Hundreds of people emailed, commented, tweeted and direct messaged me after last week's post asking to hear more of my story.
The number one question: How did you do it? How did you pay off $571,817.68 in less than 3 years?
The answer to paying off debt is pretty simple.
1. Stop using credit.
2. Earn more than you spend.
3. Use the extra earnings to pay off debt.
It's not romantic. It's not complicated. It's actually very straight forward.
I, however, do not typically do things the easy or simple way.
In hindsight, I can see that the first year of my "debt repayment program" wasn't debt repayment at all. It was more like debt shuffling. I made a few tough decisions and made good progress toward paying off my debt. But, I continued to use credit cards. And I continued to earn less than I was spending.
Until I hit rock bottom. And had to reconcile with what I had done. And come to terms with the fact that the only person who could save me... was me.
In January 2009 - my debts in order of highest to lowest:
- $385,452.12 - Mortgage on my house
- $146,191.47 - Mortgage on my rental property
- $12,550.75 - Equity line on house
- $10,412.01 - United Mileage Plus credit card
- $9,831.32 - MBNA credit card
- $7,380.01 - my car loan to Subaru
First up: selling my house.
Most people (myself included) do not want to sell a house that is upside-down.
I had bought this house at the top of the market. My payments were over $37,000 a year - and the value of the house was plummeting.
If I stayed in the house and made payments for 3 more years - I was looking at another $100,000 in payments - I knew there was no way the market would make up for that loss. I had already paid several hundred thousand dollars into this house and it made me sick to think of continuing to throw money at the problem. I was paying to lose.
I asked myself if I would buy that house for what I owed. The answer was no. It wasn't worth it.
I asked myself if I would rent my house for the price of the monthly mortgage. The answer was no.
So I decided to sell and cut my losses.
I listed the house at a break-even price. No offers.
One week later, I dropped the price $10k. Nothing.
The following week, I dropped the price another $10. Nothing.
I knew that if I kept dropping the price - I would eventually find a buyer. I didn't focus on how much money I was 'losing.' You can't lose money that doesn't exist. The money 'lost' on my house was fictional. All I was losing was a story. And I was willing to lose that story.
I focused instead on how much debt I'd be able to pay off. I focused instead on the burden that would be off my back. I focused on the freedom of not being stuck to a house. To a mortgage.
I dropped the price another $10k. And then another.
Finally, there was a buyer and a quick escrow. I ended up taking out a personal loan to cover the difference. At the close of escrow, the mortgage and the equity line were paid off.
In exchange, I had a $25,000 personal loan. To me, that was a tiny (albeit painful) price to pay to be able to unload almost $400k in debt.
Next up: The Rental Property
The rental property was also upside-down. It was a tiny condo in a town with sewer and zoning issues. Plus, during the time I had owned it - an incredibly ugly storage unit complex was built - blocking a once-beautiful view. What used to be a cute little courtyard now looked like the backside of a strip mall. Due to the new mortgage restrictions, the small square footage for this unit wouldn't qualify for a standard loan. My accountant suggested short-selling.
Even though short selling was a gigantic pain in the ass, I am grateful that I had that option and that my long-time tenant was able to buy the condo for a fair price. It was a win for everyone involved.
Next in Line: Credit Cards
Even though I wanted to be debt free - I hadn't even come close to committing to a debt-free lifestyle. Throughout 2009 - I continued to rack up credit card debt. I had just left my husband, I wasn't working much and I treated my credit cards like a fancy little back-up plan. I was owed a final payment ($78,000) on a business I had previously sold and figured I'd use that money to just wipe everything clean. So, I racked up almost a year's living expense in debt - and counted on a promise of future cash to make it all better.
Not a good idea.
I spent money I didn't have. And I planned on paying it all back with money I didn't have.
In late 2009, I was notified that I would not be receiving the expected payment. That the man who owed me money was in financial trouble and on the brink of bankruptcy. (Believe me - I didn't miss the irony. Karma's a bitch.)
We settled on a fraction of the total amount owed - and I used that money to pay off my car.
The Turning Point
Up until this point, I was basically just moving debt around. I still wasn't taking responsibility for how I was spending or what I was earning. I had made some difficult choices - but I hadn't completely committed to being debt free. To living a cash-based life.
It wasn't until the end of 2009 that I really realized what I had done to myself. The enormity of living beyond on my means for so many years. The dysfunctional relationship I had with money. My habit of minimizing and justifying and pretending.
It took losing my ass on both of my houses, being broke for a year, waiting to be saved by balloon payment and then realizing that it was gone. The reality of what I owed and what I was going to need to do to turn my financial life around finally hit me.
I made a vow. Stop using credit cards. Stop renting money. Live within my means. And pay off debt. For reals. I made a commitment to myself to get out of debt and never go back.
The first month is always the hardest. I completely stopped using rented money. I began paying for my past AND my present.
This is when my Radical Debt Eradication plan came into place. I sold everything that I could sell. Furniture, handbags, clothes, jewelry etc. and put the cash towards my debt.
I started working 3 jobs - and made a commitment to keep working like a mad woman until my debt was paid off.
I lowered my overhead, eliminating as much as possible from my monthly expenses.
I completely changed my relationship with money, using the tools that I wrote about in my book Money Love.
I liquidated my retirement accounts, paid the tax penalty and used the rest to pay off debt.
For the remainder of the balances I made payments of $3000 to $5000 a month until they were paid off. Every single month - I could have taken a vacation to a tropical resort or bought a new MacBook Pro with the amount of money that I was spending trying to clean up my past-self's irresponsible choices.
And, every single month - I saw those balances drop. There were many months where it seemed daunting. Maybe even impossible or never-ending. There were months where huge unforeseen expenses showed up. A car engine that blew up and the subsequent 3-month-stay in a repair shop. A custody battle. Attorneys fees. Things that I would have previously charged without even blinking.
This time, though, credit wasn't an option. And without that option, I found that I was way stronger and way more resourceful than I had ever given myself credit for.
I hustled. I worked my ass off. I stayed true to my vow. I stayed loyal to my commitments. And it worked. I paid it off.
I'm one week into my new debt-free life and it's so much better than I ever thought it would be.
It's funny. All week, I keep catching myself habitually thinking "I have to pay for this. I have to pay for that." Running the calculations in my head like I've done for the past few years. And then I smile and realize. I already did. I paid it. It's over.
As good as knowing it's over.