How we accumulated $16,000 worth of debt
There were two major components to our debt. The first, which was the major focus for us, was our Home Equity Line of Credit (HELOC). We started off the year with a balance of $14,777.04, which was an accumulation and result of:
- Me not having worked for about 14 months after I quit work to finish my degree full time
- Us not having a budget in place during that period and me being too busy to focus on our finances and monitor our spending
- Us going on a one month tour of Asia, a big family trip that we had had planned for years
- Me not working for 2 months during and after our Asia trip
I don’t regret any of the above (namely, quitting work to go back to school or going to Asia), but given the circumstances, I’m thankful that we didn’t rack up more debt than we actually did!
The second component of our debt was really due to an incredibly stupid miscalculation on my part. I had grossly miscalculated our Tax Free Savings Account contribution room and had incurred $1058.94 in penalties. Ouch! And because I had been so focused on paying off our HELOC, we had neglected to pay off our TFSA penalty until tax season, by which time the amount owing had risen to $1189.13 ($130.19 in interest). Double ouch!
In total, we were facing $15,966.17 worth of debt, not including any interest we paid on our HELOC loan.
How we paid off $16,000 of debt in 4 months
1. I started working again.
This was the most crucial part to our success. In fact, we probably would have continued to accumulate more debt if I hadn’t started working. I’ve crunched the numbers multiple times – we just cannot afford to be a one-income household.
Because I was on contract, I was forced to quit my job before leaving for Asia with the understanding that they would try to bring me back once I came back. Once I did arrive, they assured me that they would rehire me but the hiring process took another 3.5 weeks, so even though I was back in the country by January 13th, I didn’t start working again until February 8th.
2. We decluttered and sold as much as we could.
Since I was off for 3.5 weeks, I spent a lot of time looking for things that we could sell around the house and posted them online on Kijiji (which is similar to, but much more user friendly than Craigslist.)
Some of the things we sold included:
- Old laptops, one of which didn’t even have a functional screen (be sure to clear off all your personal information before doing so though!)
- An IKEA TV bench and shelf
- A mini fridge (which I had purchased for my office at my last job)
- Some fish tanks
- Some old freezer from my parents
- An old mattress
- Some unused wedding gifts that my Grandma decided to take
- A bar-height table with 4 chairs that Mr. Unchained’s brother gave us when they no longer wanted it
Unfortunately, because we were a single-income household at the beginning of the year, we were in a state of Financial Instability and were often having to incur debt just to meet our financial obligations. Selling things on Kijiji while I waited to start work again helped propel us into the Financial Stability stage where we could stop incurring debt just to cover our living expenses and even start paying down some of our debt.
3. We created a budget, went on a Crash Cash Diet and stopped using our credit card for purchases.
This was absolutely instrumental to our success. Had we not taken drastic measures to cut down on our spending, all the extra income we were bringing in would have been for nothing. We gave ourselves a weekly Cash Diet of $140 – $60 for groceries, $40 for household expenses and $20 each for personal spending money. Having to spend out of our remaining cash (versus swiping our credit card) really helped us cut back on unnecessary spending. It’s so easy to swipe when there’s something you really want to buy, but if you only have $20 left in your wallet, you really start re-evaluating whether that purchase is really necessary or frivolous.
- The Crash Cash Diet Challenge
- 10 observations since the Crash Cash Diet (plus a terrifying look at how much we’ve spent in the last 2 years)
4. We prioritized debt repayment.
After making all necessary expense payments, every extra penny went into debt repayment. Focusing on getting our debt down as quickly as possible also helped us make other decisions which would involve sacrifices on our end but would help us meet our goal sooner. More on that below.
5. We set a goal and monitored our progress.
I’ve always said that success starts with a goal, and that a SMART goal must be:
Since our paychecks alternate Fridays, we effectively get paid every week so I monitored our progress on a weekly basis, updating our 2016 Goals page as we went along. This helped us get a clear picture of our progress and whether we were on track to meeting our goals by the specified deadline.
6. We worked a lot of overtime.
Overtime is the most efficient way to work since you’re getting paid at a higher rate. Mr. Unchained was paid 1.5x for every hour of overtime he worked, and for any overtime I worked over 10.5 hours a week, I was paid 2x. Maxing out my overtime (at 17.5 hours per week) for one week could add an extra $600 per paycheck. It’s a good thing I took all that overtime while I could; as soon as I discovered I was pregnant, I no longer had the strength or energy to do anymore overtime. (In fact, convincing myself to stay at work for a full day was such a struggle the first few weeks!) Luckily, by the time I discovered I was pregnant, we had already gotten our debt down to $2,600.
- Is it worth working overtime once you deduct taxes?
- 7 ways to work overtime to maximize pay while avoiding burnout
7. We let our roommate move back in.
Back in February, we started toying with the idea of letting our former roommate move back in. We had asked him to move out a year ago for a variety of reasons, but his circumstances were going to be changing and he had nowhere to go. With me working full time, I no longer needed the extra bedroom as my study/extra bedroom (for those times I battled severe insomnia). We knew that letting him move back in would feel like a step backwards and a (major) loss of privacy, peace and quiet, but at the same time, the financial benefits just couldn’t be ignored. It was the easiest way to add $570 of passive income per month with minimal sacrifice and effort on our part.
In fact, based on my calculations, that was the equivalent of Mr. Unchained working an extra 40 hours (at straight time pay) once you factored in taxes and all deductions.
Work an extra 40 hours a month OR let a roommate move back in? The choice seemed clear cut and by the end of May, we were back to a full house. Luckily, this time around, he’s home a lot less due to extensive commuting so we haven’t lost as much privacy and alone time as we did the last time around.
8. We put our entire tax refund towards our debt.
Because I had gotten some pretty significant deductions as a full time student and we had contributed as much as we could to Mr. Unchained’s RRSPs, we had gotten a tax refund of $4,183.96, all of which went straight to our HELOC balance. This was a huge boost, without which we would still be in debt. I hope to be able to contribute a decent sum to our RRSPs again this year so we’ll get a refund while I’m off on maternity leave next year.
9. We combined our home and auto insurance.
Despite being with the same home insurance company for 4 years without a single claim, our home insurance premiums continued to rise. When renewal came around this year, I shopped around starting with our existing car insurance company which Mr. Unchained was getting preferred employee rates at. Not only was home insurance much lower at the new company, it also dropped our car insurance since it was now bundled.
Last year, we spent a total of $3,089.96 on insurance; $899 on home insurance and $2,190.96 on auto insurance. This year, we’ll spend a total of $2,303.84, a savings of $786.12! (This doesn’t even include the amount that our home insurance would have increased by! Note: Part of the auto insurance savings is that our vehicle is worth less and thus requires less insurance this year compared to last year, but all other variables such as deductibles remain unchanged.) Surprisingly, we also have a lot more coverage on our home than we used to on our old policy. It’s a win-win situation!
These savings amount to an extra $65.51/month.