As some background for you, we bought our home in DC for about $400,000 back in 2004. We had a combination of a 5/1 interest-only loan (80%) and 15 year balloon (20%), which meant a lower payment, but 100% financing and a big risk to the bank and us if either of us lost our job. We also had over $115,000 in debt outside of the home back then too.

As of today, we’ve paid off all our debt (the last one being my student loan in Nov 2009), have a good 5 figures in cash savings, 6 figures in retirement (but nowhere near what we’ll really need), and our 2nd mortgage paid off and a small chunk of our primary mortgage paid down. Overall, we’re closing in fast on a half-million dollar net worth, counting home equity (but that’s always a hedgy calculation). Life has been good for us financially.

But it’s decision time. We thought this house would be good for 5 years; basically a starter home. We’ve been in it for over 7. We’ve gotten to be good friends with our neighbors, we like the local area and are learning to love it more. But we have to ask…

- Should we stay or
- Should we go?

(yes, that was from a song)

There’s a lot that we have to consider and I won’t list everything here, but lets consider the financials:

- We might break even on the sale of the house, minus realtor fees
- We need to consider WHY we would move (bigger, newer, smaller, etc. house…new jobs…change of life?).
- Should we refinance? Should we go short-term (another variable mortgage like a 5/5) or longer-term (15, 20 or 30 years)?

That last question has a lot of impact because it implies how long we stay here, when can I close some credit cards (cause it’ll hit our credit scores) and, maybe if the wife lets me and I can find the right one, when I can replace my truck (another hit on credit scores and our piggy bank).

Refinancing

Ok, so let’s assume we stay. We have to decide on:

• Stay with our current mortgage: We have a variable rate (5/1), interest-only mortgage (for only 3 more years) that has saved us tons of money since the rate went to variable in 2009 (it’s under 3% right now). BUT, the 6-month LIBOR rate, which is our prime rate, has been going up recently. It went from .40 to .80, but now it’s at .70, so I don’t know what to think. We have a couple more months until the next reset though…
• Another variable rate mortgage: We’ve been lucky with our current mortgage, but Pentagon Federal Credit Union is advertising a 5/5 loan (not interest-only) in the low 3% range AND they pay your closing costs. That’s the biggest reason I’m looking at that loan option. You can spend thousands in closing costs, not counting the escrow that you get back.
• 30 year mortgage:Ok, here’s where we decide on staying in our home for a while. If we’re paying closing costs and committing to a higher mortgage payment, then we need to stick around for a few years for that payback period on the costs.
• 15 year mortgage:  Same as the 30-year (gotta stay in the house, etc.), but with a lower rate and higher payment (because it’s shorter-term).

Ok, so what do we do? I know you all can’t help with our decision of whether to stay in the home or not, but what have your experiences been on refinancing, including something like the PenFed 5/5 loan with no closing costs? Keep in mind we have A-rating credit scores (I’ve checked).

When I was growing up (haha!), my mom would constantly tell me “money burns a hole in your pocket! You’ll never be able to save for anything”, and she was right. After a birthday party or Christmas or graduation, I just had to go spend that money on ANYTHING! If I could get my money back on all that crap I bought, I’d be, well, not rich but at least have a nice savings. The thing is I can’t remember a single thing I bought which shows that it was all for instant gratification and fleeting emotions. Actually, I think a few of my purchases were probably books, and books are good, so they weren’t all bad, but that’s besides the point.

Back to the topic: Emergency Funds. Why are they important? Well I have two real-life examples for you. Luckily neither affected me directly, but both are close to me.

The Curse of the Bad Plumbing

I won’t try to pretend I know this whole story, but what it boils down to is a friend of mine in my hometown was required to redo sewer lines that led into the house (thus, their property) from the street because it was causing leaking and other junk. On my friend’s part, they’ve had flooding in the basement for decades and, personally, I think this was a good thing that finally forced them to do something about the moldy carpeting and old furniture in the basement, but at a high cost.

After getting a number of quotes, they went with a reputable company who had a better plan that meant less destruction (i.e. didn’t require tearing up the entire driveway, just part of the basement floor).

The cost: $8000

Problem is this isn’t my friend’s house. It’s her mom’s house and they’ve been co-habitating families for years. The mom has absolutely no savings, is on fixed income and is actually way over her head in debt, while my friend had been working for years to build up a savings account of, well, just about $8000 which is an amazing amount for my friend (whose husband’s pockets also burn when cash is in them).

Their options were either

1. The mom get into even more debt (if the bank even allowed it) or
2. The friend use her savings for the work and hope she’ll get paid back somehow

They opted for option #2 because there was no way the bank would, or should, give more debt to the mom in her current financial situation, age and physical condition (she simply can’t work). This means that my friend’s emergency fund came in handy at a much-needed time, as she also couldn’t get a loan for various reasons.

Let’s just hope she can get her money back!

The Bad Furnace

This is a much more common occurrence. You own a home and your furnace dies. But do you know how expensive a new heating system is? Well, for one friend, it’s $9000!

I’ve known this friend for 10 years, and he’s actually almost 10 years older than me. He has 2 kids, bought his house at a good time before the peak of the market, but he has a couple issues:

1. A mortgage AND a maxed-out home equity line of credit (HELOC) used to finance improvements and whatever.
2. A good bit of credit card debt
3. A brand new luxury SUV loan
4. A nearly paid-off luxury sedan loan
5. Only part-time income from his wife
6. A love for gadgets and electronics, and generally just browsing the internet for deals (usually during work hours)

I think he’s at a point in his life where I was when I was 9; money just burns a hole in his pocket.

His biggest problem though? He only has cash savings of $2000. Seriously, you’re in your 40s and all you have in cash is less than your net bi-weekly paycheck? Come on man! And this guy makes 6-figures PLUS his wife’s income!

So he was telling me this week that he could he doesn’t know where to get the extra money, especially since the old furnace is dead and winter is coming on soon. He thought of the following options:

1. Pulling from his retirement accounts (e.g. 401k)
2. Going with a contractor who offers a payment plan
3. Getting more, if possible, out of his HELOC

No matter what, all three of the options are going to cost him much more than $9000 in interest, and he’s the type who only pays the minimum on his debts (yet he insists on 10% tithing even when the same Good Book looks down very strongly on those who do not repay their debts in a timely manner and to not needlessly accrue more, but I’m not one to judge…much).

Where do we stand in comparison?

It’s taken a ton of self-restraint, some heavy frugal living and debt paydown, but we’re finally at a point with no debt except our first mortgage (no 2nd mortgage, HELOC, student loans, credit card debt, personal loans, etc.). We no longer live paycheck-to-paycheck and I’ve actually found it a problem to try to figure out what to do with our extra cash each month (savings, investments, paying down mortgage, charity, etc.). We’re not rolling in dough by any means, but we’re not the struggling newlyweds of 8 years ago!

I won’t say how much total we have in cash savings (different than money in investment accounts), but it’s close enough to mid-five figures that I’m pretty confident that we can handle many emergencies as needed, outside of some major health issue or accident, but that’s what insurance is for up front.

But I actually have our savings separated out into multiple accounts: emergency (like a dead furnace or major auto failure), home (such as improvements), travel (which we’re using for a European trip), and auto (either for an eventual replacement to one of our cars or a “fun car” for me). But combine all of these accounts and the sum is amazing compared to where I was at age 9, 19 or 29. I’m 33 now (if I did my math right) and could definitely be much further along with our financial planning, but we’re doing well for ourselves.

But then again, we don’t have kids or pets or any other dependents. And as long as I can hold in my urge to buy a car, we don’t have any other financial fetishes to fulfill.

And that, my friends, is why you need an emergency fund. It’s not just for when you need it, but also for the peace of mind it gives you.

On a phone call this week, I was talking with another family member about why this must be, because one side of the family has college degrees and stable jobs, while the other side has barely been scraping by for decades, and now their kids are pregnant teens or high school dropouts (with a child). What the heck happened to this other half of my family?

Dreamers

Well, what we agreed upon was that throughout their lives, these relatives have been dreamers. They’ve only ever looked at the future, not concerning themselves with the messes they were making in the present. While we can’t see into the thoughts of any of these individuals, we know what the outcome of those thoughts were, visibly, emotionally and mentally. It’s not a home you would want to grow up in, but it could always have been worse.

So, what’s wrong with dreaming? Well, it gives you hope and hope is a good thing. It gives you ideas for the future, and that’s a good thing. But how does dreaming help you now?

That’s when I rambled off something I thought was relatively insightful:

You can DREAM, but you need AMBITIONS to make your dreams a reality

For example, I dream of being in the auto industry in some way, whether selling cars, reviewing cars or driving cars, but no matter what, it has to directly involve the vehicles, not piles of paper ABOUT vehicles. I lay awake at night driving at full speed through imaginary curves on an imaginary race track, but have I ever done anything about it?

That’s where you need ambitions. An ambition is defined as “an eager or strong desire to achieve something” (reference). You can dream of helping the poor in Africa, winning the lotto, being a race car driver, or being a world traveler, but you need the motivation and drive to make that dream a reality.

Thinking of my extended family, they dream of a utopian lifestyle decades in the future when their kids (who they adopted by choice) are gone and they get to do whatever they want. They’re complainers about everything in their life and think everything will be relieved when all the nuisances are gone…but we know that’s not a reality.

I know one of the kids dreamed of being a baseball player and even had the ambition to do so, but without the next step of the formula, thus ruining other chances he had to succeed. The daughter, well, perhaps she did have dreams of being a mother, given the abandonment issues adopted children often face. She wanted someone to love her unconditionally, and she had the ambition to do so. But again, she didn’t think ahead and at age 16, she got pregnant and the father has no dreams, ambitions or even a jobby job.

You can have AMBITIONS, but they don’t become reality without GOALS

Years before I started CleverDude.com, I was in so much debt I couldn’t see daylight. I dreamed and dreamed of how to get rid of my debt, all while getting into more debt. When I got married, my wife, who is quite frugal and slow to act, helped me to get revved up about getting out of debt. We didn’t have a plan, but we both had the ambition to be debt free, or at least not live paycheck to paycheck.

We needed GOALS. A goal is defined as “The purpose toward which an endeavor is directed; an objective” (reference). Our goal was to get out of debt, but with a new home, car loans, credit cards, and student loans, we were over $500,000 in debt! For a young couple in their mid-20s, that’s one heck of a debt load when you’re only make a small fraction of that total.

But we had to refine our goal, or else it would just remain a dream or an ambition. Our immediate goal was to get rid of the consumer debt, mainly because the mortgage was such a huge chunk and at least we had our home as collateral against it.

But what about my relatives? I mentioned the boy had the dream and ambition to be a baseball player. He ignored his schoolwork and job (the short few that he held) and focused only on getting to practice. But then he didn’t apply himself, and he also realized too late that those who were succeeding weren’t just decent athletes but also well-rounded, intelligent guys who applied themselves in school and everywhere else in their lives. You don’t get to be a star like A-Rod, Jordan, Tiger or Nadal just by swinging a bat hard, dribbling well, smacking the heck out of a golf ball or looking good in little white tennis shorts.

You become a good promoter and business person; you learn how to network, to branch out into other related endeavors, and most of all, to learn how to be better and accept criticism and learn from it. My relative couldn’t take criticism and got discouraged far too early. By that time, his schoolwork, home life and job had all crumbled down around him and he had no idea how to pick up the pieces. And it didn’t help that the same thing was happening to his mom, dad and sister.

You can have GOALS, but you need a PLAN to finally make it a reality

Ok, so you have a dream. You get pumped up about it through ambition. You then start developing goals to translate your dreams into reality, but how do you make your goals actionable and achievable?

You need a PLAN.

While I’ll admit that our plan to get out of debt changed monthly and sometimes weekly, at least we had a plan. We tracked our income and expenses, saw where we could cut down, and made job moves that helped increase our income (including, however accidentally, this website). Over the course of a little over 4 years, we went from $500,000 in debt to $300,000 in debt (only 1 mortgage). If we had just started throwing money at loans, while still buying stuff needlessly on credit, we would probably have missed some payments, overdrawn accounts and just kept digging ourselves into a hole. Instead, we had a plan we both (mostly) agreed upon, however painful it was for me (no new cars? AWWWW DANGIT!), and now we’re living month-to-month (if that even), not day-to-day when it comes to income.

After talking for a few hours with my male relative (the baseball kid) who is now 21, no high school diploma or GED, a job being paid less than minimum wage (don’t ask) and in the process of being evicted from home by his mother, it was clear he knows he screwed up, but he has no ambition, goals or plans. He just dreams of getting away from his mother. Everything in that call was “my mom”, and nothing that indicated he is thinking like an independent, responsible and accountable adult.

He has a dream, but nothing else, but now he is getting help, after swallowing his pride and anger, from other members of our family, but we’re all being cautious as he has let us down in the past when he’s had an opportunity to get his degree, GED or into an excellent education and job placement program. We all now want to know that he has the ambition to change…the proper goal(s) in sight…and the beginnings of a plan to accomplish that dream and make it a reality. Then we’ll put more of ourselves on the line to help him get on his feet and do something with his life.

I recognize the difficulty he’s had in his life, from the day he was born and given to different parents, through being put down every day by his mother, to the decisions he’s made in his late teens to drop out, but I expect more from people. I don’t want people to give me excuses; I want a plan. I want reality, not fluff. I don’t want to hear you blaming someone else for your problems. Accept responsibility and accountability for your own life and move on.

Now, how will I achieve my automotive dreams? I think it’s time to buy a Porsche. Don’t you? (evil grin).

Ask my parents; when I was very little, my sister and I each had a police-themed Power Wheels tricycle that most likely cost my parents a fortune. When I lived in Texas, I remember riding it down the street to my uncle’s house while my parents walked next to us. Good memories. But then I got an evil streak…

When we moved from Texas to Pennsylvania in the early-to-mid eighties, I decided that I would start learning how to use my dad’s tools to take things apart. I can’t recall all the things I dismantled, but the biggest were those two Power Wheel trikes. The problem was, I never paid attention on how to put them back together.

I call this Brute Force vs. Calculated Agility

Let me explain further. A few years ago, I had to redo the PVC plumbing around our pool pump. I had never done any type of plumbing before, except maybe to take a trap off a drain, but I felt I was confident enough to tackle the job. But rather than measuring out all the lengths of pipe and planning on all the connectors and valves I would need, I just took some photos and drove off to Home Depot. I bought what I thought I needed, came home and started dismantling.

Yes, I did turn off the pool pump and breaker to prevent it from turning back on, and then I began sawing away.

In the end, after about 4 runs to Home Depot and 3 dismantles later, I finally had a working solution (at least I thought so because it was night time and I couldn’t see any leaks). The next day, I found yet another leak and fixed it.

But if I used my brain a bit more and decided to plan ahead and calculate what I would need, both in parts and labor, I would have had the entire job done in one attempt.

Relation to Finances

And since I’m a financial site, how does this all relate? Well, if you just go bull-headed into anything, much like a bull in a china shop, you’ll start smashing things. When I first committed to getting out of debt, I went head-first into paying off debt, with no plan on how to handle my other bills. A few months, I came very close to missing a payment or overdrawing my account because of my shortsightedness.

I decided the best course of action was to sit back, assess my situation including my expenses and income (both discretionary and disposable) and make a plan. I committed to calculating a plan, and furthermore, ensuring the plan was agile enough that I could change it if something unexpected happened. And I don’t mean “unexpected” like “Hey, I just got a promotion! Let’s go out drinking tonight!”. I mean if there was a real emergency in my life or my family’s lives that I needed to divert money away from my plan.

How did it work out? Well, as you know, I paid off $200,000 in consumer, mortgage and education debt in about 6-7 years (I’m losing count now), and we haven’t gone back into debt since the last payoff almost a year ago!

The moral? While brute force is great if you’re the Incredible Hulk, most of us need calculated agility in our financial lives to ensure we’re planning ahead for the unforeseen while still enjoying a bit of life. No one likes the kid who dismantles everything and doesn’t put it back together, so be careful with your finances or else you’ll find yourself in my shoes (the ones from 25 years ago!).

For me, back in my high school days, I didn’t really bother with figuring out how I was going to pay for college. I let my mom take care of filling out the loan applications for herself and me (as she did for my sister), while I worked on some scholarship applications and keeping my grades up. I didn’t dwell on how I was going to pay for the debt, or even how much debt I was accruing. It only hit me when I graduated college and saw letters telling me my $20,000 debt payback would be starting soon!

Target Audience

I think most of the high school population (most, not all) probably could care less to read this book. The book should really be read by parents and then by students. While it’s targeted at both parents and students, I think that responsible adults would do well to first read the book, or at least the student loan chapter, and then direct their child to read Chapter 10. Don’t try to summarize it into a lecture because your kid’s eyes are going to glaze over. The good thing is that the book is very easy to read and the chapters are short enough to keep your attention just long enough to transfer the knowledge. I think I read the chapter in 20 minutes before bed.

Topics and Highlights

Student Loans are easy to get, but hard to get out of

Student loans are unlike most other debt types (mortgage, auto loan, credit card debt) in that you have to meet very strict rules (such as permanent disability or death) to be able to erase some or all of your debt. With other debts, you can usually achieve debt forgiveness with bankruptcy, but you can’t get rid of your student loans this way. Your wages, and even social security payments, can be garnished (taken from you directly from your paycheck like a tax) to help pay back your student loans without needing your consent. One way or another, you’re going to have to pay back these loans, so make sure you know what you’re getting into!

Know your loan options

Basically, there are government vs private loans. You should avoid private loans as much as possible because with government loans, you will have the options of deferral, consolidation and changing your repayment schedule. With private loans, you’re stuck with the repayment terms you agreed to when you took out the loan.

With government loans, you have the choice of a 10-year plan or 20-year plan (and even some others. I had a 15 year repayment with a graduated payoff schedule after I consolidated my loans). You can even have repayment schedules based on your income!

As for deferral, you may recall that my own student loans were automatically deferred (meaning I didn’t need to make payments AND interest didn’t accrue because of the type of loan I had) when I went to graduate school for at least 6 credits each semester. When a new semester rolled around, the loans were updated depending on whether I had the minimum number of credits or not (I only took 3 credits during summers). I never had to submit any paperwork to do this, and it allowed me to pay down the loans much more quickly because I didn’t have an interest component to the payments. You can’t do that with a private loan!

Loan Forgiveness Programs

As I mentioned, there are some pretty strict rules to getting rid of some or all of your student loan debt, but none of them are easy. Of course, there is permanent disability (i.e. you can never earn any income again) and death, which aren’t attractive options for any of us (and if they are, you need to seek psychological help!). The other option is a loan forgiveness program, which aren’t always stable. For instance, federal employees can work off their student loans, as can many teachers and state employees. However, when budgets are tight, these programs are usually the first to go to cut costs, and you may be 9 years into a 10 year program when it happens. Just think, you worked for 10 years as a teacher partially to get your $120,000 student loan forgiven only to find yourself screwed right at the end of the tunnel.

Interest Deduction and Shopping Around

I won’t take too much thunder from the book, so I’ll let you read the chapter for yourself to learn some of the other “secrets” to student loan borrowing. However, I did want to touch upon a few other topics before wrapping up my review.

First, student loan interest. You can deduct your student loan interest paid for the year, even if you aren’t itemizing your tax return (unlike what you need to do to deduct mortgage interest). However, please don’t keep your student loans just so you can “have something to deduct” (you know who you are if you’re reading this!). Choosing to pay a bunch of interest just to save a fraction on your tax return is probably a dumb thing to do, right? The best option is to just pay it off as fast as you can and save all that money in the long run.

Second, shop around. Don’t settle on government or private loans as your only option for paying for college! I was rather lazy, but I was still able to get about $4000 in scholarships for college. It only took a small dent out of of our total costs (mine and parents’ combined), but that was $4000 PLUS interest that I didn’t have to pay back, just for a couple hours’ worth of work. Also, look into getting a job DURING college (like I did) to pay for books, rent, etc. so you don’t need to take out extra loans to pay for dining, lodging and other living expenses. And check out cheaper college options. You’ll learn in the long run that the college you attended has less and less impact on your job options, unless you want to be a high-power executive or lawyer perhaps (and then it’s a political game of one-upsmanship). Even then, if you prove yourself with your college work and activities, you can go pretty far!

Lastly, parents shouldn’t dig into their retirement savings to finance their kid’s education! I know that my parents are hurting for retirement because they took out lots of money to finance both my sister and I through college (mostly housing, but some tuition too). I know that taking over twice as much in loans which the other debts I stupidly accrued during college would have been very painful, but I would also have liked to see my parents be able to relax a bit more at this point of their careers.

Summary

I didn’t read the entire ”Debt Free For Life” book because I only had time to review one chapter, but if their other chapters are as informative and easy/quick to read as the Student Loan chapter, I would recommend the book. It’s cheap ($10 or less on Amazon, free if your library has it already) and most people can probably read it in just a couple days before bed or on the bus/train. You may think you already know these principles, but I can assure you that everyone would find new and vital knowledge inside.

Just to recap our debt/mortgage/etc. situation for you all if you haven’t followed this site for the last 4.5 years, we’ve done the following:

1. Paid off all our credit card debt
2. Paid off all our car loans. This included any negative equity rolled in from prior car loans. Right now we’re at 2 vehicles: a 2006 Honda Ridgeline and a 2007 MINI Cooper S (oh, I didn’t mention we upgraded from our 2005 MINI Cooper, but it was paid off quickly)
3. Paid off our student loans, which made us free of consumer debt
4. Paid off our second mortgage as of this month!

When we bought our house in the D.C. area back in 2004, we had much less income, mediocre credit scores and history and a ton of consumer and student loan debt (over $100,000). But the bank approved us for about $400,000 across 2 loans:

1. The primary mortgage was 80% of the total home purchase price, is interest-only for 10 years and a fixed interest rate for 5 years. We’re past the 5 year mark, so it’s now variable, based on the 6-month LIBOR, which has brought our rate down from 5.25% to 2.75%, with little chance of jumping up a huge amount in the next 6-12 months based on the rate trending.
2. The secondary mortgage was the other 20% and was a fixed rate of almost 8%! It was a 15 year balloon payment, due in late 2019, but we paid it off almost 9 years early.

So after learning that we needed to send a certified check to pay off the loan rather than just a regular check like we’ve been doing for 6 years, I called in for a payoff amount, went to the bank to get the check (and rounded up to ensure coverage of any interest in case the mortgage company was slow to process the payment) and then mailed out the payment to the appropriate address (not the normal mortgage payment address).

Last night, I logged in to the mortgage company site to check on the loan and here is what I saw:

So what’s next?

Ok, we have just one piece of debt left, so that means we’re going to pound away at our mortgage until it’s paid off decades early, right? Well, it’s not that simple. The issue is that the loan is only 2.75%, so we’re going to focus more on fully funding our 401k’s and Roth IRAs, filling up our savings accounts for various savings goals such as home repairs, new car (way down the road), and a general emergency fund.

We’ll keep an eye on the trending of interest rates, but right now we’re saving hundreds on interest with the variable rate, but we know it can’t last forever, but we can’t justify the costs associated with refinancing and when the new loan would most definitely be 2-3% higher than our current rate. The more cautious reader would say take advantage of rates now as they will only go up, but in our case, we aren’t positive we’re going to stay in this home forever, so yet another reason to hold off on locking in on a long-term loan with a higher rate.

Anyone else in this boat? How are you handling the risk vs benefits conundrum?

Sending in extra payments

We’re on a monthly payment plan, not one of those “pay twice a month” deals. Our payment is due the first of every month.

Now, I use online billpay with my bank to just send a check directly to the bank without the paper slip from the bill. But what I learned a few years ago when I tried to make a SECOND payment in the same month as one I already paid for was that the mortgage company applied the payment to the next month’s interest first, thus resulting in much less principal reduction. I was expecting the entire amount would go towards principal rather than the next payment, so I called the mortgage company.

You know what their rule is about sending “extra payments”?

You need to send the extra payment to a different mailing address.

Whahuh? If I’m sending in an extra amount well before the next due date, and the amount is not even close to the regular payment amount, then I would expect their “system” to recognize the intent is an accelerated loan payoff. But no, they want to strip out all the interest first and apply it to the next month no matter what.

I’m sure it makes sense in some financial world somewhere, but to me it’s idiocy. Therefore, I plan around it by just sending the extra payment in with the regular mortgage payment (same check) and avoid this special second address.

Can anyone explain the reasoning the mortgage company might have for this type of action? I should also add that including the memo “apply full amount to principal” or anything similar doesn’t work. You HAVE to send it to the other address.

Hey there Mike,  I have been following your blog for a few months now. I was just reading the “Our remaining Debt” and saw that you paid it off in 3 years.  I have about $18,000 in credit cards.  What do you suggest to pay these off as quickly as possible?

Just a quick update before I get into answering the question. If you haven’t been following the site, we started with well over $100,000 in consumer debt (not counting mortgage), and paid it off in about 4 years. Sure, there were minimum payments for about 5 years prior to that, but they barely made a dent in the principal debt owed. In that time, we also acquired new debt in the form of a couple cars, but paid those off either with the money earned from selling existing cars or from savings, which was an amazing feeling to even having a “car fund” in the first place!

Oh, and I’ll have another announcement about our debt situation coming up soon, so keep an eye out for it.

Now, for John’s question. Without details on interest rates, how many cards the debt is spread across, your income, etc., I can only comment on how WE went about getting rid of our $20,000 in CC debt (really it was up to $25 a few times).

1. Back in the day, like from 2001-2005, I was able to move our large balances around to 0% offer cards. Now, you can maybe still find the offers, but there’s no cap on the fee. Calculate the cost-benefit of paying the fee vs the interest on the card to see if it’s worthwhile to move the balance to a better interest rate. Also, keep in mind the duration (12 month offers are obviously much better than 6 month deals).
2. Once I finally committed to focusing on paying off the cards, I opted to pay off the couple of cards with the lowest balance. Now, the wisest thing to do is to pay off the highest interest cards first, however, getting those few little wins really helped our motivation to tackle the big balances. But, if your smaller balances are still daunting, and/or the interest rate is extremely lower than the other cards, then start paying off the bigger balances first.
3. Ok, now assuming you have been able to STOP SPENDING (hard to pay down debt when you keep accruing it), and that you have at least a few dollars in your budget to pay extra, then start sending the extra to just one card. Don’t try to tackle all your debt at once or you’ll feel like you’re spreading yourself too thin and you’ll probably give up.
4. Lastly, try to get extra income. I was able to pay off most of our debt over 4 years thanks mostly to the advertising revenue on this site (which most of you probably don’t even notice). It also helped that I had a good job in IT, but remember that I live in DC with a sizable mortgage, car loans, and student loans. I did one loan at a time, sometimes not the correct one, but we got it all paid off and we’re just working on our 2 mortgages now (more on that soon).

John, feel free to comment with additional information or other questions to help me refine my answer more. And same goes with all you other readers. Share your tips if they differ from mine. Is it more than just focusing on one debt, stop overspending and try to get extra income? How else did you motivate yourself successfully?

I’m personally motivated by goals. If I know there’s an end in sight, I can accomplish the goal. Otherwise, I procrastinate and never do anything. Others are motivated in other ways, so share your thoughts!

During that time, I opened a few cards and closed a few, but I’ve always sort of kept a core group of credit cards in our arsenal. I’m not a pro like some people when it comes to getting the best (I don’t even have an AmEx card anymore) or taking advantage of all the rewards programs. I tend to just carry a debit card and 2 credit cards at most, and those 2 credit cards are usually my Penfed Visa and my Discover More card.

Really, I only use the PenFed card primarily and keep the Discover card for our Sam’s Club membership, but sometimes I remember the rotating Discover categories (travel and restaurants in Q1 2011) and I’ll use it to get 5% cash back. But what about the rest of our credit cards?

Well, we had 9 cards total, and I decided to cancel 2 of them today:

1. Pentagon Federal
2. Discover (personal card)
3. Chase
4. Citibank
5. MINI (yes, the car…one of the legacy cards from the balance transfer days, but it has a great limit)
6. Kohls (our only store-branded card)
7. Bank of America (the only non-rewards card)
8. Discover (business card)
9. GM Card (again, from the balance transfer days, but this one has a tiny limit)

I cut the last two for a reason. First, I haven’t used my Discover Business card in 2 years and the More card gives me better rewards. That was an easy one because business cards don’t appear on your credit history.

Next, I dropped the GM Card. That was a tough one because of one reason: I had over $600 in earned rewards. Unfortunately, the points are only good for buying a new GM vehicle or GM parts, which I have no plans to do anytime soon. The limit was under $2000 and it wasn’t my oldest card, so there’s little impact on my credit score.

So that leaves us with 7 credit cards. We only use the Kohls card rarely when we get a really good coupon. We could probably find better deals in other stores and use our other cards for rewards. I never use the MINI card, even though points earned go towards MINI parts (and we have a MINI), but it has a high limit. I don’t use the Citibank card either (they just changed it to a different type of card, so I need to check it out more).

That leaves Chase and Bank of America. They’re my two oldest cards, and my Chase card is now a Chase Freedom card with rotating categories that competes with my Discover More card. Worth keeping.

The Bank of America card is my oldest card and it has a really high limit. The downside is they only offer teaser rewards for about 3 months. I used to have 2 BoA cards, but they closed one due to inactivity, and I only use this rarely to keep it alive. After learning more about the new way they calculate credit scores, I’m tempted to just cancel it and take the ding. We’re not financing anything anytime soon and it’s just a burden to manage (just knowing it’s there and can ding me when I don’t want it to is the burden).

So we have the opportunity to chop up 4 more cards and reduce our stack to 3, but it’s a tough call. I know it will hurt my credit score, especially since I’m considering dropping my oldest card and also cards with high limits. I maintain maybe a 1% utilization, which is nothing compared to the 50-75% I used to carry (or higher), so upping it to 5-10% shouldn’t hurt in the long run.

How about you? Have you dropped a bunch of credit cards all at once? Care to share which ones and why? Did you lost rewards/points in the process, like I did with the GM Card?

“I am never going to get out of debt. Why should I even bother?”

Have you ever thought that you will never get out of debt or that your financial troubles will always bring you down, that you are going to be haunted by your past mistakes forever?

Besides all of the practical information that you may read on Cleverdude and other personal finance sites, there is one thing for certain: You must have the right ATTITUDE for getting out of debt.

Now, before you think I’m crazy, there IS some credit to the thought about having the right attitude for success. When you think that you will succeed and when you can mentally picture yourself succeeding, you are more likely to take steps to do so.

Let me give you an example:

Alex thinks that he will get out of debt. He made so many mistakes in college, and now he is stuck with $20,000 on his credit cards.

He runs by a TV store and decides to stop in for a break (aka “just to browse”). He sees a 60 inch TV. “Wow, I need that”, he thinks. He then thinks of his debt and says to himself, “I’m never going to get rid of this debt, so what’s more debt?”.

He doubts his ability to succeed in what he wants (to be debt-free!) so, he makes a silly decision to continue that debt and continue, in his mind, to fail. He buys the TV. And with the surround-sound stereo system. Yes, it’s beautiful. Yes, it looks wonderful on his wall. Yes, the upcoming football season will be so much better now that he has that TV. But wait, his new credit card balance is WHAT?!? His monthly payment is THAT! How much of his salary?!!? Oops….He thinks he failed…and he starts the debt cycle again.

Let’s change that scenario:

Alex goes running. He goes into a TV store and sees a beautiful 60 inch LED TV. Wow, look at that picture! Then, he remembers his dream of being debt-free. He sees himself with no credit card debt, buying the TV (even cheaper because as it won’t be as new, the cost will have decreased), with CASH because he saved up for it. He decides to wait on buying the TV because he is in the midst of a plan to reduce his debt. Yes, he will wait on that instant gratification of the new TV and he will buy it when he is financially ready. He walks out of the store with a smile on his face. The TV will be his, in due time, because he will buy it when it is right for him financially.

So, the moral of this story:

Visualize yourself debt-free. Come back to this thought any time you are feeling doubtful of your ability to reduce that debt. If you can visualize it, you can achieve it!

Stay positive about your accomplishments, no matter how small, in reducing that debt. And, if you are just starting out trying to manage and reduce your debt, remember, you realized your debt! That’s step number one. Good job! Now, go do something about it.

Stay focused! You are on a path to reduce your debt!

Everything happens in due time. You don’t need that shiny new object now. Plan for it and you will feel better about it when you purchase it on the right timeline for your budget.