When I graduated college and knew I was moving, the thought of buying a car was daunting. However, instead of buying a $1000 beater car as Dave Ramsey suggests, I decided I would rather buy a new car. I would pay off the loan as quickly as I possibly, and then drive the car into the ground for the next 10 years. I'm a pretty simple girl, I got the most basic Honda Civic I could, mostly because how long Honda's are known to last. Like I said before, I intend to drive this car into the absolute dirt, and it didn't make sense for me to buy a car that wasn't reliable, drive it in the snow, and have the uncertainty of it breaking a month later. I crunched the numbers multiple times and knew if I put my head down I could pay off the loan rather fast.
To buy this car I took out a loan for $8,500, and below is the transaction history of my payments. For the most part I was living off of one paycheck and I would throw what I could of the second at the car. I incurred some unexpected $500 costs along the way that I was able to cash flow, but it definitely slowed down my progress. My payment was $148 for 6 years, and I believe my interest rate was 5.5%. When it was all said and done, I think I paid just under $200 in interest, compared to the $1800 if I had kept the loan for the full 6 years.
I started my job at the end of January and received my first paycheck the first week of February. I track my expenses through the Every Dollar app which allowed me to go back and see the days and amounts I made payments. I also have included little notes of where the money came from, if it was an additional payment.
1/24: $839 ( I had less start up costs for my apartment than anticipated, so I threw that extra money at the car)
2/22: $700 (Saved $1000 into an "emergency fund" from my paycheck, this was the leftover amount)
3/1: $167.50 (Was under my expected budget for February, this is the left over money)
3/18: $500
3/30: $1000 (tax return)
4/5: $367.86 (instead of saving money this month, I threw some more money at the debt to get it under 5k, at this point I actually felt like I was making a dent in it)
4/16: $1108
5/8: $400 (some rollover from the previous month and some graduation money)
5/11: $1660
5/28: $1860 (by the way I budget my paychecks May was a 3 paycheck month, so I threw that entire 3rd paycheck at the car, as well as a little extra I had in savings, to just pay it off)
Now into what made the actual difference in helping me payoff my car in 5 months.
Additional Payments
- What made the biggest difference for me was making additional payments throughout the month. This took away the option of me making up excuses as to why I should put that money into savings rather than throw it at debt, and prevented me from spending it on things I didn't need. Also, putting rollover money towards it helped more mentally then anything. As I was nearing the end of the month I saw myself looking at my budget thinking, well I could go out to eat a few times, or I could throw $50 at the car.
- Also, any additional money that you did not anticipate, put towards debt. For me this came in the form of some graduation money and tax returns. This could also include any bonuses or overtime you may have.
Budgeting
- Budgeting was the biggest factor for me, and I think for a lot of people. I am very fortunate, and I knew if I made a budget, and stuck to it, I could realistically live comfortably on 1 paycheck.
- I gave myself very little money to splurge on random things. I was realistic with the budget, but did keep it tight. Another tip is to keep your budget to very few "categories," this help me spend overall less money on non necessities. An example for this would be restaurants, clothing, and beauty products would all fall under the miscellaneous category, because they were wants and not needs. I kept this budget rather small, because I cared more about paying this off than I did about buying a cute shirt. It really made me think about my purchases before I made them. I wish I had a budget back in high school and the beginning of college so I could tally up how much money I wasted on ice cream and sun dresses.
- I also learned a lot about not trying to keep up with people and their spending habits. It was hard to see people buying all sorts of nice things, and spending all sorts of money, when I knew I was more financially stable than them. However, this was a good lesson to learn so early in my adult life, because material things don't hold much value to me personally, and I would rather put my money elsewhere.
- This was another big thing for me. Now I understand my interest rate was high because I didn't have credit, and my loan was for the longest duration possible, but if I had just made normal payments I would have paid and additional 20% of the initial loan in interest. I was blown away when I saw that, it is important to understand how quickly interest compounds and this can be a great motivating factor to pay down debt. I made a spreadsheet that allowed me to enter different payment amounts throughout the life of the loan and total the amount of interest that would be paid. My initial goal was to pay off the car in a year, but when I realized how much additional interest I would be paying, it didn't make sense to me to put money in savings rather than paying off the debt.
- If anyone has interest (pun intended) in seeing this spreadsheet please let me know.
All and all, paying off this debt was harder than I anticipated, and now makes me appreciate the money I earn, and no longer have to pay towards my car. It has also taught me that I am uncomfortable with the feeling of debt, and now I look forward to (hopefully) 10 years down the road paying for my next car with cash. There is no golden ticket to paying off debt, live very simply, and stayed focused on your goals.
Let me know your experiences with paying off debt, and if you have any recommendations for others trying to pay off their personal debts!
