How to Pay off $26,000 of Debt in 18 Months on a $35,000 per Year Income | YNAB

How to Pay off $26,000 of Debt in 18 Months on a $35,000 per Year Income

Yesterday I featured Jenny and Aaron’s, well, debt. Today I’m covering their budget and showing them how they can be debt free in 18 months thanks to a debt snowball, work bonuses, and tax refunds.

This budget is based on two $1,350 paychecks per month. Health insurance and retirement contributions are withheld from paychecks, so don’t appear in the budget. 401k loan payments are also withheld from paychecks.

You’ll notice a lot of $0 categories. That’s a reflection of the change in lifestyle Jenny and Aaron will experience by committing to getting out of debt. Paying off the balances will allow them to start funding those categories again.

Category Budgeted Notes
Charity    
Tithing $270  
Other Charitable $30  
Charity Total $300  
     
Monthly Bills    
Mortgage $877.59  
Water/Garbage $50  
Electric $70  
Natural Gas $60  
Cell Phones $50  
Car Insurance $42.46  
Netflix $7.99  
Hulu $7.99  
Home Security $0  
Pest Control $0  
HOA $10  
Monthly Bills Total $1,176.03  
     
Everyday Expenses    
Groceries $270  
Fuel $135  
Household Goods $50  
His spending money $30  
Her spending money $20  
Restaurants $25  
Other Medical $10  
Misc $0  
Cash $0  
Everyday Expenses Total $540  
     
Rainy Day Funds    
Savings/Buffer $0  
Emergency Fund $0  
Car Maintenance $20  
Home Maintenance $25  
Preparedness/Storage $0  
Birthdays $0  
Parties $0  
Anniversary $0  
Christmas $0  
Other Holidays $0  
Halloween Costumes $0  
Date Night $0  
Landscaping $0  
Furniture $0  
Clothing $20  
Haircuts $10  
Movies $0  
Electronics $0  
Swimming $0  
Baby Stuff $0  
Wedding/Baby/Grad Gifts $0  
Church Stuff $0  
Preschool $0  
Rainy Day Funds Total $75  
     
Savings Goals    
Vacation $0  
Flight Lessons/Plane $0  
Weekend Fun $10  
Anniversary Trip $0  
House/Moving $0  
Car Replacement $0  
Back to School $0  
Change $0  
Savings Goals Total $10  
     
Debt Payments    
Car Loan $235.17  
Credit Card A $140  
Credit Card B $100  
Credit Card C $100  
Debt Payments Total $575.17  
     
Budget Total $2,676.18  

Jenny tells me Aaron’s annual work bonuses are very consistent (he works for a very large, growing company whose commercials you see every day). Although they’re expecting a raise before year-end, it won’t be huge and their tax refunds should be close to what they’ve been in the past.

It’s also worth noting that this snowball doesn’t include the two “extra” paychecks per year Aaron gets (because he’s paid bi-weekly), and it also leaves out the raise I just mentioned (which has already been approved).

In other words, as long as Jenny and Aaron live within their means, they can be debt free in a very reasonable amount of time. The snowball kicks off using $5,000 from the savings they’ve set aside for their two kids’ future. Although it’s emotional, they agree that they need to solidify their own finances before they can hope to help their kids.

Here’s the plan:

  1. Use savings to pay off Credit Cards 1 and 2 completely. ($500 + $3,050 = $3,550)
  2. Take another $1,450 from savings and, combined with payments from Credit Cards 1, 2, and 3, pay down as much of Credit Card 3 as possible. ($1,450 + $140 + $100 + $100 = $1,790)
  3. This leaves Credit Card 3 with a balance of around $2,650. Make payments of $340 per month (combined payments from Credit Cards 1, 2, 3) from October to January (4 payments). Allowing for some interest, this drops the balance on CC 3 to ~$1,500.
  4. In February, use first portion of annual work bonus to pay off Credit Card 3. ($1,500)
  5. Combine remaining portion of work bonus with snowball payment ($340) and normal car payment ($235), and throw it all at the car loan. ($1,500 + $340 + $235 = $2,075). Because you’ll have made four more car payments between now and then, the car loan balance should be around $8,500, and the $2,075 payment will drop it to around $6,400.
  6. Put your entire tax refund toward the car loan. If you get your taxes done quickly and get the refund in February, that drops your car loan balance to $1,400. ($6,400 – $5,000 = $1,400).
  7. Using your new $575 snowball payment ($340 from paying off credit cards + $235 from car payment), your car loan will be paid off in three months. Which means credit cards and car will be paid off in May of 2014.
  8. Apply the whole snowball to 401k Loan 1. You’ll pay it off in around four months. ($575 x 4 = $2,300). The loan will be gone around September of 2014.
  9. Combine the monthly payment from 401k Loans 1 and 2 with your snowball payment and apply the entire amount to 401k Loan 2 for the four months between October 2014 and January 2015. ($6,500 loan – 4 x $650 = $3,900 remaining on 401k Loan 2)
  10. Use $3,000 from 2015 work bonus and first $900 of 2015 tax refund to pay off remainder of 401k Loan 2. Game over. You win.

Jenny and Aaron – it’s going to be tight, but you can do it. Getting out of debt involves one big decision (“We’re through borrowing and we’ll do everything in our power to get out of debt.”) followed by small, daily decisions (“We’ll buy that DVD when we’re out of debt.”).

Work together and fight for your goals. When the snowball is done rolling, you’ll have freed up $600 per month – over 20% of your current take-home income, not to mention your annual bonus and any tax refunds. Life will be brilliant with no debt. Make it happen!

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