Debt is no fun. I think everyone can agree with that! Before we get into our strategy of paying our debt down I feel like you need to know what our debt consists of. My girlfriend and I have over $100,000 in debt but honestly I’d say we’re pretty lucky. We aren’t married yet but will be eventually so that is why everything is listed as her debt or my debt. When we eventually do get married it will become our debt and it won’t be a she pays hers I pay mine deal. We’ll be working against it together!
What We Owe
My girlfriend currently owes a little under $64,000. This balance is all in student loans. She has some fixed rate loans (all at 6.8%) and some private variable rate student loans (anywhere from 4.75% to 8.25%). I, on the other hand, owe a little more than $62,000 on a 4.625% fixed rate 30 year mortgage and a little over $4,000 on a 0.9% fixed rate car loan that will be paid off in less than a year.
How We Plan to Pay Off Our Debt
Right now since we aren’t married my girlfriend pays down her debt and I pay down mine. Currently my girlfriend is aggressively throwing every extra penny at her debt. She has a budget that allows for some fun money and all of our normal necessary expenses but any overtime and extra money she gets goes toward her loans. While this gets frusterating for her at times it is working as evidenced by paying off over $15,000 in just one year!
While I am not currently assisting her in paying down her student loans I am saving money to put a large lump sum down once we get married. Every paycheck I have money transferred into a student loan payoff account that will eventually be used once we are married to help her pay her loans down. I will then continue assisting her with these payments every paycheck to get rid of her student loans as fast as possible. It will be a great feeling for both of us when they are finally gone!
We want to pay them off as fast as possible so we’ll be paying off the loan with the highest interest rate (8.25%) first. However then we have a sticky situation facing us. Two of the larger loans are at lower interest rates (4.75% and 5.75%) but they are variable rates which means once rates start going up they are going to get more expensive than the fixed rate loans fast. I think we’ll probably attack the variable loans first before going back and paying off the fixed 6.8% loans.
As of right now I intend to pay off the 30 year mortgage over the full term of the loan. This is probably a controversial decision in the personal finance community but I have my reasons. Over the next 30 years I am certain interest rates will be going up. While I wish I had the interest rates of today (about a percent lower than my 4.625%), refinancing would kill me in terms of closing costs. After we get out of this economic funk we’re in now I don’t think I’ll ever see interest rates on mortgages anywhere near as low as what I have now. As such I’m going to keep my fixed interest rate loan for the full term.
Another reason why I am doing this is because in recent history over most periods of time there has always been at least some factor of inflation which slowly erodes the buying power of your money. The dollars I use to finish off paying my mortgage 25 years from now will be worth much less than any extra money I put into my loan now. On top of that I lose the opportunity to use the extra payments for other endeavors that could provide me a better return than my interest rate.
I owe a few more payments on my 0.9% fixed auto loan but I have the cash in the bank to pay it off today if I wanted to. In fact I could have bought the car with cash but decided against it. Right now the plan is to finish paying it off according to the schedule but part of me just wants to pay it off today. Regardless this loan will be gone in less than a year!
So there you have it! Our debt situation and how we plan on paying it off. How much debt do you have and how do you plan on paying yours off?