Hello bloglings! Welcome back to the blog. I’m back after a mini hiatus of procrastination and I’m happy to see you’re here too!
In this mini hiatus, I’ve been most fortunate to finally cross off the first milestone from my financial independence journey. On 30th September, 2020 I officially became debt free. In the 6 months, starting from March 2020, I have been able to pay off debt close to four times my monthly income.
When I’d started out (naïve and innocent) I had started paying just my monthly balances plus an additional 5-10% on my lowest balance. At that rate, I was due to become debt free by September 2021. Of course, after the dawning of common sense (courtesy some studying), I realised I was in a position to pay it off far quicker. And I started out with a more aggressive strategy. My new target was to be debt free by August, 2020 but a couple of months in, I made a conscious effort to slow down and defer it by a month just to be a bit more financially sound. Constantly changing decisions may not be the best idea, but honestly that trial and error was really helpful. I did something quickly, found inadequacies and optimised it quickly.
You don’t really need to change your strategy mid way honestly. You can choose one, set it up and forget it. I’m a bit more of an experimenter. And hey, if i didn’t do that, we wouldn’t have this post!
If I were to break up my journey, I’d probably break it up into 3 phases and each phase has taught me a rather unique lesson. In this post I’m going to be sharing with you the top 3 lessons I learnt, as I undertook the goal of becoming debt free at an accelerated pace.
Lesson One: Minimum Due Is A Trap
Every time I saw my minimum due figures, I felt like paying this would surely make a dent in the debt. Cumulatively my minimum payments equalled to about 20% of my monthly income. An additional 5% on top of that, should have just been a cherry on the cake. I felt like that even if it took me 18 months to pay it off, it was still good enough. Better than never right?
Unfortunately, minimum balance is basically your interest with a little more going towards principal. It was only in April did I realise the amounts of interest that I’d ended up paying since October 2019, when the debt had piled up. At the time I could only afford the minimum payments but since the pandemic, I knew I could chip away more of it. Thus from May, I was contributing as much as 50-60% of my monthly income towards debt.
These are really high percentages and it’s not possible for everyone, but definitely go as high as you can. Check your spending and budget, find places to cut down and then redirect that money to debt. Trust me, it feels great to see that figure of ‘debt to be paid’ falling sharply every months.
I choose non-essential categories which had a significant amount of money going to them. My first targets of cutting down were my subscriptions, impulse purchases and gifts for others. Those categories freed up a fair amount of money.
Even if you can go as high as 30-40%, it’s still better than just minimum balance payments. Infact, anything is better than just minimum balance.
Lesson Two: Never Run On Fumes
When I started out with my more aggressive stance in May, my monthly budget was running on fumes. The fact that I was running on 40% of my income wasn’t really the problem. I stay at home so it’s all good. The problem was that I was living on an extreme paycheck to paycheck cycle. I had no savings whatsoever and that honestly made me really scared. After a point payday felt like the only day in the month where I didn’t have money related anxiety.
On digging deep into good debt repayment practices, I came across literature which said that having a month’s expenses as a short term emergency fund was essential to reduce your anxiety.
I could have stopped the intense payments for a month or two to save up, but I just could not bring myself to make only the minimum due payments. It just felt counterproductive to me from an interest standpoint.
So, I decided to reduce my monthly debt repayment percentage to about 40-50% of my monthly income and the balance 10% went towards building my emergency fund. I started doing this in July, by which point I already had made a serious dent in my debt with one card paid off courtesy my more aggressive preceeding months. The reduced contribution hampered the pace only slightly. But putting away that 10% into a recurring deposit and starting my savings really felt like true relief!
Reducing the 10% did delay my debt free status by a month, but I was never more relaxed in my whole journey than this point.
Lesson Three: Use Windfalls Wisely
Between March and September I had 3 small windfalls. The first was in March when I received a month’s pay as a joining bonus. The second was a final settlement from my previous employer in April and third was my birthday month of August.
If I were to be honest, my first windfall was managed quite poorly. My thought at the time was to have liquid cash in case my new job went south. I was being ‘practical’ apparently. Of course, soon enough Practical Me met Irrational Me. Seeing that cash just sitting in my bank account made me spend it quite impulsively because I thought ‘there was a lot there’. I did manage to save a little bit out of it, but that was that. In hindsight, had I used that windfall wisely, I could have immediately paid off one of my cards, with 0 effort. It’s okay though. I have since learnt to forgive myself because those were my BB days aka Before Budgeting days. Live and learn!
My second windfall of April was about 15 days of pay from my previous employer, which I rather wisely directed towards my debt as well as my birthday money considering I was now budgeting and had a better handle on my money.
Granted, I was in a position of extreme good fortune here, but if you do ever get any windfalls even if it’s Rs 1000 for your birthday, use it wisely. It’s basically like you’ve earned time if you use it to pay off debt or invest. It sounds really boring especially when the amount is small and you can use it to buy a bauble, but time truly is money. Your hours are limited and paid for. If you do get extra money, its like earning extra time! Use it to get ahead and get yourself in a stable place.
And that’s it! These were my top three lessons from my 6 month debt repayment journey. I totally get that this journey could be termed as ‘easy’ because of some good fortune and priviliege that I have had. Truthfully for me as someone caught in the eye of the storm, it wasn’t. It felt like nothing short of a minor miracle. It was a matter of habit and choice. I had to choose habits to give up, pick up and implement.
Debt repayment in any situation is a minor miracle, so do celebrate it. Whether you do it in 6 days, 6 months or 6 years, it’s a feat of pure determination. Be kind and compassionate to yourself as you do everything in your power to get out of it.
Do share your journeys, thoughts and comments! See you next time!