5 Top Changes I Made to Improve My Financial Life (continued)
What are the top changes we made to improve our finances? Below continues the discussion of the top 5 things we did that I feel had the largest and most immediate impact. This is the fourth entry of five.
4. Extra Payments on Debt
When I decided to tackle my debt, the first and most obvious target were the maxed-out credit cards. They did have higher interest rates than other forms of debt that I wanted to eliminate but perhaps more importantly, they clearly represented the bad decisions that I had made and that I was committing myself to not make going forward. As mentioned previously, I worked very hard to reduce monthly expenses. This represented newly freed up money in the budget each month. I knew that I had to deploy those resources on a new goal or risk those savings being lost in normal month-to-month lifestyle creep.
I had one credit card that I considered my “main” card and another that was only for emergencies. Somehow, I had managed to max them both out to the tune of over $30,000 combined. My normal monthly budget called for a $1000 regular payment on my main card and a $300 regular payment on the secondary card. These payments were made each month regardless of the balance. Sadly, I was spending way more than that $1300 per month on the cards. The secondary card had a smaller credit limit so naturally it carried a smaller overall balance. I decided to eliminate that balance first and then apply that additional $300 per month to the main card. By making these lump sum payments on my smaller credit card, while choosing not to add new charges to that card, I was able to eliminate the balance on that card in a little over 3 months. I then applied all monies that were going to that card, along with the originally budgeted $1000 per month to my main credit card balance. This card had a larger balance and was my main card for normal monthly expenditures so tackling this debt proved a little more challenging. However, I was committed to getting out of credit card debt, so I worked very hard to minimize any new charges to this account. Through these moves I was able to pay off this balance in approximately 6 months. Since that time, which is almost one year ago at this point, I have paid the balance, if any, on each card monthly. I have noticed that our spending has started to creep up again and I will need to address that, but I have remained diligent in paying off the cards in full each month.
Once I had the credit cards under control, I turned my eye to our Automobile Loan. At that time, the balance on this loan was a bit over $20,000 and our monthly payment was just under $425 per month. My previous budgeted amount for credit card debt plus car payment amounted to $1,725 per month. It would have made perfect sense to dedicate that entire amount to this new debt until it was gone but I decided to go in a different direction. I have hinted that I have rental real estate and I will talk more about that someday soon but at this point in the journey I was making great progress, but I wanted to turbocharge my efforts. One of my rental properties had become vacant and rather than re-rent it, I decided to sell that one unit since the local real estate market was soaring. Unfortunately, when inspecting the property at the turnover, I noticed that it needed quite a bit of work to get it prepared to sell and take advantage of the market. I quickly enlisted the help of a firm that I work with to have the work done and simultaneously engaged with a local realtor friend to make sure that I focused on the improvements that would have the greatest impact on buyers. This work was done in about a month’s time and I listed the house. On the very first day it was listed, I received multiple offers and I accepted the best one. I had held this property for almost ten years but still carried a mortgage on the property. After all costs and paying off the mortgage, I netted a decent profit. I applied approximately $10,000 of that to the car loan and used the rest to fund a new investment account at Vanguard. I then began applying the budgeted $1,725 per month to the remaining balance on the loan. I added to this anytime I could find additional funds in the monthly budget and miraculously I was able to pay the remainder in about 6 months.
While the credit cards carried higher interest rates and a combined balance that was higher than the car loan amount, paying off the car loan was much more satisfying for some reason. My wife and I scheduled a meeting with our local banker to close the auto loan and walking out of our bank branch that evening, I felt several inches taller. I realized this was the first time in my adult life that I was without a car payment.
With those bases covered, it was time to start attacking any remaining debt. When I analyzed my finances more closely, I realized the only remaining personal debt was rooted in my home. I would be happy to report that this consisted only of my primary mortgage but that was not the case. I was carrying a large balance on a Home Equity Line of Credit (HELOC). I had applied for a large HELOC at a time when home prices were skyrocketing, and lending requirements were fairly loose. I then managed to max out that credit instrument almost as quickly as I did the credit cards. I primarily used these funds to finance investment real estate, so I always viewed this a “good debt” but it was debt nonetheless. At present, I am tackling that portion of my debt. That battle is on-going, but I am making strong progress. As of this writing, I have reduced the balance on that debt by approximately 30%. I will continue to make extra payments until this item is eliminated. At that point, I plan on tackling my primary mortgage in much the same way. The real challenge begins when I am completely debt free. I will need to battle complacency and ensure that I do not fall back into past bad behaviors and make sure that I lock in the savings that I have fought so hard to realize and move those monies to investments. I will discuss that more in the next post.