically -- to move the payment process forward faster rather than just moving the debt around. And we never touched our home equity, or liquidated retirement funds, or employed any of the other "quick fixes" people resort to, often to their later regret.

Starting next month, between maxed-out retirement and personal savings contributions, we'll be averaging a 45-65% savings rate every year (depending on how much work we have).

Did I mention that our credit scores are so high that they require oxygen? That's what happens when you borrow boatloads of money and faithfully pay it back with never a late payment (even if it's minimum payments). Not that this matters right now, since we're never going into debt again for anything other than affordable real estate with money borrowed at a reasonable rate.

And we have a never-ending tide of 0% credit card and finance offers streaming into our home these days. They all go straight to the shredder.

Here are the two message boards that were instrumental in making all of this happen:
Credit: http://boards.fool.com/messages.asp?mid=23700928&bid=100145
LBYM: http://boards.fool.com/messages.asp?mid=23701839&bid=100158

Personal Finance Changes Inspire Other Life Changes
The Fool's message boards and articles have affected my life beyond enabling me to learn the skills (and keep the motivation) necessary to pay off such a mountain of debt. In addition to this, since joining the Fool I have:

Learned about and embraced a simple, low-cost index fund-based investing strategy for building wealth and security that takes just a few hours per year to maintain and removes all the emotion (aka "stupidity") from investing:
The Coffeehouse Investor: http://www.coffeehouseinvestor.com

Realized that financial independence and early retirement are actually possible:
Retire Early Home Page: http://boards.fool.com/messages.asp?mid=23559162&bid=112992

Lost 30 pounds of unsightly flab:
Fools Fighting Fat: http://boards.fool.com/messages.asp?mid=23178823&bid=113530

...and gained 15 pounds of sightly muscle, having made exercise a part of my daily routine (and will be running in my first half-marathon in April):
Running Fools: http://boards.fool.com/messages.asp?mid=23682707&bid=114911
Weight Lifting Fools: http://boards.fool.com/messages.asp?mid=23350848&bid=115039

Transformed our backyard rectangle of mud into a lovely little garden with our own two hands:
Gardening and Landscaping: http://boards.fool.com/messages.asp?mid=22553516&bid=112916

Looking Backward, Looking Forward
On Friday evening we'll be celebrating our victory in our little living room, burning symbolic "debt notes," cutting the "debt cake" and drinking some very good champagne from our "four for $15.00" flutes.

Then, in about a month, I'll watch our first auto-transfers of the former snowball amount into our Roth accounts and 4.8% HSBC Direct e-fund -- and start watching that brand new snowball of compounding interest start rolling and growing.

So, thanks again for all the valuable advice, thoughtful posts and moral support, Fools. Especially those kind souls and fonts of information and insight, of which there are too many to name (and I'm sure I'd leave out some of them if I tried).

I will remain a Fool and a regular on these boards -- hey, once an addict, always an addict -- to try to give back to the community that gave so much to me. Cheers!


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