At the start of this blog – mere months ago – I had two student loan debts that I have been paying off one sad monthly payment at a time since early 2004. For the sake of brevity – and more importantly because I think it’s representative of my previous attitude toward debt – I’ll focus in on my Perkins loan.
My initial balance on this loan was $5,090 at a 5% interest rate.
The good news – after a very focused couple of months I have finally paid off this debt.
The bad news – up until January of 2010 I had been happy to make my minimum payment of $58/month on this account – which over the course of the loan ranged in monthly interest charges of $8-$20 a month.
Since January of 2010, I found ways – namely, more controlled spending and an eBay sale – to direct $2,071 towards paying of my Perkins loan. As I mentioned earlier, over the lifetime of this loan I had averaged a meager minimum monthly payment of $58/month … or a total of $174 in the same three-month period that it took me to finally payoff the loan.
Well that’s all I HAD to pay!?! … goes the little voice in my head
But by paying the bare minimum on this loan since May of 2004, I unnecessarily lengthened the time it should have taken for me to pay of this debt. And the true cost was not only my initial loan of $5,090 … but an additional $1081.68 in interest.
And while I realize student loan interest is deductible, I think this scenario is very typical not only of my own debt experience and approach, but is a microcosm of the approach to debt that many of us take. And the worst part – many of us are taking my ill-conceived Perkins Loan minimum monthly payment method and applying it to much larger debts, with higher interest rates, over longer period of times. Mortgages, auto loans, that new refrigerator and range we put on the Kohl’s charge card, a new summer wardrobe on the Macy’s account, and who knows what else.
But perhaps like some of you, I always felt decent about my debt position – and that’s the SCARY part. I’d tell myself thing like – “I make my monthly payments”, “I’m not defaulting on any accounts”, “I don’t pay late”, “I have no problem opening up lines of credit”, and all the other little psychological tricks I could use to justify the comfort of minimum monthly payments.
And I only write this entry because I’m thankful that the fog lifted on my minimum monthly payment approach. At my previous rate, I probably would have been paying off this silly little debt I had been holding onto since college for the next 3 or 4 years. Obviously, that’s ridiculous. But that’s the point, I think if many of us with debt issues really stopped and thought about the behaviours that led to our debt problems we’d realize how silly and illogical our approach to money is/was.
And therein lies the power of two tools that I am now a firm believer in; two tools that helped bring some clarity to what I had been doing wrong and what I could do to make things right:
1) the Monthly Budget – take control of what’s coming in and what’s going out. Most importantly, find ways to cut out the waste.
2) the Debt Snowball – there are multiple variations to this, but I think Dave Ramsey’s approach is pretty solid. He properly assesses the value of short-term wins when it comes to those of us with debt issues.
So here’s to my first short-term Debt Snowball victory. And now I can apply that same focus and energy (not to mention another $58 a month) to my next target – a $9500 balance on a Citibank card (currently 1.99% until the end of 2010).
Have you been prone to the minimum monthly payment trap? What was your first Debt Snowball success?