The day I paid off my debt

Today I made the final payment on my credit card. It felt scary to do it. I had all kinds of anxiety thinking things like “I’m going on holiday at the end of the month, do I have enough?” Well, the answer is yes, I do have enough. It’s a feeling I’m not used to having, but I have enough because I’ve sorted out my financial life.

 

There have been so many times in the past 6-7years where I’ve been struggling to get through the month, or worse just spending recklessly It’s deeply ingrained anxiety that I’ve lived with for years and now, finally, I have managed to break out.

 

Maybe the magnitude of what I have achieved has not sunk in yet, but I was expecting to feel different. People say it is like a weight being lifted. I agree it does feel that way. However, today the weight on my back was very light compared to the one in January of this year. I have been breaking chunks off every month since then and the weight of debt has been lightening. Today was the last piece and one I’ve been looking forward obliterating for a long long time.

 

Now I have done it and, yes it feels great. I must be 100% honest and state I am not debt free. I still have my car loan and at this point, I’m happy paying that out until it ends in Feb 2020 (I love the car too much) and the car is now worth more than the loan. But all the other debt is gone.

 

The road into debt

 

To mark the occasion, I would like to reflect on how I got myself into the mess I found myself in. As with any story or struggle, it is not one that happened suddenly, but gradually over time.

 

I took out loans for sensible things like education to pay for my law conversion course. I then borrowed a lot to take 10 months out of work to study for the Bar. All worthy endeavours, but expensive. Add to that a general issue with not saving enough because there was always pressure to spend to go to weddings, holidays, drinks and meals out with friends resulting in me struggling to save any money.  I’m glad to say that those days are in the past.

 

Additionally, I had to take out loans to fund a project in the building I live in which is a leasehold property. Of course, the project overran and increased in cost. That has been a struggle and a drain on my resources, however, it looks like I won’t have to pay anything for a while now thanks to a court ruling. That has cancelled £7000 of money that was demanded by my landlord but I refused to pay. I’m only kicking myself that I paid anything at all as I could have not paid at all and been about £10000 better off.

 

In 2016, I lost my father and grandmother within 2 months. That also led to a spiral of spending pointlessly – I bought, or rather entered a PCP agreement to get a BMW to cheer myself up. It did cheer me up and gave me great freedom as I had not previously owned a car for 6 years. Sometimes you have to live a little… but yes I could get a cheaper car.

 

After completing my studies last year, and I started earning again in September 2018, I began to think about the debt. I couldn’t see a way out. I got a tax refund and paid off the rest of my government student loan (£2400) before I started the new job so it wouldn’t come out of my salary.

 

I then came across an article on FIRE in the NY Times which really inspired me. I heard about all these people, some younger than me, who had retired. I couldn’t believe it. How would I ever get there?

 

I started in earnest and made some rookie mistakes. I wrongly started investing in the stock market around November 2018. This was a mistake I realised when reading Mr Moneymustache’s post about debt emergency. The debt should have been my priority. https://www.mrmoneymustache.com/2012/04/18/news-flash-your-debt-is-an-emergency/. I cannot agree more with his philosophy here and urge you to do the same.

 

His philosophy changed my mindset completely. This was a blazing emergency and I needed to change my life no matter what. Over the course of a month, I started to add up all the cards, loans and overdrafts I had. It was frightening. I was about £39,000 in debt (£15,000 car loans, £16,500 unsecured, £1500 overdraft). This was unsustainable. I was paying around £800/month on loan payments alone.

 

I used the tools at my disposal and paid off one of the loans with my savings, then paid off a loan with a 0% credit card offer to save around £500 of interest a year. I also made a stretch plan to pay that card off by June. I cut my expenses back by hundreds a month. https://playingwithfire.uk/2019/02/

 

Every time I got paid, I put the money into the credit card (£1500-1800 a month) so I couldn’t spend it and held on tight for the rest of the month. There were some dark days as I had only a few pounds left in my account at the month’s end. I stopped going out, eating out and skipped holidays. I cooked meals at home (turns out I love cooking). It was not the best fun I have to admit. I viewed it as a sacrifice to get me out of the hole I had dug myself over the years. When things got tough I looked toward the day I would be free and that kept me going. The first few months were the hardest as they were during winter. Lots of PS4 games were played and thank God for Red Dead Redemption 2. As things got easier I allowed myself the odd meal out and the odd pub visit.

You probably want to know about the numbers. Well, I get £4005 a month after tax in salary, another £500 in rent from renting my spare room out (tax-free), and £500 to cover expenses from my girlfriend (she lives with me in London).  My monthly expenses are about £2700 all in (and could be less, to be honest). I tried to put every spare pound into paying my debt. I never could find the full £2300 as I always overspent but I got close each month and maybe with the Emma app I will!

Here I am, still in June having achieved it. I have paid off £16,600 in 5 months and had a further £6400 of debt cancelled as it was unlawful. Gone. Done.

Screenshot 2019-06-30 at 14.05.22

debt graph jul19

I thought it would take literally years to do this. But treating paying my debt off as a blazing emergency worked. All my efforts for these 5 months have gone into saving money and paying it down as soon as I got my paycheck.

 

It’s been an incredible journey and one I’m glad to have shared and held myself accountable to by writing this blog. It had kept me focused on the goal.

 

I couldn’t end this post without thanking my girlfriend who has taught me so much about frugality and self-discipline these past few months. She has supported me through this period of change and now we can have a healthier and happier life together.

 

What now?

 

The next stage could be to sell my car. Then I genuinely would have no debt (other than my mortgage). But I do like that car… no, I love it.. but selling it is the sensible thing to do. Let us see.

 

Next month I shall start building a buffer of savings of around 3 month’s worth of expenses. On my current budget that is around £7000-8000. I will target about 4 months to get there.

 

 

 

May update

May has been a long month by all measures. Many things have come to a head and I’ve felt both directionless and demotivated at times, and extremely excited about the future at others.

Firstly, the issues with the company have made me reassess what I am doing career-wise. I think I’ve mentally checked out of the company, and although I have half-heartedly applied for new jobs, it’s only a matter of time before I do so properly. I just feel there is no point in working hard for a company that is on the brink and is being run so irresponsibly. The atmosphere in the company has become rather unstable and certain individuals are attempting a power grab (the chairman’s son-in-law). As he is a deeply unpleasant man and is unlikely to be going anywhere, it only leaves me with one choice long term. In the meantime, I will keep working and collecting the dough.

Secondly, a visit by some antipodean friends of my girlfriend gave me some great ideas. They had given up their jobs and were planning on travelling round Europe in a camper van. It will be 3-4 months of adventure and fun. Although they were not officially doing ‘FIRE’ they were certainly far more financially free than me. It goes to show that at age 28 and 26, with careful saving, they were able to undertake this great adventure. They don’t do very high paid jobs but decided this was a goal and lived a lifestyle that would allow them to reach the goal. They lived in a shared house in Melbourne and didn’t eat out much. Now they have enough money to give up work, buy a camper van and live carefree for a bit. Well done them.

The great idea was the result of a side hustle that my friend had where he ran a website and provided services to contractors making £16,000 in the process. I realised that I could do exactly the same thing with my skills albeit, providing a different service. So I plan to set up a company of sorts and do it part-time. Should it take off, I would do it full time. Watch this space…

Debt progress

I have been paying off my debts steadily. I have to confess that I didn’t mention a £700 credit card bill that I let sit since February in any of my previous posts (mainly because I was ignoring its existence). So that was disappointing, but it was there and is now paid. I also paid £300 to my other loan which got me below the £3000 mark. This was a huge achievement and the end really is in sight.

I feel like I am 2-3 months away from clearing my debt. This is slightly longer than I had anticipated but I have felt the need to splurge a bit this month. A trip to Bath for the weekend, eating out a fair bit, and a trip to Scotland to visit my mother have eaten into my balance. However, they were all needed and enjoyable. I didn’t use a credit card to pay for any of them and I still have money in my account at the end of the month AND I paid £1000 of debt off. Not bad.

I do feel I will have to reign it in a bit this month however and really get to the end of the debt, but overall I feel that my finances are under far greater control than they ever were before.

OSV18_01_PowerStation_Hero.0.jpg
Dream campervan

 

 

 

Calculations and calibrations

Last weekend shortly after making my blog post, buoyed by the confidence that I am approaching debt freedom, I spent several hours calculating whether it would be better for me to save money or to pay off my mortgage.

Firstly, there are several viewpoints on whether mortgage debt counts as ‘debt’. Of course it is different to a credit card or a car loan as you have purchased an asset that will appreciate in value and give you ‘equity’, and you pay off a chunk each month which also contributes. However, as that equity is tied up in the home, and when it comes to selling that house, all other houses will have increased a similar amount, is it really an asset?  It’s not like you can shave off a piece of the wall and spend that money right? And it doesn’t generate you an income, so many argue it is a liability.

I am on the side of thinking that a mortgage is a debt, but as you must live somewhere, you might as well be paying your own mortgage, rather than a landlord’s. Eventually, you will own the property.

I have been lucky as I bought my flat for £237,500 in 2012, and now would be able to achieve £450,000 for today.  I would not have achieved this gain had I rented for the same period.

Pay off mortgage or invest?

I couldn’t find a comparison online to see whether investing spare money in an ETF or making increased payments on the mortgage was better. I decided to have a go.

I made a couple of assumptions. Firstly, I will not start investing until June 2019, as, until that point, I will be paying off my actual debts. Secondly, I will be able to find £2000 per month to do this. Thirdly, that I assumed an annual rate of return on ETF investing of 10%. I based this on reading around blogs to see what other people thought and based on past performance of the stock market.

The assumptions I made about my mortgage were that my interest rate would remain the same as it is now at 1.69% (unlikely I know, but it is the current situation and I am unable to predict the future).

The method

I built the spreadsheet with three different options:

  1. Put £2000 into my mortgage every month, on top of my normal payment and save nothing;
  2. Put £1000 into my mortgage, and £1000 into an ETF; and
  3. Put £2000 into an ETF.

I calculated the monthly interest in each case and then added up so I would see the effects of compound interest accurately.

I don’t claim that this is a pinpoint accurate way to calculate it, but it gives me a picture of where I might end up in the future and the best way to start my FIRE journey.

The results

I was very surprised by the results of this exercise as the overwhelming long term best way to go was to put the maximum amount of money into an ETF. I believe this is for several reasons; firstly, the rate of return assumed of 10% is much higher than on my mortgage. For each £2000 I would make £200 annually compared to the £34 cost to borrow at 1.69% rate I pay. That’s a £166 annual difference for each payment without taking into account compound interest.

When it is shown like this, it is an absolute no brainer, but I still find it shocking. I had always believed that paying down a mortgage was the best way to go. In some ways, if you are in your forever home then it may be a good idea, but really I can’t see any way it makes sense to do it.

Should interest rates increase and the rates of return for the ETFs drop then it may make sense to switch over to repaying the mortgage faster.

The other exciting thing I realised was I will have £1,000,000 in savings by age 50. After that, thanks to compound interest, it really takes off.

The graph below is my total net-worth which includes house value, pension, ETF, and mortgage liability.

Screenshot 2019-03-31 at 14.47.59