Digging out of Debt: The Final Push

Part 1 – Poor Attitude: My early money blunders

Part 2 – The Pit: How I got myself into the financial hole

Part 3 – Treading Water: 2 Years of No Progress

Part 4 – Fire Under My Ass: The wake-up call 

Part 5 – The Final Push: How I finally dug out, and what I’m doing to stay in the black. (Now Reading)

This is a series of articles explaining how I personally got myself nearly $20k into debt over the course of 4 years, and then out in just under 2.  For the next week, I’ll post one article a day going through one particular phase of the process, and either how I screwed myself over, or how I started on the road to recovery.

The Final Push

Once the light bulb went off over my head, I went into overdrive to pay down every bit of debt I had.  Over the next 6 months I pulled out all the stops.  My spending habits transformed overnight and I was squeezing every penny out of every resource available to me.  There were three major actions I took to squash the debt.

1.  Finish Debt Consolidation

Ok, so remember that high-limit credit card I opened in 2007?  Well, the idea was that it would be the only credit card I’d use and I would just pay that down.  Sadly, I slipped a lot in this area over the 2 years.  Since that card was maxed from the start, any silly spending still went on the other cards.

By the end of 2008, I had put about $4k on these other cards.  Yeah, I was back where I started again.

So I consolidated the debt again to that one card, which still had a nice low interest rate (and an even lower rate on balance transfers).  Everything went onto that card, and the other cards went away into hiding to prevent temptation.  By the end of 2008 the only expenses that were on the other credit cards were auto-payments for a few bills (I know, dumb, that gets fixed later).

2.  Every Penny Not Going to Fixed Expenses Went to a Debt/Savings Split

I had done a lot of reading on the importance of paying off debt vs building savings and realized that there was no clear-cut answer.  Half of the books and sites I read said paying down debt because it has the high interest first was the most important, while the other half emphasized savings so you could survive an emergency without backsliding.

In the end, I decided to do a 70/30 split of debt/savings.  This way I was paying off debt while still building a safety net.

To achieve this, I became super-frugal.  More accurately I bordered on being a cheapskate.  If it wasn’t rent, or a utility, or basic transit costs, it was cut out entirely.  Turns out that doing this freed up literally half of my income.  Seeing that I thought “Awesome!  this isn’t going to take any time at all!”  But even putting that much money towards bills and debt, things were slow going.  Doing this,I  ran the numbers and realized that I would be paying down debt until sometime in late 2011.  This wasn’t going to get me where I needed to be as fast as I wanted.

3.  I Raided my Roth IRA.

This is probably the most questionable decision I made.  After leaving the insurance company, I had a nice 401(k) that I rolled into a Roth IRA after leaving (a tax nightmare by the way, if you ever consider this, look into the tax burden first).  This pile of money was sitting there, losing most of the value it had gained since I had done the rollover.  So by early 2009, it was pretty much equal to what it was when I did the rollover so I was at least able to yank it all out penalty-free.  While this put a huge dent in the remaining pile of debt, it wasn’t enough on its own, it just shaved 6 months off of the payment plan.

The End Result…

After going nuts with the payments and the cost-cutting, consolidation and raiding that Roth IRA, and the benefit of some Christmas & Birthday gift money plus a nice federal and state tax refund, I was able to pay off the last little bit of debt by the end of May, 2009.

Thus unburdened by an ugly financial shadow, I was able to propose to my girlfriend (she said yes btw) and begin my climb toward solid financial ground.

Ensuring my financial future

There are a few simple things I’ve done to ensure my future financial wellbeing

  1. Automatic Savings Plan
    I ran the numbers this morning and I’m saving roughly 33% of my take-home income every month.  I’d like to push that even higher, but for now that’ll do pretty well.
  2. High Interest Savings Account
    Even though interest rates are ridiculously low right now, I opened an IGN account with a 1.30% APY.  Every time I have $1000 over my “Critical” line in my regular bank savings (an amount I want to always have immediately on-hand if I really need it), it goes into the IGN account.  That account is growing at a fantastic rate, and because it’s separate from my regular accounts, I often forget it’s there.  So every time I do look, it’s always a pleasant surprise.
  3. Hit the 6-Month Savings Point
    I technically hit that point at the end of 2009.  I had in savings enough money to cover my essential costs (and those of my fiancé) by Christmas.  However, a lot of that money is going into the wedding and the honeymoon, so I still have a ways to go before I really feel like I have that safety net permanently in place.
  4. Rebuilding my Retirement Savings
    Yes, through the glories of compounding interest I lost out on possibly over $100,000 in retirement, but I made the call that securing myself now was more important in the long run.  I’ve been contributing regularly to my current 401(k) which is a split between a traditional 401(k) and a Roth 401(k) and in the coming year will be increasing my contribution.Also starting in late 2010, I’ll begin rebuilding my Roth IRA again.  Yes, I lost out on a few years of interest and savings, but overall I’m in better shape for it.  I can now actually contribute more to these retirement accounts (as opposed to letting it just sit as it was before).

These are just my critical “must do” financial goals to ensure stability for myself and my wife-to-be.  I’m now working on an entire financial plan that I am looking to implement fully by the end of 2009.  But that’s another series of articles.

So that’s how I went from $15k in debt to a nice solid way into the black.  I wanted to post this series because I so often see finance blogs talk about all these fancy ways to climb out of debt when really it’s not that hard, and only takes a bit of perseverance.  I’ll be the first to admit I’m terrible at managing money.  I’m managing as well as I am now by automating most of it so I don’t have to think about it.  Sure I have a lot of room for improvement, but where I am now isn’t half bad.

How are you doing financially?  What are some of your quick and painless tips for saving money?