Editor’s note: This article was first published in January 2013; the story’s references to cable TV, home newspaper delivery and paid scientific studies reflect that time.
This is the recent, true story of Stephanie, a 26-year-old American woman who was living comfortably until she realised she had fallen into the free-money trap, to the point where she could not move forward without dealing with her debt. She tells us her story and how she did it, step by step, in the hope that it helps the many readers caught in the same trap.
At 26, I was working very hard and thought I had everything under control. I was still paying off my student loans and used my credit cards for little treats, like almost everyone.
My parents had no money to pay for my college education, but that didn’t stop me from attending the University of Maryland for my bachelor’s degree in anthropology. Since I had trouble getting scholarships and grants, I ended up financing it with student loans, which are usually granted at low interest. Once I finished my degree, I got a job paying $50,000 a year and lived like anybody else. I went out with my friends, bought myself treats and went travelling, while paying the minimum on my loans and the minimum on my credit cards. Everything was going fine.
Three years ago I met a guy and we started a relationship. The time came to make plans together, move to his city to live with him, and so on. This guy loved personal finance, and when the subject of my debt came up, he got to the bottom of it and uncovered a problem I had never given any importance to.
He added up all my debts in a spreadsheet and the result was like a slap in the face: my total debt came to $90,000, which made me over-indebted in the eyes of the banks, because it was spread across many small loans. If I had kept paying only the minimums, it would have taken me more than 10 years to clear all that debt, not counting the interest.
My boyfriend showed me how every year I owed more instead of less, even though I was making my payments, a very common situation among people in debt. So he proposed a plan that would let me clear those debts completely in just 3 years.
We sorted the debts from highest to lowest interest rate. First came the credit cards, at 15% interest, then personal loans at 9%, and finally the student loans, which had been split into several loans at between 2% and 3.5%. Those debts had to disappear in that order.
The tricks I used to pay off my debt
My student loans ranged from $3,000 up to the $20,000 of the federal loan, and I had several credit cards with balances from $3,000 to $9,000. Since the cards carried the highest interest rate, they would be the first to go.
I started by drawing up a budget of my monthly expenses, to try to find a way to save between $500 and $1,000 a month and add it to the $800 a month I was already paying in minimums on my loans.
1. Rent: I left the apartment where I lived alone and moved to a smaller one in a cheaper neighbourhood, and I found a roommate to share the costs. That alone cut my housing costs in half.
2. Cable and newspapers: I cancelled my cable TV subscription and my home newspaper delivery. Thanks to the internet, I could get both on my computer.
3. Gym: I stopped paying the $95 a month for the gym and started exercising at home and outdoors.
4. Phone and insurance: I limited my calls and data use until I had cut my phone bill by $30, and I also dropped some of the insurance policies I was paying for. I also cut my car insurance by about $80 by switching to another company.
5. Entertainment: I changed the way I had fun. Party nights at home with friends, and trying to enjoy the daytime much more at weekends, hiking or doing other healthier activities instead of staying out drinking until 6 in the morning. Not only did I save money, I also met different kinds of people who brought something new into my life.
6. Travel: I loved travelling, and that was something I didn’t want to give up, at least once a year. But I did shorten my holidays, and thanks to the internet I found several websites offering low-cost group trips. Once again, I saved on my holidays and met lots of new, very interesting people.
Once I had cut my expenses, I had to find a way to earn some extra money, to push my income as high as possible and get rid of the debt as quickly as possible.
1. Babysitting: I signed up on a website specialising in babysitting services, and I work a few hours a week looking after children in my free time. It pays well.
2. Scientific studies: I signed up for every scientific study I could. They usually pay between $50 and $150 for taking part in the experiments (as long as there was no risk involved).
3. Freelancing: I signed up on several freelance job websites, where some companies pay for a piece of work or for an article written on a specific topic. I was good at it, and I could also do it in my free time.
At my company, they noticed what I was doing and appreciated the willpower it took to work so hard, so whenever an important task came up at work that paid something extra, they tended to offer it to me.
Some months I made more than $2,000 in extra money (not every month), but thanks to that effort I paid off my credit card debt in about 6 months, which let me ease off the punishing work pace and start paying off the rest of my loans.
My new life
Today I’m debt-free and I already have some savings. Lots of people now ask me how I did it, and the truth is that it isn’t easy: some weeks I worked up to 20 hours of overtime on top of the 40 hours a week at my job. My only reward was watching myself meet my goal.
Was it worth the effort? Absolutely, because otherwise I would still be paying off those debts, and they would probably still be growing.
Final takeaway
This young woman’s case shows that it is possible to reach a goal with some effort and, above all, by acknowledging the problem. It also shows something else: if she had had no debt and had followed this same strategy, today she would not have paid off $90,000 of debt; instead she could have earned $90,000, which, invested properly, could have grown to at least $98,000.
Further reading
Featured image: Paige Alonso, CC BY 2.0, via Flickr.
