I wrote this post in April but it is a reflection on our debt-free journey back in January 2020.
I think it was after our August’s summer holidays in Portugal in 2019 when I started thinking about the strategic financial goals for 2020.
At the time, we still were working on our Emergency Fund (more about it in this post). I remembered saying, let’s crack on with it as quickly as we can. If we do, we would reward ourselves by spending Xmas in my home country surrounded by a family and friends we have not been it for some time. If Xmas was a break from financial goals, New Year was the time to recap and start the next step.
Becoming debt-free sounded like a great idea in principle but the trouble of writing our debt down and then allocating all available money to pay it off was not alluring to say the least. It meant we would have to cut on almost all the entertainment money (we decided to still enjoy 4 one night SPA breaks and summer holidays in Portugal), no new clothes with exception of the new ones for Mr Little One. If you ask me, I do not need a lot as long as I can keep myself entrained by a good book, movie or a cuppa with a close friend. Ahh and the parker insert for my favourite pen. Is this too much already? 😉
It was during the New Year party we hosted when guests sat together to shared their goals for 2020
It was my turn and I remember thinking to myself, now or never…
With such declaration, came 6 accountability partners so I knew the game is on. Of course I could easily dismiss what I said but I was ready to take on this journey and get rid of this extra baggage we used to carry on from one month to another.
Where I Started
I listed all our debt from the smallest to the biggest. As I thought I was done, I realised that my mobile which I bought in September 2018 was not yet fully paid off. It is because when I was thinking debt, I was thinking credit cards. So foolish of me! As a society we are just used to ‘getting a new phone’ without thinking carefully about it. So was I.
Once we had the debt listed from smallest to the bigger we briefly discussed which ones we would pay off first. I wanted to pay them off starting from the smallest. Mr L., quite rightly wanted to pay it off starting from the debt with the highest interest on it. For instance, the interest of credit cards is labelled as APR, which stands for Annual Percentage Rate. This usually applies to purchases in other words – anything you buy using credit card and it is not applicable to to cash advances (when you withdraw cash from the credit card) and balance transfers (repaying existing credit card with a new credit card). It it worth remembering that not all of the services available (card purchases, cash advances and balance transfers) have the same Annual Percentage Rates. You can easily check APR on your credit card by looking at your statement. The current interest on my credit card is 26.68% standard rate per annum and the same 26.68% on cash advances which is 30.2% compound equivalent. Two interesting things to remember:
The interest (the price you pay for using someone else’s money) on credit card will move up and down in line with changes to the Bank of England Base Rate. If Base Rate is increased then the interest on credit card will also increase. This is why it is so important to understand how the bigger picture affects your personal finances.
If you do not repay your total outstanding balance in full each month, the credit card provider will charge you interest on interest, known as compound interest.
Compound interest is the 8th wonder of the world. He who understand it, earns it; he who does not, pays it.
~ Albert Einstein
First Debt Paid-Off
Having our debt listed from the smallest to the biggest, we decided that we will pay off the smallest debt first. I absolutely agree that from mathematical point of view it is better to pay off the debt with the highest interest rate on it but there is also a behavioural element which should not be underestimated. We wanted to have a first win quickly to motivate us to keep the foot on the pedal.
My phone is iPhone 6S (as Mr. L tells me) and I bought it in September 2018 with a 24 months instalment plan. So when I called my my network provider in January 2020 they informed me there is £193.90 remaining balance which equals £21.00 charged on a monthly basis. If I paid it off this meant that our Monthly Regular (Bills) Expenses would decrease by £21.00.
Note: when I got the phone I asked the lady to make sure that the provider charges me for the phone and the data in two separate transactions as oppose to just one transaction which is the most common. So if you desperately need a phone and you cannot pay for the headset upfront ask them to split how they take the payments. This way you will clearly see how much debt (phone instalment) you need to pay per month. I do not care this may be interest free. Debt is debt (someone else money) so get rid of it as soon as possible.
As I paid the remaining balance on the headset, I was offered a better deal on the data. From £37.24 per month I switched to £25.92 with an increased data. So not only I got rid of £21.00 from our Monthly Regular (Debt) Expenses but I also decreased the Monthly Regular (Must Pay) Expenses by £11.32. So overall, our money pot each month increased by total £32.32.
Debt-free journey may not be the easiest because we usually focus on what we need to give up to pay off debt and we forget that we also win by having more money at our disposal. Yes, £32.32 is not a massive amount of money but is the almost the same as we pay for our broadband per month. Or a very cheap plane ticket if we were to escape somewhere nice for a weekend.
Win: We gave ourselves £21.00 take-home ‘pay raise’ by paying off the remaining balance on my mobile device
Credit card #1
When it comes to our credit card #1 I do not even remember when I got it – this is for how long we have it! There are some benefits of having credit card but this would be a topic for another post. For now, I will focus on paying it off.
The good thing about looking under the carpet is that you may also find something you did not expect 😉 The surname under the credit card was still my maiden name and we got married in 2015! So fast forward I post a letter to the credit card provider including our Marriage Certificate and they changed it very quickly issuing me with a new card. Paperwork completed!
As you have read above, if you do not pay credit card balance every month the lender will change you interest on interest. This means that the monthly charges would be higher than if the outstanding balance was paid off in full. So what a lot of people do, they pay off the full balance but then they go onto using the credit card throughout the month to buy food and other necessities. Again, from mathematical point of view this is better than not paying your full balance. We decided that behaviour was more important for our finances so we decided not to use credit cards anymore. This meant, we will stick to paying only the minimum payment each month and that it. If we then have any money left to actually truly pay off some of the credit card debt, we would do so.
In Jan 2020, we paid off £1,155.78 towards credit card #1 leaving the total balance to pay around £900.00. This meant that the Monthly Regular (Debt) Expenses decreased by around £18.00. Prior to the lump sum payment towards credit card #1, the minimum monthly payment on the credit card was around £51.00 and paying off a substantial amount of money, the minimum payment is around £33.00.
Win: We gave ourselves £18.00 take-home ‘pay raise’ by paying off a substantial amount of money towards credit card #1
The total debt paid off at the end of January 2020 was £1,349.68. The mobile headset total of £193.90 plus £1,155.78 towards credit card #1. This then gave us a Win of £39.00 and more motivation to keep going.
TOTAL WIN: £39
more in our disposable income per month
Since our primary focus is financial I though I let you in behind the scenes a little bit because from reading the above you may sometimes get an impression that this is somewhat easy!!! When the truth is it is bloody hard. Not because of the debt-free journey itself but because life happens whether we are on financial journey or not.
The second half of December and then half of January was full with sickness, flu, stomach flue and what’s not. Coming back to work after Xmas break also was not the easiest. This topped up with Mr Little One drop off to the nursery which became some kind of theatrical drama, lack of sleep and too much coffee – made the beginning of 2020, one of those challenging months. It would be so easy to derail on our debt-free journey. Because why not to make myself feel better by getting a new dress because life is so hard !
What helps me in such times is workout. At first it sounds counterproductive, because when I am tired I feel like giving up on everything. Instead I get my Yoga mat ready and I just do it. Sometimes, it takes me 10 min into workout for my brain to switch from negative thoughts to a neutral ones. You know the internal dialog when you beat yourself/worry too much? I usually train no more than 30 min and on days when I do stretching, yoga or mediate this is usually no longer than 20 min with shortest meditation 5 min long.
I once had a gym subscription but after using it only 6 months during the course of one year I signed out. Instead I subscribed to an app by Anna Lewandowska (Yes, she is a wife of Robert Lewandowski). It costs me £9.49 per month and I can cancel it immediately. There are a lot of training programme and what I really find useful is that each training have three options: short, medium and long depending on how long I want the session to last. When it comes to meditation I use a free version of Headspace. There is only one programme for free but I do not really need much more. Yoga/stretching – I just search for 15 min sessions on YouTube for free.
This is not to say that I do not enjoy going to the gym. If I did use it more I would definitely spend money on it because when it comes to health I believe that there is a certain price tag: you either take care of your health on regular basis now (which means time and money spent on looking after yourself) or you will have to spend more on medical treatments when we get older. Not to mentions serious consequences of heart attacks.
Below is a graphic summary of all my workouts in January 2020. Just so I can say: job well done 😉 and the journey continues.
Until next time,
If you find this post useful I would like to hear from you. What is that resonates with you? Is your household also on the debt-free journey? Or maybe you do not know where to start? Leave your comment below. You are not alone with this money stuff!
In the meantime, I wanted to remind you that there are free financial trackers available to download.