I would be doing a disservice as a financial blogger (FIRE blogger at that!) if I neglected to write about debt. As a 51-year old pre-retiree its within my best interest to retire debt as soon as possible while building up (and Preserving) the nest egg.
While in my early thirties, like a lot of young people, I had a mountain of credit card debt. I was fortunate enough to attend a live Dave Ramsey financial seminar. I purchased his books and DVD’s and was on my way to financial freedom based on Dave’s principles. His “Debt Snowball” reduction method is a unique approach. Say a person has several credit cards. According to Ramsey’s method (link: Debt Snowball ) you should work toward paying off the smallest balance first, making the minimum payment to all the others. Once the smallest card/debt is completely paid off, immediately focus your attention to paying off the next smallest balance, and so on (until all debt or credit cards in this case, are paid in full). Take it from me first-hand, the Debt Snowball method works and works well.
This snowball method should be used for all of your debts; the car payments, medical bills, student loans, your mortgage, etc. As for the credit cards used today, I use several but I pay them off every month (thus no interest charges). I have a American Airlines frequent flyer Mastercard as well as a Marriott Rewards Visa and Hilton Honors American Express. By using these I’m exploiting many, many travel perks. Twice per year my wife and I are able go on leisure trips; fly first-class for free (using airline miles) and stay in a high quality hotel (from pints earned by using the respective hotel credit cards) for FREE. One year we flew first-class to San Francisco (free), stayed in the San Fran Ritz Carlton (free), and rented a National Rental Car (free). The only expenses incurred were dining, a boat ride to Alcatraz and a few wineries in Napa and Sonoma Valleys. We had a fantastic time for five days and nights and spent less than $2000. for the entire trip for meals and incidentals (a case of wine!).
I admit I recently purchased a new 2018 Honda Accord 2.0T Touring model with all the bells and whistles. I paid $10k cash down and financed the remaining balance ($23k) for 48 months @ a rate of 2.70%. I can justify these terms and this loan because my company provides me a $550. monthly car allowance. Without the car allowance I would have paid cash for a 3-year old car.
I’ve contemplated paying my mortgage off completely but under the advisement of my CPA, I am keeping the mortgage until soon before retirement. My final month I’m employed full time (the end of 2023) I’ll pay it off in full. In the interim I’m paying an additional $835. toward principal each month, building equity very quickly but reaping the benefits of the mortgage tax deduction at the same time.
I realize many readers have debt, some have very little and some (maybe due to kids in college, illness and medical bills, student loans, etc.) have quite a bit and feel like prisoners. I can empathize as I’ve been there myself and it’s stressful. There has been so much written about debt reduction by many financial experts. Some advise to pay the highest interest debt first. Others advise to pay all revolving debt first before starting on the car or mortgage debt. All of these experts have their reasons for advising these various methods. I can assure you that Dave Ramsey’s Debt Snowball method worked for me and it can work for you. Dave Ramsey is a very well-respected financial expert and he makes no bones about proclaiming his Christian Faith. That’s someone I find very like-minded and aligned with my personal values and Faith. Thus I place my trust in his advice.
Whatever method you decide to use, use it diligently AND quit buying “stuff.” Sacrifices must be made in order to pay your debt down. This means brown-bagging your lunch everyday, it also means no more trips to the coffee bar for expensive “Frap” drinks. This may mean sustaining yourself on canned tuna and macaroni/cheese for awhile. I lived on this meal while paying down those credit cards, as well as hamburger helper, oatmeal bought in bulk, eggs, etc. The key is to SACRIFICE, and focus on the big picture. Divesting yourself of all revolving consumer debt (credit cards, etc.) is the definition of FREEDOM. Once you’ve paid off that final credit card bill, “sin no more!” (Use credit cards as a Perk-Tool like I do, otherwise they serve no purpose!). The sooner you pay off the debt, the sooner you can focus your resources on investments and wealth creation.
(disclaimer: I am not afiliated with Dave Ramsey and I receive no remuneration from him whatsoever. Ramsey offers a service I truly believe in and I feel compelled to offer him my free endorsement.)