Shayne loves talk radio, and every so often tells me stories about the people who call in and the goofy things they say. One of his favorite shows is Dave Ramsey. I've listened to bits and pieces of the show, but never paid much attention. Until last night, when something clicked in my head, and I went to his website. Unlike some of the folks he talks about, we don't have much debt. Just a couple of student loans and our (used) car payment. Overall, I think we've done okay with our money, and we save a decent amount every month. Our big debt is obviously our house payment, and we just started our 30 years over again when we refinanced. During all the signing of papers, there was a "truth in lending" statement that gave us a friendly reminder of all the interest we'll pay over a 30 year period. It was somewhere in the nieghborhood of $130K, which is more than the house itself cost us or is even worth.
So we ruminated over that for a few days...
Last night, I went to a mortgage calculator and saw that if we paid an extra $300 per month, we'd save ourselves $70K in interest and pay off our home in 14 years instead of 30. And somehow, through a few different internet searches about living frugally and paying off debt, I ended up at Dave Ramsey's site.
Dave's suggestion is to have a $1000 emergency fund in place. You then pay the minimums on all debt, and select the smallest to pay extra on. Once that one is eliminated, take the amount you were putting on that loan and pay it towards the next smallest. The result is a debt elimination "snowball", where with each successive payoff, you have more to pay on the next loan.
After reading this, a little lightbulb went on in my head. We already have an emergency fund and a Roth IRA, so we're a little out of order from his full list of recommendations. But his "snowball" idea convinced me that we should take half of our savings account and begin to pay off our debt. That will eliminate 2 student loans immediately and enable us to pay $175 more per month on the 2 that are left. If we follow that snowball idea through with all of our debt (excluding the house), we'll have all the student loans, plus the car, paid off in less than 18 months. The student loans will be gone in 9 months (as opposed to 2016!). This is all without a single change in our lifestyle or working any part time jobs. Obviously, we can make this happen even faster if we limit otgher expenditures and/or dump our tax return or any overtime pay onto our debt.
The next step is to amass a bigger emergency fund of 3-6 months of living expenses. It'll be much lower than it was, without all those monthly payments! And then you start hacking away at the mortgage. Can you imagine life without a mortgage payment?!
The only downside that I really see to all this is that the bathroom reno will have to wait about 18 months. But we can save up for it that much faster once our debt is gone, and I won't have to worry about spending the money or borrowing from our equity. We'll pay cash. The remainder of the upstairs reno is DIY work, and the only expense we have to worry about is a $40 sander rental. So we'll keep plugging away at that. The bathroom will still be there in 18 months.