How to Knock Out a $22k Debt When Your Paycheck/Budget Says 'Impossible'

By | December 22, 2015 Leave a Comment

The Village Leader's 2016 Debt Revolution

Put Together Your Own ''Stop Being Poor'' Goal for 2016


It's crunch time, friends, with no time to waste! The New Year is fast-approaching, and if you plan to succeed this year in becoming more independent financially by knocking out your debts, you have to start planning now. I've got a plan of my own which I want to share with you now. I think you'll like it.

It involves using a few little-understood strategies for paying down debt and building wealth which you've probably never heard of, and I hope it will inspire you to do something just as dramatic as what I'm planning.

If you've been reading along with this blog for a while, you know my long-term financial plan is simple:

"Gain complete financial freedom."

Every big goal you have in life naturally breaks down into smaller, incremental ones... in this case, one of my incremental steps happens to be paying off debt---a crap-ton of it---as quickly as possible.

And therein lies the rub--doing this proves to be somewhat difficult when your current savings plan and budget look you straight in the eyes and say "F You, That's Freaking Impossible."

This is an interjection which I promptly and utterly reject. I don't get talked down to like that by anyone, and I won't take it from an inanimate budget, either! The budget is not my boss.

What I'm Going to Accomplish


Here's a a high-level view of what I want to accomplish:
  • Pay off my remaining student loan debt
  • Make extra payments on my mortgage, in order to reach 20% equity, so I can cancel the Private Mortgage Insurance on my home--this will allow me to reallocate funds from Expenses every month (PMI) to Savings (and Investments) by about 5%-- about $171.
Now, what's my time frame?

I've been pretty judicious about paying down the student loans since I began repayment three years ago, and the same with the mortgage, which I entered about the same time. That being the case, 24 months's worth of time to complete these goals seems realistic.
    You might think these goals are lofty, even devious and intricate, but my plan has been working so far--inasmuch as I dutifully complete the steps along the way. If I'm going to make it happen, here's a further breakdown of what I have to do:
    • Stop wasting money on things I don't need to (be even more careful with everyday spending)
    • Crank up my savings rate another 5% of gross (goal is 25%)
    • Relentlessly use extra money at the end of every month to make extra payments where I can
    • Use windfall payments to further reduce debt loads
    • Continue growing my wealth safely and successfully, as I have in the past
    If you're doing this exercise with me at home, do what I've just done. Decide what your long-term financial goal is, break that down into a couple of short-term goals, and decide what specific action you have to take to make them happen. This will involve, ultimately, arriving at a number you need to contribute each month toward meeting that goal.

    How Much Debt I'll Pay Down On Average Per Month


    So, back to me now. I've determined that by December 31, 2017, I need to put away a total of $22,296 to meet my two intermediate goals. That comes down to $11,148 per year, or an average of just $929 per month.

    "Hmmmm... I don't think I have that lying around in my budget anywhere close... nope, don't think so. Well, screw that, I guess."

    This is what the average financial weakling's thought process is like. But I'm not average by any stretch of the imagination.

    Although it's true that I don't just have that pile of money lying around, my approach to this dilemma is a bit different than the above. I tend to avoid asking myself dead-end, binary, win-or-lose questions like, "Will this work?"

    Instead, I ask myself questions like, "How can I make this work?"

    And the answer is: "With a vengeance."

    Let me show you how it's done. Take some notes.

    Figure Out Your Expenses Using a "Budget"


    First, I'll look at what money is lying around in my regular budget before I take this extra $929 into account. To do that, I need to know my spending. Here are the items in my own budget, probably similar to yours.
    • Housing $1085
      • Mortgage (Principal, Interest, PMI, Escrow--insurance, taxes)
    • Utilities $295
      • Gas/Oil (Heating), Water, sewer, garbage, electricity, internet, cellphone,
    • Gasoline $110
    • Auto Loan or Maintenance  $100
    • Clothing  $30
    • Charity Donations  $600
    • Christmas/Birthday/Special Occasion $50
    • Entertainment $20
    • Student Loans $300
    • Auto Insurance "Bank"  $60
    • Food/Groceries/Restaurants  $450
    • Misc Home Necessities  $100
    • Kids Activity Spending (if applicable) $30
    • Total Budget Spending Allowance:    $3230
      • Additional Proposed Debt Payments/Savings:  $929
    • Total Monthly Proposed Expenses for 2016-2017:  $4159
    OK, now let's see if I make enough money to wipe out this debt:

    • My Income:  Net Income After Savings, Taxes, and other Deductions: $2980
    • My Awesome Wife's Income:  Net Income after taxes, etc:    About $860
      • Total Combined Income:  $3840
    • Income Minus Proposed Extra Expenditures of $929:  -$319
    Crap! We're short. I don't make enough money to do it! My plan is foiled... or is it?

    Find Your Extra Sources of Income, Which We All Have


    At this point, ask yourself this question: "Do I have any extra sources of income that I haven't taken into account?"

    And the answer is: "Of course, we all do!"

    For a refresher on one major source of hidden money in your life, see THIS ARTICLE I wrote on how to make your budget MAGICALLY give you some bonus paychecks every year--at least TWO, to be exact.

    Then there's this article about windfall income, similar to the above but with a few more details on other types of free money you get out of nowhere.

    After reading these articles, you should understand that everyone has spare money lying around if they choose to... so we can proceed.

    Using just the Bonus Paycheck method,  I should be able to rake in at least an extra $2900 next year, and the year after  in "bonus" paychecks (that's not even counting my wife's income, which will produce about $1600 more). I'll take that extra "magic" money, and toss it into the annual money pit of $11,148, and suddenly, the amount I need to be spending "out of budget" every month to pay off the debt becomes just $687 ($11,148 minus $2900, divided by 12 months). Unfortunately, I'm still short -$77 in my budget. I'll be getting poorer every month if I make all these payments/savings deposits.

    Using the Windfall method, every April, I'll get a Tax Return. Everyone does, as long as they have a mortgage, a student loan, contribute to tax-deductible charities, or produce some extra offspring during the course of the year. Properly applied, that lump sum tax return of about $1200 goes straight into the $11,148 money pit, too.

    Most people don't think about a tax return as a source of income, because they blow it on non-value-added things, like toys. Well, in the Village, we only buy toys when we've disposed of our other toys, and sold our old dusty junk we don't use on Craigslist.

    Having applied all of this spare money, my annual "out of budget" payments are down to just $7048, or $588 per month. I'm now actually ahead by $23. That's great news... but I'm not done yet! I have one more source of income.

    As it turns out, as long as I perform well on my job at work, I can get an annual performance bonus of up to 8% of my annual salary.

    My bonus for the year was just deposited yesterday and looks like it comes to about $2700. If I take that amount and toss it also into the $11,148 money pit, that brings my annual "out of budget" extra debt payments to just $4348, or just $362.33 a month.

    Can I afford that?

    Well, it turns out, yes, I can!

    Since I'm netting $3840 a month with my normal paychecks, and I only spend $3230, I end up making my extra debt payments each month, I can max out by budget spending, and still have $247 to spare!

    Awesome! This plan just keeps getting better and better!

    The Only Things You Need to Do to Make This Debt Debt


    Some observations on this plan. The keys to making this work are:
    • Learning to live on 28 days' worth of pay over the period of 30-31 days of every month using my Budget Magic Trick. When you do that, you'll always have extra money lying around for emergencies, or for paying off debt.
    • Not blowing your tax return on useless, depreciating garbage, like a new car or other fancy toy. Use it to kill debt, which will give you more money at the end of each month
    • Finding and holding a great job that incentivizes me to work productively and efficiently
    Many of you out there might not get bonuses at your employment. That's fine... you can still put together an awesome debt-killing plan using your windfall payments, and by budgeting better.

    Whatever it is you need to do, get on it now! Toss out the TV that's stealing your evenings, nights, and weekends, and do something that's going to pay off for you in the long run!

    The last thing I didn't mention which will make this plan even more powerful, and help you execute it even more smoothly, includes maximizing you 28 days' worth of pay by cutting down expenses.

    The idea is to go line by line through your spending and see what you can reduce, cut back, or eliminate entirely. I've recently written extensively about tons of ways to do this, even giving you over 40 ways, in detail, to cut waste out of your life. Read through that information, and make the changes.

    As you can see, even on the meager salary I bring home, my household is fully capable of indiscriminately knocking out the life-sucking debt in our life--but this can only be done if I have a plan, I'm disciplined, and I'm motivated to see it happen.

    Put together your own plan right now... don't waste another minute.

    Live long and invest,

    Jeremiah 
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