In my last post I talked about developing a strategy for fighting off my debt – I said I would pay off my credit cards, then my car loan, then my student loans and finally, my mortgage. I got my credit card loans paid off pretty quickly, it only took a few months. I applied my promises and paid an extra $1,500 to my credit card payments until they were gone. And as of yesterday…. wait for it, wait for it… My car loan is PAID OFF!
I applied the same principles – make sure I have the extra $1,500 each month before doing anything else and applying it to my “targeted debt.” If you remember, I started with a car loan of about $15,000 (right under, actually) and a car payment of $356 each month. But I also added the $1,500 to that payment and mailed a check of $1,856 each month for 9 months. Earlier this week I mailed my last check of $1,604.52 for the payoff and it was credited yesterday!
So many of you are probably thinking “okay, great. He paid off his car and won’t have to worry about payments again for 4-7 years when he buys a new one.” WRONG! I am now going to change my saving habits a little, let me explain.
The average person pays about 8% interest on a 5 year auto loan. If you were to purchase a brand new, very reliable, nice car for $20,000 and make only the required payments – you would pay about $4,350 over the life of the loan, or $72.50 each month. And the average person has an auto loan for their entire life. So what am I doing differently? I am making my auto loan payments to myself, interest free. I am now going to save an extra $300 every month for a car fund (My $356 car loan payment minus interest rounded to $56). If I continue to do this over the next 5 years I will have $18,000 saved, not including any interest I make on the money. Assuming I can trade my car in for $8,000 (which is the average trade in price of the same car I have but 7 years old now), I will have $26,000 to spend. If I continue to rinse and repeat this for the rest of my life I will have saved enough interest to buy my car in cash TWICE! Think about that for a second… $75 a month saved, forever!
After all that I can now add the $56/month I am saving on interest into my student loan payments, for an extra $1,556 paid each month.