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Last month I was able to pay off my auto loan, about a year and a half early. In addition to the positive effect it has on my credit score, and that I don’t like my hard earned cash going to someone else if I can prevent it, I wanted to pay off my auto loan before my maternity leave started in February.
Related Post: My 3 Habits For A High Credit Score
Related Post: Pay Off Auto Loan Or Roof Repair
I was able to pay it off by following five strategies for paying off debt fast.
Setting up automatic payments means that I won’t forget to write the check and mail it. My hubby once forgot to pay a credit card that he charged a couple of Little Caesar’s Pizza to, and the $15 in pizzas blossomed to $100 once late charges and interest were added in.
Related Post: 9 Reasons Why I Pay My Credit Card Every Week
I had my auto loan set up for automatic biweekly payments, which means half the minimum payment is paid every two weeks. Besides that it lowers the interest portion of each payment than if I paid monthly, I actually make an extra payment on the loan, 13 monthly payments rather than 12 monthly payments.
Payments Larger Than Minimum Payments
While the minimum monthly payment was around $220, I actually made biweekly payments of $140, which means I paid $280 a month (plus the 13th payment of $280). Making the bare minimum payments drags out the loan, which is like pulling the band-aid off slowly.
Putting Extra Cash Towards Debt
Anytime I had extra cash, like a bonus or a tax refund, I applied a portion of it towards the auto loan. Anytime I noticed my cash balance was creeping higher, I also put a portion of that increase towards the auto loan.
Large final payment
Once I reach a point in the loan where the remaining balance can be paid off without causing a big disturbance in my cash balance, I make a large final payment. In January, I had $1800 left on my auto loan, so I bit the bullet and made an $1800 payment rather than the usual (automatic) $140 payment. And now, my car is paid off and I won’t have to make payments during my maternity leave. Yey!
These five strategies can actually be applied to any kind of debt, whether it be a credit card, auto loan, student loan, mortgage, etc. I tend to pay my credit card weekly, and I already paid off my student loan using these five strategies. I haven’t been using these strategies on my mortgage because I’m concentrating on eliminating the smaller debts first, and for some reason, the credit union won’t allow me to set up biweekly payments, or automatic payments larger than the minimum amount. I also have a personal loan for repairs on my roof, which I automatically pay biweekly an amount $50 more than the monthly minimum. I’ll start making extra payments once I return to work. That is, if daycare expenses don’t suck my cash flow dry.
Related Post: Daycare Is Expensive. And Totally Worth It.
Now let’s see how fast I can pay off my personal loan.
There are three major habits that I practice to keep my credit score high, in the high 700’s to low 800’s, depending on which credit agency you check.
Check Credit History Regularly
The first habit is to regularly check my credit history to make sure nothing weird or incorrect is showing up, like a loan or a credit card that I don’t recognize. To check my credit score, I have a free account at Credit Karma, which I log into at least once a quarter. I recently took out a personal loan to cover the cost of a roof repair, so I checked my credit score when I applied for the loan to make sure the loan officer wouldn’t have a reason to decline my loan application.
Related post: Pay Off Auto Loan Or Roof Repair
Frequent Credit Card Payments
My second habit is to make frequent payments on my credit card, usually every week or so. I time it around my weekly payday so that I know I have incoming cash. Paying frequently makes it easier on my cash flow, keeps the credit card balance from getting too high, and allows me to regularly monitor my expenses and determine if I’m spending too much money.
Related Post: 9 Reasons Why I Pay My Credit Card Every Week
Pay Off Debt Early
My third, and probably most effective, habit is to pay off loans early, which I do by using three specific methods.
Firstly, I set up biweekly loan payments whenever possible so that I pay less in interest and pay an extra months payment.
Over time, that extra payment every year adds up. There are two loans, the mortgage and my hubby’s student loan, that for some reason does not allow automatic biweekly payments. But my other loans, my personal loan for a roof repair and my auto loan that I just recently paid off had no problem with biweekly payments.
Payments Larger Than The Minimum Payment
Secondly, most of my loan payments are larger than the minimum payment. It’s easy to do when you make automatic biweekly payments. Just pick an amount higher than half the minimum payment that the bank should deduct out of your bank account every two weeks, and voila, you’re paying more than the minimum payment.
Large Final Payment
Lastly, I pay off the entire remaining loan balance when I reach a point in the loan where doing so won’t cause much disturbance in my cash flow. Most recently, I paid off the remaining $1800 on my auto loan a few weeks ago so that I wouldn’t have any payments during my upcoming maternity leave.
In addition to these three main habits, I’ve noticed that when I carry a credit card balance that is larger than normal for more than a month, my credit score tends to dip a little. It’s probably because my credit card utilization increases during that time, which can affect your credit score.
During the last week of tax season, my office received many calls from clients wondering why they were making tax payments with their tax extensions. Many were under the misconception that a tax extension was a way to postpone any tax payments. That is not completely true.
Being that the U.S. government is funded by taxing their citizens, it will do everything in its power to get as much money as possible. So, if you owe tax, the IRS will charge you penalties and interest on any monies owed and not paid. So if you didn’t pay enough in taxes throughout the year and owe money in April, you can be charged penalties and interest on the money that you owe on April 15. If you file an extension, and thus postpone the due date to October 15, you may owe additional penalties and interest on any monies owed for the time between April, the regular tax due date, and October, the extended due date.
Related Post: Understanding The 1040 Individual Tax Return
Related Post: 4 Ways I Increased My Tax Refund
So while you can technically postpone your tax payments until October, you may owe even more than you would have if you had just paid them on time. Paying an estimate in April of what you think you may owe will save you on penalties and interest. The instructions for the 1040 even say you may owe a penalty if the amount owed is more than $1,000 and that it is more than 10% of the tax shown on your return. It also says you will be charged interest on the tax not paid by April 15. Do you really want to give the IRS more than you have to? I know I tend to get mad at myself for having to pay more because I was too lazy to take care of it earlier.
Late last year, on December 10, 2015, I refinanced my public student loan with a private loan of $11,000.00 from my credit union to take advantage of the lower interest rate of 5% rather than the original rate of 6.55% with Mohela. My first payment of $329.68 was due in January 2016, and the last payment is due December 2018 (3 year loan).
To pay off the loan faster, I immediately set up automatic biweekly payments of $164.82 to start on December 25, 2015, and occur every two weeks. I just asked the loan officer if I could have the amount automatically deducted from my account (with the same credit union). He calculated when the deductions would have to occur, and set them up. This way, not only do I make the required monthly payment of $329.68 ($164.82 X 2), but I actually make one additional monthly payment since there are 13 payments of $329.68 (26 payments at half the monthly payment) rather than 12.
At that rate, my last payment will be three months early, on September 14, 2018, rather than the scheduled December 8, 2018.
Then in June 2016, I walked into the credit union and asked the teller if I could increase my biweekly payment from $164.82 to $180.00. The teller filled out the paperwork for me, I signed the bottom, and the first $180.00 biweekly payment was deducted from my account on July 8.
Two weeks later, I walked back into the credit union, spoke to another teller, and increased my biweekly payment again, to where it currently stands at $205.00, which started on August 5. My monthly payments now total $410.00 ($205.00 X 2), and I still make 13 monthly payments a year.
At this rate, my last payment should be on March 30, 2018, almost nine months ahead of the original schedule.
Don’t let student loans, or any loan for that matter, scare you into thinking that you’re in a hopeless situation. Not only are biweekly payments easier to manage, and ease the stress on your cash flow, but they actually pay the loan down faster (here is the biweekly payment calculator to calculate your loan payments). The scheduling of my automatic student loan payments means that I never have to worry about missing my biweekly payment.
And whenever I want to increase my payments, I just walk into the branch and speak to the teller.
The best way to cut your expenses does not necessarily mean totally cutting out all the joys in life, like your morning coffee, or going out to dinner. It helps, but sometimes, you just really need that jolt in the morning to keep you from staring at your computer screen for the first hour of the day. So let yourself splurge on the coffee every once in a while. To really make an impact on your expenses, you need to reduce those pesky expenses that come back every month, like your rent (or mortgage payment), your auto and/or student loans, your utilities, and your grocery bill. My biggest household monthly expenses, for example, are my mortgage, 2 auto loans, 2 student loans, groceries, and the electric/gas bill. I also have a cell phone and a gym membership, but they are relatively small compared to the other categories. And I haven’t paid for cable tv since 2006.
1. Your rent or mortgage payment is probably the biggest slice of your monthly expenses. My mortgage payment of $820, which includes the mortgage, taxes, and homeowners’ insurance, amounts to 35% of my monthly expenses. Now, finding a cheaper apartment, or lowering your mortgage, may not be easy, but it’s not impossible. I regularly check mortgage rates and closing costs for the day that I should refinance my mortgage, even though I’m only 2 years into my 30 year mortgage. Lowering your rent or mortgage, even by just $25, adds up to $300 a year.
2. Student loan payments are also a big chunk of our income. They total $570 each month, or 24% of my regular monthly expenses. I have thought about refinancing our student loans to a private loan to reduce the 6.55% interest rate, but I don’t want to lose the flexibility that federal student loans offer, such as deferment or income based payments. I also enrolled in automatic electronic payment to lower my interest rate down from the initial 6.8% to 6.55%, thus lowering my monthly payment.
3. Your auto loan, if you have a car, is probably your next biggest expense. Payments can range anywhere from $150 to $500+, depending on what kind of car you have. With two cars in my household, our auto loans total $420.00 a month. The easiest way to lower your monthly auto loan is to downgrade your vehicle. Really assess your needs and determine if you really need, as opposed to want, that $30,000 car, which, at 5 years and 3% interest, is $539.06 a month. If you bought a $25,000 car instead, with the same loan terms, the monthly payment becomes $449.22, a $89.84 difference. That’s a savings of $1,078.08 a year.
The other way to lower your auto loan is to refinance it, similar to refinancing your mortgage. It may not lower your monthly payment as much as downgrading your vehicle, but it could still knock off more than a few dollars. I once refinanced my old Jeep to lower the interest rate from 4.99% to 2.5%, which saved me about $20 a month.
4. Our groceries expense is around $300 a month, for our family of 3 people, 3 dogs, and an old lady cat. Since beef is relatively expensive, we stick to mostly chicken and pork, and eat beef only a few times a month. We also buy grocery store brands whenever possible, and not the brand names. Since America has it backwards and makes the healthy food expensive, I usually buy frozen vegetables and fruits rather than the fresh stuff, unless they are on sale. Four times a week, I also eat leftovers for lunch the next day. I tend to treat myself and buy lunch on Wednesdays, since I teach Tuesday nights, and I am not home for dinner.
5. My electric and gas bill is another bill that can get as high as $300 in the winter, but there are a few ways to reduce it. The simplest way is to use energy efficient bulbs, windows, and doors, basically making the house energy efficient. I also take advantage of budget billing with the utility company. Basically, the utility company estimates the electricity and gas I used in the past year and divides that amount into 10 monthly payments. That way, my bill is around $140 every month for 10 months, I don’t have wild swings in my energy bills between the summer and winter, and I get 2 months of no bills. The drawback to that is that they kick me off budget billing if I’m late on even one payment, to which I can just call them and get back on.
6. While cell phones may be another slice of someone’s cash flow pie, it is a relatively small portion of mine. Since my hubby and I don’t make many calls, use little data, and leach off of the free Wi Fi that is almost everywhere, we ditched our cell phone contracts a few years ago and went prepaid. For $70 a month, we get 500 minutes together, unlimited text, and 1.5 gb of data for me, and we’ve never gone over the limits. We’ve also got smart phones we love for less than $170, each.
7. Cable tv is a thing of the past. I haven’t paid for cable in years, thanks to Netflix, Amazon Prime, and the local library. Plus, I become a total couch potato when there is the temptation of tv. And besides, a common trait among rich people is that they don’t watch a lot of TV, anyway.
8. When my gym membership expires next February, I don’t plan on renewing it. My preferred exercise is running, and I can run for free outside. I joined the gym back in February when it was too cold to run outside, and I was training for my first half marathon, the Binghamton Bridge Run Half Marathon, in May. I paid for a whole year upfront to get the lowest rate possible, which amounts to $30.00 per month. But as soon as the nice weather arrived in May, I was never at the gym. And I hate wasting money.
The total of these 8 expenses (really 7, since I don’t have cable tv) is $2,350 per month. When you put them into a pie chart, you can see just how much space my mortgage payment, student loan payments, and auto loan payments take compared to the other expenses.
Making even just minor changes that lower those payments by a little bit would lower my expenses and offer some relief on my monthly cash flow.