Mike didn't know he could pay off $38,204 of debt in 18 months - until I showed him how in this


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Mike and his wife are newlyweds (they said “I do” about two years ago). They’re out of school, both working, looking forward to eventually having kids after they enjoy some time together and a little world travel.

Their budget will show you they’re doing things right: living well within their means, accelerating debt payoff, and saving for the future.

But…there’s a but:

Mike and his wife are cruising along at about 55 miles per hour when they have the ability to do 95+ with no worries about getting pulled over.

Check out the budget and you’ll see what I mean.

FYI: Their combined take-home income is around $7,200 per month, and they responsibly contribute to retirement with payroll deductions (which is why you don’t see retirement savings in the budget).

Household  
Mortgage$2,037.31Bought the house two years ago with a 10% down payment.
Phone$117 
HOA$100 
Electricity$100 
Cable$68.94I’ll assume this covers their internet connection as well as TV.
Home Insurance$56.89 
Supplies$50 
Water$40 
Gas$39 
Pest Control$37 
SoftWater$35.95 
Filters$21 
Alarm$14.95 
Computer Backup$13.99 
Household Total$2,732.0344% of budget
   
Non-Mortgage Debt  
Student Loan 1$164$16,442 at ~5%
Student Loan 2$182.18$5,370 remaining at 0% (loan from family)
Car Loan 1$297.38$8,125 remaining at 1.95%
Car Loan 2$240.93$8,260 at 2.99%
“Self Loan”$165“Borrows” money from his vacation fund and then pays himself back with interest.
Non-Mortgage Debt Total$1,049.4917% of budget
   
Personal  
Charity$1003.60 
Free Spend$80 
Disney Season Pass$58.34 
iTunes$10 
Email Hosting$8 
Personal Total$1,159.9418% of budget.
   
Transportation  
Gas$250 
Car Insurance$163.50 
Van Pool$120Mike uses this to avoid driving his 60 mille round-trip commute.
Car Maintenance$70 
Transportation Total$603.50 
   
Food  
Groceries$300 
Restaurants$100 
Food Total$400 
   
Savings  
Vacation Savings$150 
Emergency Fund$100 
Savings Total$350 
   
Budget Total$6,294.96 

First things first, you’ll notice they’re running a roughly $900 monthly surplus – awesome. Mike tells me he actually categorizes the surplus, setting it to $0 at the beginning of the month, then funding it with whatever’s left over in the budget, plus the extra $900, and throws the whole thing at the student loans. Again – that’s great.

But Mike, I think you and your wife are tiptoeing around financial success when you could rocket yourselves so far ahead of where most of us would have dreamed of being at a similar stage in life.

You’ve told me you have three months of cash between checking and savings. You’d like to get it to 6-8 months of cash in the bank, but I think that’s the wrong move right now.

Here’s what you need to do:

Use savings to pay off Car Loan 1 and free up $300 per month. Yes, I know it’s not the highest interest loan, and I know it drains most of your emergency fund. Here’s the thing: you and your wife have stable incomes and no credit card debt. You told me yourself that if your income were to change you could dramatically reduce expenses to make any emergency funds last longer. This bumps your snowball from $900 to $1,200 per month.

Stop paying back the “Self Loan” and stop contributing to the emergency fund until you’re debt free. The “self loan” is an interesting concept; the problem is you’re paying real interest to real creditors, which is actually taking money out of your pocket. Put that money toward your snowball.

Same thing with the emergency fund contribution. Even after paying off Car Loan 1 you have a full buffer and then some. Apply this money to your debt. Snowball jumps from $1,200 to $1,465 per month.

Drop the Disney season pass and switch to Ting. I’m not hating on Disney, but spending $700 per year ($60 per month) on a season pass while you’re paying interest on debt isn’t ideal. And hey, I’m only asking you to skip the pass for one season while you get debt free.

You mentioned to me that you’re already on Sprint, so making the jump to Ting would be pretty painless (I’ve been using the service over a month with no issues), and save you $50 to $60 per month. Now your snowball is $1,585.

Find another $100 per month in your budget. You can do it – we’re talking about 18 months of sacrifice. Fuel cost, car insurance, soft water, pest control…some effort in your transportation, household, and personal categories should yield an extra $100 per month no problem. Snowball: $1,685.

Attacking your debt with a $1,700 snowball gets you debt free in about 18 months.

Mike, in your email you told me you and your wife are striking a balance between getting ahead financially and living comfortably. You’re doing a great job, but I’d say you’re too casual about your debt.

The major indicator is the car loans: I remember a conversation with Jesse a few years back where he said “financing a car is the ultimate poor man’s move.” At the time I was making a $600 per month payment on a $30,000 car loan. Jesse was right – my car loan was indicative of my entire attitude about borrowing.

You and your wife are young and smart, with plenty of earning power. Take full advantage of your circumstances: pay off the debt and resolve never to borrow again. I once had a millionaire business owner tell me “you will be shocked at how easy it is to get rich once you’re completely debt free.”

That’s my two cents. Anybody else?