Category Archives: debt

Debt Reduction and the 3 Steps For Creating a Repayment Plan That Is Almost Fun

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Believe it or not, but “Debt Reduction” can almost be a fun process!  During the time that I was repaying my mortgage and two car (all at the same time), hitting certain milestones that I created was almost fun!  I thought I would share my process and how to get the most out of it.

Step 1

Use a spreadsheet to track your debt payments and the effects on the amount you owe!  What if you don’t want to spend money to buy a spreadsheet?  Consider the spreadsheet program in Open Office Calc or use Google Spreadsheets.

This step is my base, without this step I wouldn’t have been as motivated!  I took it a step further and made a what if page to calculate how changes in the amount I paid would affect the life of the debt and the total interest that banks would receive.

Step 2

For this step, I created financial milestones!  Once we crossed these financial milestones (really mortgage milestones, but the idea is similar), we would reward the crossing of the milestone by going out to eat at a decent, but not too expensive restaurant.

Note, we chose to make the milestones significant.  So we set our milestone at 20% intervals of the amount owed.  So if our debt was $100,000, we would celebrate at 80,000; 60,000;  40,000;  20,000 and obviously at zero!

Step 3

At this step, you’ve paid off your debt and how you have all of this extra money rolling in because your debt obligations are gone…  so what do you do?  Well, in my case I decided to use the extra money to buy stocks that provide a dividend.  Then my idea is to use the dividend to eventually pay for those fun expenses (like lunch, eating out, vacation, etc) while at the same time pumping my extra earned income into solid dividend stocks and other new investments.  That dividend could then serve double duty and cover hard expenses (food, utility, taxes and other non-fun expenses) in times of tightening.

What about retirement, 529s and other important expenses?

Do it all, or at least that is what I did.   During my repayment plan for my cars and house, I continued to fund my 401k and 529 plans for my kids.  I was even able to put a little bit in my Roth IRA.  It was tough, and instead of paying my mortgage off in 5 years, it took my a bit over 10 years to pay everything off.

I believe that a balance approach towards finances is the best approach.

The key is to make the best of your situation, and enjoy life!

Here wishing the best for your finances,

MR

Debt Free, Now What?

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Back on February 2010, I became totally debt free, but now what?

I thought that there would be a period where I would break even for a while, and then start to plow about $1,000 extra each month into investments!  So now that it’s seven months later and how much extra did I save or invest?  Not a single cent!

So what’s the problem?  Why haven’t I been able to catch up?

Well it’s been a matter of bad luck with equipment breaking down and needing replaced and spending too much for our past vacation to Hilton Head Island!

But it’s also been a subtle form of LifeStyle Inflation!  Thinking back now, I realize that when wants would arise, I would just go ahead and buy it.  Yeah, I thought about it a bit, but I knew that I had the cash.  Then when our car and lawn mower broke down, I had the cash too…

So now will I begin my saving and investment regiment?  I certain hope so!

The only think that I’m worried about is the fact that my house is over 10 years old now, and it seems like things are starting to look a little run down!  I expect things to start breaking soon or later!

I decided to lower my expectations to only save and invest $500 a month.  Hopefully, I’ll be able to build back up to $1,000 though!  I plan on paying myself first this time.  That way I won’t have to feel guilty about missing my goal!

We’ll see if i can get my lifestyle expenses under control so I can accomplish my new goal!

-Don

Update 11/05/2012

Debt Free Now

Okay, the tide has definitely turned since I initially wrote about being debt-free now!  The excess in the amount of money I was saving dramatically increased after 10 months after becoming debt-free!  So I increased my 401k contribution up to 17% of my income, and still had a lot of money coming in.  So I also joined my employer’s ESPP to fund my Roth IRA.  Using my employer’s ESPP has been one of the best money moves I’ve made to-date!  Especially since I’m using my ESPP to save the money for contributing to my Roth, and since I’m using my Roth IRA as a Tax Shield, there is a nest of benefits that makes this an awesome wealth accumulation strategy.  Being debt-free now has enabled me to speed up wealth accumulation by at least doubt the rate that I was saving before I became debt-free!

Other Projects and Experiments:

We Have It Easy, Remembering Debtor's Prison

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Debtor's Prison

Prior to the middle 19th Century, people that were in debt didn’t have the luxury of Bankruptcy!  The debtors that couldn’t pay their debt went to prison!

Most of the history of Debtor’s Prison was from Europe, but the United States had Debtor’s Prisons too.  It wasn’t until 1833 that the US Federal government and most states abolished Federal Imprisonment for Debtors.  Even some of the signers of the Declaration of Independence went to Debtor’s prison.

The famous author Charles Dickens’s dad went to debtor’s prison in England for a period of time.  In his works, we find reference to such prisons.

In Medieval Europe, both men and women were locked up together in a single large cell, until their families paid their debt.  The prisoners often died of disease contacted from other debt prisoners.  Conditions included starvation and abuses from other prisoners.

The irony (IMHO), is that the debtor goes to prison until his family can pay off his debt and get him out.  But (and here’s the irony), to get out of debtor’s prison, the debtor would have to somehow pay to get out, but he was in prison?!?  So how can someone in prison work to earn money to pay for his way out of prison?

While most countries have done away with debtor’s prison, China (not including Hong Kong where imprisoned debtor’s is still common), in 2008 had imprisoned the first mainland prison sentence for unpaid debts.  In fact, it’s possible to be imprisoned for life by not paying the debt incurred with “malicious intent“.

I was surprised to hear that China didn’t have a debtor’s prison originally, but now has one…