How I Killed My Debt and What I Learned From it

Here is how my debt history looks like. The $ amounts are scaled amounts, not actual amounts. However, the proportions (ratio of debt to assets etc.) are all real. The debt does not include mortgage. I have been tracking this using MS Excel. This shows a period of time (about 3 years) till just before I recently stumbled over PF bloggers and discovered more sophisticated ways of tracking debt. Points of interest on the tracking graph have been marked A,B,C…and will be explained below. There is nothing new in the lessons learned, it’s all common sense, but they make more sense when you connect them to the graph. (The last couple of months are not included , but I will post an update on it soon; it will be interesting since I took advantage a few 0% balance transfers during that time)

A: Realization - This when I started recognizing my debt as a problem and made efforts to document it.

B: Foolish Spending - Ignored the ultimate mantra “Spend less than you earn” and took a big hit to my net worth. Debt increased. Seemed like I am going to lose it. But didn’t give up and did some aggressive damage-control.

C: Increased Income - Somewhere around this time got some additional help and gross income increased. Notice the jump in net worth. Debt wasn’t decreasing almost as fast.

D: Aggressive Payments - Made some more aggressive payments to credit cards. This really made a difference.

E: One Last Spending Spree - Almost there….but not yet…one of the last major credit card expense that I wasn’t able to pay in full by the end of the month (minor ones appeared later on, but they were hardly a threat to my debt-free status).

F: Debt Free - Finally, paid up all debt and tasted freedom

G: Compounding At Work - Notice the rapid increase in net worth. This is interest compounding at work, well at least some part of it is. Mostly it’s a combined effect of interest compounding and the fact there is more saving because of less debt. Earlier, credit card interest/payments masked this effect. In this period, the payments that went to credit cards are now going to the savings accounts.

Lessons: Recognize your debt early and face it fast. Start making payments aggressively; it hurts initially, but if you don’t do this …credit card interest rate will hurt…thats even worse. It takes time for debt to vanish, so be strong and keep attacking it. Only when you kill your debt will you see the benefits of your savings/investments. It doesn’t make sense to have a bunch of money in your savings account while your are loosing tons of it on credit card interest. Once your are free from debt, its important to keep it away; spend on credit cards only as much as you can pay up by the end of the billing cycle. It took me almost three tough years, but it might take you more (or less) so prepare your mind for that.