Get out of debt!

Tuesday, October 14, 2008 22:27 - By The David

My Magic Debt Number

As I type this, I owe $10,793.86 on three credit cards. My goal is to pay them all off by March, 2010.

Here is where the damage came from:

$912.64 – used credit card for all purchases to save money for a down payment on my house
$2609.70 – took advantage of interest free financing to furnish my house
$7271.52 – used credit card to have my driveway paved

To tell the truth, I don’t feel too bad about these. They all represent one time purchases, and they’re all on interest free cards (thanks to special deals or balance transfers).

The first debt actually saved me money. To save cash for a down payment on my house, I used my credit card for all expenses for a month or two. By paying 5% down on my mortgage, I saved .25% on the interest rate. Over the course of a 30 year mortgage, that saves me $12,088.07. While I admit that I should have saved the money before hand, using my credit wisely worked to my advantage.

The second debt was a bit of a splurge, but it’s made the house much more enjoyable. To me it’s still a good purchase.

The last debt caught me by surprise. I have a very long driveway – about 300 feet uphill. It was a gravel driveway when we moved in, but quickly turned to mud. It became difficult to get up or down the driveway, so we had to do something about it. Again, ideally I should have saved the money first, but it’s made life much easier and also increased the value of my home.

I want to get out of debt, but at 0% interest, I’m going to take my time. My goal is to take as long as I can to pay off all three cards without paying any interest. This means I have to pay $810 a month until April 2009, then $606 a month until December 2009, then $522 a month until April 2010.

To make sure that I pay everything off in time, I set aside money from my budget IMMEDIATELY after I get paid. I make the minimum payments due, then store the rest in an online savings account. I basically make payments to myself (and use interest to my advantage).

I’ve got a visual way of tracking my progress. Here’s what it looks like when I open my checkbook spreadsheet:

I smack myself in the face with my debt every day. What better way to remind myself of my debt and goal?

The number in the middle is my original debt.

I use the red squares to track my progress. Every time I pay off another 4% of my original debt, I change the color of one square to green. It’s a good motivational tool. It feels so good to change the color that it encourages me to pay it all off (and not spend any more on credit cards).

The yellow section at the bottom shows how much debt I started with, and where I’m at. I like knowing exactly where I stand.

It’s a simple – but effective – system. Debt is bad (red), paying it off is good (green). I think having something I can look at is more effective than just seeing a number or percentage alone. It gives me more context and makes it seem more real.