With my wife starting her daycare at home in September, there will be additional income coming in. I have the habit of reviewing my personal finance on this blog and thought I would share a few plans to pay off my debts in order to help you to do the same thing.
I usually manage my budget in a very uncommon way since I have been making important year-end bonuses over the past five years (read the chronology of my income here). This allowed my wife to stay at home while raising our three children but it has also given me a few headaches while managing a monthly budget deficit compensated by a lump sum payment in January. I’ve enjoyed life too much in the past three years with major expenses such as:
With a single household income and additional expenses, you can guess that my total debts didn’t drop during that period. Surprisingly, I’m not doing as bad as my debts level is actually lower than it was when I first reported my net worth back in 2011. But now that we will be making more money, it’s time to establish a strong plan to get rid of debts. I’ve ran through different scenarios to see what my options are.
The first thing I need to do is to make a list of debts to pay off along with their current monthly payments. I’ve made a quick chart to have a good picture.
Debts Amount Monthly Payment Interest Rate
CREDIT CARD $5 781 N/A 19.99%
LINE OF CREDIT $19 592 $100 1.50%
HELOC $264 384 N/A 1.50%
CAR LOAN $9 982 $434 0.90%
Personal Loan $7 083 $230 3%
Pool Loan $5 173 $70 6.45%
I didn’t put payments for my credit card and home equity line of credit (HELOC) since I play around the balance of both to never pay high interest rates on my credit card. I’m usually able to drop the HELOC balance with my year-end bonus but it goes back up during the year due to my monthly budget deficit. Thanks to the daycare, I won’t be seeing a deficit anymore!
Since my wife will be working at home during office hours, she won’t need a car anymore. I could sell my sport car and use the family SUV to go to work. If I sell my RX-8 this year, I should get something between $5,000 and $6,000. This is enough to pay off my credit card in full and concentrate on other debts. I usually play around between my home line of credit and credit card to not pay high interest. By selling my car, I wouldn’t have to play around anymore and I could use my liquidity to pay another debt. I would not only get at least 5K in my pocket but I would also save about $300 per month worth of gas and insurance costs (without counting maintenance!). I don’t really want to sell my car because I love it, but I think I would like to pay off my debts more at this point in my life!
My Tribute car loan expires in 2015 with 23 payments left as of July. This is not my biggest interest rate debt (this is the pool loan) but this is my biggest monthly payment. The daycare should generate roughly $2,000 per month in free cash flow. Considering that I have to use a part of this money to cover for my monthly deficit, I estimated my free cash flow at $976 per month. In September, the car loan will be showing a balance of $9,114 (2 payments done in July and August). Starting in September, I could make a total payment of $1,410 (which is $434 from my regular payment + $976 in extra income). At this pace, my car loan will be finished within 7 months which leads us to end of March 2013. At this point, I will be able to use my extra $1,410 to start a debt snowball and pay off another debt.
In March 2013, my personal loan balance should be around $5,211. Using the current monthly payment of $230 plus the $1,410, I could make payments of $1,640. In three payments, I could almost pay this debt off as well. This leads us to end of June 2014 to attack the pool loan. At this point, the pool loan should total roughly $4,600. With a monthly payment of $1,710 ($1,640 plus regular monthly payment of $70), I can clear it in three months as well. Therefore, in September 2014, I could show only my home equity line of credit along with my line of credit balance for a total debt of $284,000 or lower. With an additional payment of $1,710 per month, paying off my line of credit will be a piece of cake taking about a year to clear it up.
In order to make my life easier in terms of budget management, I think I will opt for option #3: paying off my line of credit ASAP. By increasing my monthly payment to $1,100 on my line of credit I will be able to drop its balance rapidly. Once I pay enough on the line of credit to clear another debt (e.g. my Tribute car loan), I will draw a check from my line of credit and pay it off. Then, I will increase my monthly payment on my line of credit and repeat the same process to attack my personal loan.
It will be much easier than playing around with my bank to increase payments. Plus, if I ever run into unexpected expenses (we all know it never happens, right? Hahaha!), I will have the liquidity on my line of credit instead of getting stuck with a huge monthly debt payment on a loan.
According to this plan, I could be left with only my home line of credit to pay in 2016. At this point, I will most likely start saving $1,000 per month to invest and use the extra $710 to pay off my debts. However, I know there are other expenses that will come around that time too… My Tribute will probably due to being changed by 2019 (it’s a 2009) and I really would like to have a garage and finish my basement so my kids could have their own space. Therefore, I will most likely save $1,000 per month in investments and use the $710 monthly to build an emergency fund that will be used to pay for a new car and then pay for renovations. Private school will also arrive just around the corner so I better be ready for this (and increase my monthly savings in my TFSA to fund it!). The good side of things is that my income will most likely become bigger and I will be able to fund these projects with my year-end bonus.
Readers, have you ever done a plan like this? What do you think of mine?
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