personal finance is personal

I’m Focusing on Paying Down Debt and Improving Cash Flow in 2019

Erik Debt Reduction, Financial Education, Pay Off Debt, Thoughts of a Mastermind 7 Comments

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Over the last year, I haven’t shared with you all of the details of my debt situation. I’ve been honest with talking about how I financed my home improvements, but I haven’t shared the entire picture.

Sitting here at the end of December 2018, I’m looking to focus in on paying down my debts and improve my cash flow in 2019.

Over the past 15 months, I’ve taken advantage of a high income and knowledge of financing to open up numerous lines of credit for home improvements and investments.

Now, I’m a little bit nervous of the situation I’ve gotten myself into because my debt payments each month are higher than I’d like.

In this post, I want to share with you the details behind my debts and talk about my plan in 2019 to eliminate these debts.

High Income Professionals Are Not Always Good With Money

Growing my income to a high level at a relatively young age has been a goal of mine for the last 5 years, and a goal where I’ve seen some great success.

In 2017, I earned over $107,000, at the age 25, and in 2018, I’m going to come close to $120,000 in total earnings.

With this high income, companies are constantly targeting you to open up lines of credit, credit cards, and make purchases with them.

I work at a bank, and as someone who reads the fine print of everything, I understand the terms and conditions around different ways to finance purchases. Throughout the last 15 months, I took advantage of this (and now have reached the edge of my comfort zone).

Starting with a Home Equity Line of Credit, I unlocked $22,000 of equity from my house and used some of this money to fund my Roth IRA, contribute funds to my business, and make a few other investments in alternative assets.

Next, I replaced 8 windows and a door, and financed this at 0% for 3 years. The total cost was roughly $13,000. Even though the payments are at a 0% interest rate, this is still a $357 payment every month.

Moving on to another line of credit, earlier this year, I opened up a 0% interest rate credit card to do some more home improvements. The credit line was $16,000, and I used about $10,000 of it for these improvements and other purchases.

And finally, I still haven’t removed Private Mortgage Insurance from my mortgage, and have about $5,100 left to go until I reach 78% Loan to Value.

Each of these debts are restricting me from achieving my financial goals, and are costing roughly $700 a month to service.

debt amounts and payments

 

Adding this on to my mortgage of roughly $1690 a month, I need to make at least $2400 a month just to stay good on my loans. This is unacceptable and something I’m not enthused about.

One thing to note here is that my decision and thought to get rid of my debts is more psychological than mathematical. With 2 debts at 0%, and a third at 3.85%, all of these are historically low interest rates. At the same time though, the debt service of $702 a month is what bothers me and I want to free this cash up for future freedom.

With a High Income Comes Responsibility

I titled the section above “High Income Professionals Are Not Always Good With Money” because it seems that many people believe “people with higher incomes are better with money because they make more”.

While I have had a handle on my situation the entire time, and also have still been able to meet my savings goals throughout the entire 15 month period, looking at my situation now is a bit eye opening.

If I didn’t track my income and expenses every month, I’m sure this would have gotten out of hand (and then I’d be in much more trouble!)

Even though I have a high income, this doesn’t guarantee I’ll be good with money. I understand a lot the terms and conditions of the situation I’ve gotten myself in, and have a plan, but there is still a lot of risk going down this path – one which I wouldn’t recommend and probably isn’t “being good with money.”

At the same time, I’m not someone who shies away from risk or taking chances.

My overarching thought in life is to explore different experiences to find the truth. I don’t regret going into debt, but now I have to face the music and get out of it.

My Plan for Reducing My Debt and Improving My Cash Flow in 2019

My plan probably will be a little bit obnoxious to you if you are a lower earning individual… but my plan for reducing my debt is to simply live life how I have been. Specifically, I need to keep performing well at my job, keep putting hours in on my side hustles, and instead of speculating with my savings, put these towards debt.

My expenses are already fairly low, and I now am house hacking with a roommate paying me $650 a month.

With a salary of just over 6 figures and a lucrative side hustle, I should be able to eliminate at least 3 of these debts just through staying focused and disciplined with my pay down. I save 50% of my income, and shouldn’t need to make any drastic changes to get rid of these debts.

As I detailed in my 2019 goals post from a few weeks ago, one of my goals for the first quarter is to take out my credit card payment.

As shown above, the current balance is $8,118, and I should be able to get this taken out with my year-end bonus and quarterly side hustle payment.

Also in the first quarter, I’m hoping to take out the Private Mortgage Insurance, and if this happens, I’ll be able to unlock over $200 in cash flow a month!

Next up will be the windows loan. While this loan still has 18 months left on it, the big discomfort comes from having $357 a month going out of my bank account each month.

I believe I can eliminate this sometime in quarter 2, which then will leave my HELOC to pay down throughout the 2nd half of the year. This will leave me with a little bit smaller cash position than I might feel comfortable with, but it will be worth it going in to 2020.

Of Course, There’s some Alternative Paths in This Plan

The plan above is a little bit too straightforward for me 😉

As someone who is always thinking of different ways to build wealth, take chances, and succeed financially, there are a few things which could speed up (or slow down) this process of becoming debt free.

First, you are able to take out Roth IRA contributions without penalty. The last 3 years, I’ve maxed out my Roth IRA and with how I’ve positioned my portfolio, there’s a chance I will have doubled my investment sometime in 2019.

With this, I would consider taking out half (i.e. my contributions), and letting the rest compound over time.

Second, I’m always looking at deals and investments to see what is worth my time and energy. In 2017 and 2018, I definitely went overboard with this, so part of the plan in 2019 is to continue to focus in on what is working and NOT worry about other things.

However, if there is something that is very undervalued and presents itself as a great opportunity, then I will certainly not hesitate to jump in on it 🙂

2019 Will Be a Great Year!

I’m very excited for 2019 and am going to make the best of my situation at work and at home.

Something I mentioned briefly and want to say again is that most of my want to pay down my debt is psychological vs. mathematically driven.

Yes, at 0% interest, it would be sub-optimal to pay down my debt and instead, if I want to grow my wealth, I should be putting this money to work.

Well, I am putting my money to work in a number of other areas and now feel the need to improve my cash flow.

Going into my late twenties, I want to have an incredibly strong financial foundation to build from, and with this plan, I should be able to succeed.

And of course, I’ll be keeping you updated along the way 🙂

Thank you for reading!

Readers: do you have any debt pay down goals for 2019? What do you think of my situation? Would you do anything differently?

Erik

How I'm Paying Off Debt In 2019

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Comments 7

  1. You’ve probably already thought of this, but I just helped a friend with this math. Do you have any more room on your HELOC to pay down your 1st mortgage and eliminate the PMI? As you get closer and closer to the “eliminate PMI” number, the implied interest rate is to borrow that last few thousand becomes astronomical.

    Good luck

    1. Post
      Author

      I have a few thousand left on the HELOC, but can get it paid off without tapping into that. I could have it gone by the end of 2019 if I don’t “eliminate PMI”, but would rather have it gone sooner rather than later.

      Thanks for the comment 🙂

  2. If it allows you to sleep at night, go for it. Personal finance is as much mental as a numbers game.

    I’m looking at paying off our mortgage in 2018. Although if the market continues to drop I may have to reconsider to invest instead. I pay debt according to my risk tolerance driven asset allocation. That being said with no additional payments my mortgage will be gone in 2020 so not the same situation.

    1. Post
      Author

      Being mortgage free would be an unbelievable accomplishment – probably unmatched in terms of what that freedom could do for your situation 🙂

      Thanks for the comment – I just want to open up some more options and 2019 seems like a good year to prepare for the future!

    1. Post
      Author

      Personal finance is a set of choices. While I went into debt for investments and improvements, I could have easily went into debt for other non-financial reasons. All I did was pull my spending forward, and now I have to pay it back. It’s definitely a risk and without my 2019 plan, could certainly go the other way! Happy New Year’s!!

  3. yes, I agree with you. To increase income or increase your business you have to decrease your debt amount. Save more and spent that on your business. Decrease the amount of installments. Manage your finances in a way that you don’t need to pay your full income into debt installment.

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