Creating a Five Year Debt Plan
I just edited an article about seven steps to get out of a personal debt crisis over at Penny Thots. I felt that it was appropriate because I just recently decided that I wanted to get incredibly serious about developing a 5 year plan for eliminating all of my debt that is costing me more than 10% interest.
Why 5 Years?
There are several reasons why I picked 5 years and will be structuring the plan in such a fashion. First of all, I am in enough debt that I know it won’t be happening overnight but I don’t want it to take 20 years either. Some of the debts will be paid off in that time frame simply by continuing to make the current payments, e.g. the Prosper loan. Others will require some additional payments.
In five years (actually 67 months), I will be facing a significant birthday and will really need to be thinking about getting everything in line for retirement before it sneaks up on me without being adequately prepared.
Finally, the youngest child will be graduating from high school in just under six years so it is expected that the house will be empty. Having extra cash and extra time would be a good thing. At that point, extra cash will be used to invest in cash producing assets that help to support my wife and me during retirement.
Why Ten Percent Interest?
I would hope that the answer speaks for itself. Making 10% annually on an investment is a decent return, especially a no-risk, tax-free investment like paying off debt. Any debt that is charging me less than that will make me think twice about possibly putting those funds that would be used for payoff into dividend paying stocks or more real estate.
Student loans and mortgages are carrying such low interest rates that it would certainly seem reasonable to continue to pay these off slowly while building an asset base.
Creating the Plan
First, I need to sit down and figure out which debts are costing me the most interest and figure out where to focus my energies. I also need to write down monthly goals and targets to see if the debt reduction plan over the next 5 years will be feasible. My gut says it is, but I want to write it down in excruciating detail. I will work on that over the next few days.
Then I want to present the plan to my wife and enlist her cooperation and commitment. I figure that I will have to include a few rewards along the way to make any sacrifice more palatable. Things like deferred items around the house and a trip might be useful for obtaining the proper level of motivation.
I feel like I have made some progress but need to really sit down, create some intensity, and then execute. It is going to be a long road, but in the end, should be well worth it. I hope update everyone next week on how it all turns out.