Bigger Debts Are Overwhelming Us!


7th February 2024 | 00:05:43

Bigger Debts Are Overwhelming Us!

Bigger Debts Are Overwhelming Us!

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TLDR: Kara and her husband have $86,000 in debt and want to pay it off in three years or less. They have $15,000 saved up and are considering teaching English in China for extra income. Dave suggests they budget carefully, focus on paying off their car debt first, and then tackle the student loans. He emphasizes the importance of having a written budget and sticking to it.
Kara, it's great to have you with us in Lexington, Kentucky. How are you doing today?
"I'm doing well, Dave. And you?"
"I'm doing better than I deserve. What's up?"
"We have a combined student loan debt of approximately $75,000. Our annual income is around $75,000 to $80,000. We've paid off most of our smaller debts, including medical bills and my car. Our only remaining debt is my husband's car, which currently has a balance of about $11,000. Our goal is to eliminate all of our debt as quickly as possible, but the large numbers can be overwhelming."
"I understand your concern, Kara. The debt snowball method can be effective for paying off debt, but it can slow down when you get to the larger debts. We'll still list your debts from smallest to largest and allocate funds to pay them off in that order. However, we'll also take a step back and look at the bigger picture to maintain hope and motivation."
"With your combined income of $75,000 and a debt of $86,000, you would need to allocate approximately $4,300 per year to pay off the debt within two years. However, a more realistic timeframe is closer to three years."
"That's our target, Dave. We'd like to pay it off in three years or less. Additionally, I've applied to teach English to children in China remotely. If I'm accepted, I could potentially earn an extra $600 per month."
"That's great news, Kara. Every extra dollar counts. So, to summarize, you need to allocate about $3,000 per month towards your debt. Starting with the car debt, it will take about four months to pay it off. You also mentioned having $15,000 in savings. According to Baby Step 1, you should keep $1,000 in savings and allocate the rest towards your debts."
"We've started working on a budget in April, but we're still getting a handle on it. We're not sure if we're doing it correctly."
"A budget is essential for managing your finances and achieving your debt repayment goals. You and your husband need to create a detailed budget that outlines every dollar you earn and spend. This means assigning every dollar a specific purpose before the month begins. Stick to the budget and avoid unnecessary expenses like eating out or taking vacations."
"We've already canceled some of our plans to focus on paying off our debt."
"That's a great decision, Kara. You're on the right track. You've taken the big steps and put the necessary pieces in place. Now, it's time to fine-tune your budget and dive into the details. Once you have a clear and detailed budget, you'll feel more in control and less overwhelmed."
"Thank you, Dave. We'll work on that tonight."
"Excellent. Regarding your student loan, ensure that you're making principal-only payments. This means allocating extra money towards the principal balance rather than just paying the minimum monthly payment."
"I'll look into that, Dave. Thank you so much for your guidance."
"You're welcome, Kara. You and your husband have the potential to achieve your debt repayment goals. Stay focused, stick to your budget, and don't give up. You've got this!"
##FAQ: Q1. What is the couple's financial situation?
  • Combined student loan debt: $75,000
  • Combined income: $75,000 - $80,000 annually
  • Other debts: $11,000 on a car loan
  • Savings: $15,000
Q2. What are their financial goals?
  • Pay off all debts within three years or less
  • Save for retirement and other financial goals
Q3. What is the debt snowball method, and how can it help the couple achieve their goals?
  • The debt snowball method involves paying off debts from smallest to largest, regardless of interest rate.
  • This method can help the couple build momentum and motivation as they quickly pay off smaller debts, which can make it easier to tackle larger debts later on.
Q4. How much money do they need to allocate towards debt repayment each month to reach their goal of paying off their debts within three years?
  • Approximately $3,000 per month
Q5. What is the first step the couple should take to get started with the debt snowball method?
  • Create a detailed written budget using a budgeting app like EveryDollar.
Q6. How can the couple avoid common budgeting pitfalls?
  • Avoid "kind of sort of" budgeting. Every dollar should have a specific assignment in the budget.
  • Avoid eating out excessively and unnecessary spending.
  • Focus on the big picture and the details to stay motivated and on track.
Q7. What is the importance of making principal-only payments on student loans?
  • Making principal-only payments ensures that more of the payment goes towards reducing the principal balance, rather than just paying interest.
  • This can help the couple pay off their student loans faster and save money on interest.
Q8. What is the recommended approach for paying off student loans?
  • Make principal-only payments whenever possible.
  • If the student loan servicer does not offer principal-only payments, consider making extra payments towards the principal each month.
Q9. What is the couple's estimated timeline for paying off their debts using the debt snowball method?
  • Approximately 30 months
Q10. What are some additional tips for the couple to consider as they work towards their financial goals?
  • Stay committed to the budget and debt repayment plan.
  • Explore additional income streams, such as the wife's potential teaching job in China.
  • Celebrate milestones along the way to stay motivated.

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7th February 2024

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