Lacey Smith

Prepare: Pay ahead on debt (updated)

In Uncategorized on June 15, 2011 at 12:00 pm

We are over halfway through my suggestions for short-term emergency preparation. Unfortunately, the easy parts are over. The next two steps are hard because they will take more sacrifice and self-control to achieve.

These goals are not unattainable though if, and it’s a big if, we are willing to do what it takes to make it happen.

Today’s preparation suggestion is to pay at least three months ahead on regular debt payments.

This is a big, potentially daunting step and it may take several months before you can check this one off. Don’t panic. Take this goal apart and turn it into a smaller pieces. Savor the little wins along the way.

Ideally, none of us would have any debt, but that’s not real life.

Until recently, my husband and I had three loans, two on cars and one at a jewelers. We’ve been fairly wise with our money and avoided any additional debt except for student loans, which are next on my list to pay off.

I imagine that we didn’t have more debt than the average, and likely had less. We also have a monthly rent payment, which is not unlike a mortgage, though it’s a much smaller payment.

Running the numbers it becomes clear that the average US car payment (about $300) and mortgage (nearly $1300) makes it tough to pay three months of debt in advance, but it is still doable.

Let’s look at the numbers based on the real averages and theoretical assumptions.

Income:       3404/month (low US average)

Taxes:            275 (about what the taxes actually are)
Car loan:        300 (low average)
Mortgage:    1300 (average)
Media:             270 (cell phones, tv, internet)
Groceries:       300 (low average)
Utilities:          500 (includes gasoline & insurance)
Entertain.:      100 (dining out, movies, etc.)

What this leaves us with is an “extra” $359 which is probably mostly used up by incidentals, kids’ needs, charity (my church donations would equal most of that $359), etc.

This makes it clear average Americans are living outside their means and will have a tough time paying even monthly debts. I hope you are not in this position.

I’m going to make a couple of adjustments on these numbers to make things a little easier. I’m going to use the Idaho mortgage average ($1000/month) and lower the car payment to $250/month. This frees up an extra $350, enough to make a real impact on your debt.

I’m also going to assume that you’re willing to make some sacrifices on your TV bill and subtract $70 from the “media” category and $50/month on entertainment (take the kids of spouse to a movie at the 2nd run theater. All the fun, 1/3 the price).

Now we have $470/month to put towards debt. Pay that toward your monthly car payment and in two months you’re three months ahead, with $190 to spare.

If you put that extra $190 toward your loan payment and then put the full $470 towards your mortgage and in another six months (eight months total), you’re three months ahead on your regular debt payments.

You may not have that much wiggle room in your budget and you may not be willing to make as many sacrifices. You may also have more debt and your progress may be slower, but even $20/month will eventually get the job done.

I hope this also shows the value of living beneath your means. My husband & I had about 1/3 the monthly debt obligations with about 2/3 the average income. Paying ahead created peace of mind and paying extra made things tight then but gives us a lot more freedom now.

Here’s my final suggestion: decide what things you can give up and pick your debt with the lowest payment. Get it paid ahead by one month. When you hit that goal, celebrate small.

Then move that money to the next smallest debt and continue until everything is paid three months out. The bigger your achievements, the bigger the celebration.

Use any extra income (hold a garage sale, sell extra stuff on ebay, take on some babysitting for a neighbor) to pay ahead on your loans faster.

The more you give up, the sooner you reap the rewards, and the sooner you’ll “get back” the things you gave up.

Paying ahead doesn’t save you anything in interest and may come with real sacrifice, but I’ve done it and it’s a goal that’s worth it.

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  1. Great advice. One practical suggestion I would make with getting your mortgage or rent payments ahead of schedule. Typically paychecks come every 2 weeks. Take your monthly mortgage/rent payment divide it in two and pay that every time you get a paycheck. Take that right out at the beginning so you learn to live with the rest. Two months out of the year you will always end up with a 3rd check in the month. Do the same that week and put that amount towards your rent/mortgage like any other check. Each year you pay on your property you will get one month further ahead it doesn’t feel like that big of a sacrifice because you’re doing what you’re always doing. What’s even better if you have a mortgage is that not only gets your payments ahead but dramatically reduces your interest payments by paying early.

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