Increasing your monthly your cash flow can be financially empowering. So many people are burdened by high interest credit card debts that represent a big chunk of their monthly expenses. Credit cards, though, aren’t the only debts you need to eliminate from your budget to increase your cash flow.
Normal debts and cash flow
Have you’ve thought of focusing on and paying off ‘normal’ debts, like car loans, student loans, and even your mortgage? Have you considered the effect of doing this on your cash flow, not only on a monthly basis, but in long term?
This is not a new concept; Dave Ramsey has talked about this in his financial programs for years. If you review the 7 baby steps, you’ll see that he talks about removing car loans, student loans, and even mortgages payments from your budget.
We have two debts left, my student loans and our mortgage, and we’re really trying to figure out a long-term plan. These are both relatively low interest debts, and we can comfortably cover the payments. Although many people would be comfortable just making payments, we’re looking at what would work best for us both financially and personally.
Paying off your car loan
Out of the three types of longer-term debt mentioned above (car, student, and mortgage loans), I really think you need to get intense and cut expenses to pay off your car loan ASAP. Car payments are not only a drain in themselves, but many lenders have specific insurance requirements that can add to the total costs.
Our car payment was something that we knew we wanted to eliminate sooner rather than later. We started by cutting back on bills that weren’t important to us like cable TV and a landline phone service. We also allocated money from blogging and tax refunds to help pay down the car loan. Sending in the extra money help motivate us further because we were seeing the balance get smaller and smaller.
We also got aggressive with our car insurance, searched for a better deal, and managed to cut our car insurance premiums in half. My advice when shopping around is to have a copy of your current policy in hand so you can make direct comparisons. It’s hard to keep up with all the details without having a reference point.
With the car payment gone, we now have an extra $235 each month available. The great thing is that once you’ve paid off the loan, you have options. I would put at least some of your monthly car payments into a car replacement fund. Cars eventually break down, so being prepared is the way to go. We opened a subaccount at ING Direct to keep the money secure and earn some interest.
Student loans: low interest, but still debt
Some people want to pay their student loans off on schedule, using the full ten years. I can understand this viewpoint because the interest rates for federal student loans can be quite low. Private loans, however, can be expensive and thus worth eliminating as quickly as possible.
Though I’m consolidating my student loans and while the interest rate is very low, I’m still going to attack my debt ahead of schedule. After setting aside money for retirement, any extra money I receive from my online endeavors will go towards paying off my student loans. I admit that we’re not as aggressive with this loan as we were with the car loan, but we’re still paying extra.
My advice for those looking at paying this off in an intense manner is to have a support system in place. Since student loans are usually pretty large, having that support system can help you stay focused. Find a friend or family member to hold accountable and keep you focused. Paying this loan off would give us $200/month to reallocate, most likely to paying down the mortgage and increase our charitable giving.
Eliminating the mortgage – run your numbers
Paying off the mortgage early has many supporters and detractors. Many people will argue, and with some good reasons, that it’s better to invest your money than pay off your mortgage. I’m arguing today from a cash flow perspective. Having a mortgage is our biggest single expense, and if we paid that off sooner, then we could save tens of thousands in interest payments.
We don’t, however, want to do this by sacrificing our retirement goals. That’s why we are continuing to invest for retirement while paying down our mortgage. I don’t think these goals have to be mutually exclusive, you have to figure out how you want to allocate your money yourself.
Our goal was to create a realistic plan that we can keep and would not be a huge blip in our budget. The plan? We’re taking the first-time home buyer’s tax credit and using it to pay down our mortgage. In addition to using our tax refund for the same purpose, we’ve also automated an additional $150 every month to go towards our mortgage principal.
Running the numbers, we found out that this small adjustment (without factoring in the tax refund) will cut ten years off our mortgage and save us $42, 408.57 in interest payments! We will have 10 years to spend over $600/month as we see fit. This is definitely something that we want to accomplish. For us, having a paid off mortgage gives us both increased cash flow and some peace of mind.
Have you been accelerating your debt repayments? If so, how do you decide which loans to pay off faster? Are you accelerating your car loan, student loan, or mortgage payments? Why or why not?