The Key to Paying Off Debt
The last time I blogged about paying off my auto loan, a fabulous reader sent me the following email:
Hey Singlema,I discovered your blog while researching tithing while in debt and I have been hooked every since. I enjoy the humor and your no nonsense approach to finances.
In reading your blog today you said you only have a little over $2,500 left to pay on your car. Why won’t you just pay it off? I too am in debt pay off mode and I have raided my savings account several times to pay off things what is your take on this…
I assume the reader asked me this because s/he knows I have a healthy emergency fund - emphasis on “emergency.” Otherwise, where would I get the money to “just pay it off?” If I had $2,500 laying around doing absolutely nothing, I would pay it off. Single Ma is fabulous, but she aint got it like THAT! Ha! I’m just kidding, let me answer the question…
In my opinion, the key to paying off debt is the same as achieving other financial goals - better yet, anything in life. Priorities, a goal, a plan, dedication, and patience.
My income is limited, so I have to establish financial priorities. I consider my entire financial picture; disposable income, savings/investments, debt and a little wiggle room to enjoy life. I decide what’s important to ME, then I run the numbers to see what makes the most financial sense.
When I established a goal to pay off my car, it was only AFTER achieving the goals with a higher priority.
When I created the plan to pay off my car, I again considered my disposable income, the required monthly payment and came up with a “minimum” extra payment that I could afford to pay - and would always pay, no matter what. This helped me to determine the completion date for my goal. Was Dec ‘07, now July, maybe even June…
To make sure I was dedicated to pay off my auto loan by xyz date, I put the “minimum” extra payment on auto pilot. If there’s a surplus at the end of the month, I send it over manually.
The rest is taken care of with time…patience.
When you try to get ahead of yourself by sacrificing one goal for the sake of another, you find yourself in a never ending cycle. It will feel like you’re putting forth a lot of effort but getting nowhere. Then you begin to feel overwhelmed, maybe even give up, accumulate more debt, and accomplish nothing. Sound familiar to anyone?
Sure, I could take $2,500 from my eFund to pay off my car loan. But what’s the point? When the car is paid off, it will throw a wrench into the rest of my debt payoff plan. I won’t be able to immediately switch focus to my student loan because I’ll need to restore my eFund. If I used what was my car payment to restore my eFund, it will take me right back to July. So what did I gain?
Or perhaps I shouldn’t worry about restoring my eFund? Oh hell, why not use the rest of my eFund to pay off my student loan too? Then what happens if I have an emergency? Will I use credit cards to survive and create new debt that is worse (i.e. higher interest rate) than the debt I had to begin with? Nah, that aint fabulous!
As a single mom who can’t predict the future, NOTHING is more important to me financially than my eFund. It’s #1 on my priority list. Furthermore, unless the interest rates on my auto loan (5.5%) and student loan (4%) were vastly HIGHER than the earnings on my eFund (6% until April, 5.05% otherwise), it doesn’t make financial sense. So deviating from my original plan due to some psychological or emotional reason to want my car loan paid off RIGHT NOW will accomplish nothing - only a shift in priorities. But wasn’t that the first step in my debt payoff strategy? LOL
Which takes me right back to the drawing board - priorities, a goal, a plan, dedication, and patience. For anyone paying off debt, I would suggest that you consider these steps. Focus on one thing at a time, stick to your plan, and be patient.
But I’m still in debt, so who am I to say? This is just my two fiddy cents. 
Peace & Blessings
~*~*~*~*~*~
Work to achieve, not to acquire.
And as always, BE FABULOUS!
~SM
~*~*~*~*~*~Work to achieve, not to acquire.
And as always, BE FABULOUS!
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That was a great explanation. I have priorities, goals and plans but what I lack is dedication and patience. Subsequently, I use huge windfalls (i.e., tax refunds, payout from refinancing) to eliminate debt and beef up savings. I accomplish my goals but this method does not teach dedication or patience. I need to fix this.
Interesting, and, once again, you raise valid points and help me answer my own question! My E fund is almost at $1K, and I was thinking, why don’t I just transfer that over and pay off Credit Card A? Well….that would put me back to square one, and would have to spend another 6 months building my E Fund back up. And,God forbid, what if there was an actual emergency..and I had no cushion to fall back on? Then I would be forced to use credit, and start that nasty cycle all over again! Sister is not even going back there…..it really hurts to fall without a cushion!!!
I have a small e-fund and even with the emergencies I had in 06 as you know, I have been tempted to use it to bring down even one credit card. I have to keep reminding myself that the reason I started the e-fund is because of the way 2006 ended for me.
Your post is right on point.
*hugs* girl ooh this couldn’t be more on time.. cause I DAMN SURE contemplated using my efund to pay off this stupid issue that arose BUT decided against it and I am now fighting that issue.. They ain’t just GETTING MY MONEY..
E-Fund has come in VERY HANDY with these emergency issues that have arose, hospital bills from daughter’s fracture, etc.. but replacing those funds aren’t as easy as we would like to make it seem… but definitely dedication, patience and a suga daddy helps! LOL *joking*
BK
Giiiirrrrllll! Speak on it! I realized after raiding my savings many times that I just wasn’t getting the difference between an eFund & savings. I don’t touch my savings now because I know how long it took me to build it up (as small as it may be). Now if I had to, yes but to pay down debt? No.
What chapter is this little goodie going in? *giggle*
Good point on setting goals and sticking to them. If it is not an actual emergecy, I try as hard I can not to dig into the fund. With patiece I did one day look up and see I had saved up a nie amount and a lot of my debt was repaid. Some was in collections so I wasnt really getting charged any interest. Hard as it may be, I think you and I fight the same demons
Patience, planning, and forward thinking are the keys to getting out of the debt-payment-bigger debt-smaller payments cycle. Right on point witht his post, you continue to motivate me.
Thanks
“priorities, a goal, a plan, dedication, and patience.”
You are so right Single Ma! You’ve just convinced me to reconsider raiding my eFund to pay for my braces. I will find another way dammit.
Tell Baby Girl to be thankful that her mama is paying for hers now so that she won’t be coming outta her pockets when she’s grown and having to foot %100 of the bill!
I know a lot of people that are debt-free and cash poor because of paying debt off too quickly.
I have a steep student loan debt, but I am not in a hurry to pay it off because it’s only at 3% interest.
It’s always smart to use debt as leverage. Rich people do it all the time. And so does Single Ma~
you go girl !
You guys are so inspiring with the eFund talk!
You’re helping me get my priorities straight, too.
I’m glad you guys enjoyed this post. I really meant everything I said, and yes, I do practice what I preach. As most of you already know, I’m a HUGE advocate of the emergency fund. Search my blog and see how many times it comes up. LOL I think a person should always be somewhat prepared for the unknown. Even if it’s only $1,000. That cushion, no matter how small, can help you avoid a whole heap of problems. All you need is one thing to go wrong and your financial life can shatter like dominoes. My eFund keeps me grounded.
And by the way, I apologize for not participating in the comments like I usually do. Life is getting better around these parts, but still a little hectic. Probably a few more weeks before things completely return to normal. My BabyGirl and the Pooch are suffering the most.
Damn a job that pays me well and actually expects me to work. Hmph! LOL
I am figuring this out myself. I was thinking I should just stop contributing to the 401k and empty one of my savings accounts to pay down debt… but too much in my life is happening now and soon. You’re right, if you sacrifice one thing to take care of another out of an irrational need, then you really don’t get ahead. I realize that now.
So well explained. We have recently come to the same realization after years of not having a savings b/c didn’t it make more sense to pay off debt? It was a vicious cycle to whittle away at the debt only to have something “unexpected” come up. With no savings that meant paying for the “unexpected” with credit. Very disheartening. We now have a decent savings established and are concentrating on the debt!
[...] Single Ma @ Single Ma’s Fabulous Financials has some great insights on keeping an eye on the priorities while paying off the debt. A reader recently asked her if s/he should “raid her savings account to pay off the car loan”. This response by single ma is very well balanced and a very rational explanation of what happens if you don’t stick to a plan because you are bitten by the debt-reduction bug. If you are actively working on your debt I highly recommend this post. [...]
Single ma,
I agree with you completely. Paying off debt is investing in yourself and thus should be approached like investing. Use a similar concept like dollar cost averaging. Pick an amount budgeted towards your goal and pay off that amount every month, no more and no less. I think you have explained this well.
I have been following this strategy for years now, but I never articulated it enough to justify why I was doing it. I just did it because it seemed like the right thing to do. You explained it very well though!
I also got another idea from this post. My paychecks and bills are pretty predictable. I should start making automatic payments of those bills I’ve already committed an extra minimum to. Matter of fact, I think I’ll blog about that…
I need to take a hard look at my personal financials.
Business just gone bust, and like many, a life-change like this makes you start a blog to record what you did!
As a first step, I was wondering if you have any pointers on where I could get a spreadsheet to help me with debt reduction?
I am turning over a new leaf and for the first time seriously looking at getting out of personal debt.
Any links or recommends to spreadsheets would really help and be appreciated.