This is the story of Sam and Sally (not their real names). Sally owned a house before she met Sam and they got married. They lived relatively simply lives, but there were a few hiccups along the way. Sally injured her knee at work and was off work for two months recovering. Sam works in construction, so he makes good money during the summer, but is often laid off in the winter.
Each year, despite their best efforts, their debt levels gradually increased. Sally owed about $20,000 on her credit cards, and Sam owed about the same on his credit cards and line of credit.
They were just barely keeping up with the payments, but they both realized that just making the minimum monthly payments was no way to deal with their debts. They had no savings, and they knew that retirement may never be possible if they couldn’t get their debts under control.
After much thought, they made a difficult decision: they decided to sell the house.
The house was in Sally’s name. She purchased it before she met Sam with the help of a small down payment from an inheritance from her grandmother. They liked the house, but they realized it was larger than what they needed. Sally talked to a real estate agent, and listed the house for sale after they found a place to rent.
When the house sold, they used some of the money for first and last month’s rent, and for moving costs. The remaining funds were about $20,000, so they had a decision to make: what to do with the money? Obviously they were going to use it to pay down their debt, but which debts?
They could pay all of Sally’s debts, or all of Sam’s debts, or part of each. They crunched the numbers, and realized that Sally’s debts were all high interest rate credit cards, and Sam’s debts were lower interest credit cards and a lower interest line of credit. They decided to pay off the higher interest rate debts first, so they paid all of Sally’s debts.
It felt good to eliminate Sally’s debts, but Sam still owed $20,000. The house was sold, so there were no additional funds to pay off Sam’s debt.
They crunched the numbers again, and realized that they had two additional sources of money: they were no longer making payments on Sally’s debt, and their living costs were lower now that they were renting a smaller house.
The minimum payments on Sally’s debts were about $600 per month (before they paid them off), and their livings costs were about $200 lower in their new place, so they had $800 per month to put towards Sam’s debts.
That’s exactly what they did. In addition to the payments Sam was already making, they paid an extra $800 towards Sam’s debts, and in less than two years they were completely debt free.
It wasn’t easy. It required a lot of discipline to make the payments each month, and it did involve sacrifice as they were renting instead of owning their own house. But, in the end, it was worth it.
Sam and Sally have now started a savings plan, and they are each contributing $400 each month to their RRSPs, which is saving them on their taxes, and helping them save for retirement.
Sam and Sally are a success story! They were able to pay off their credit card debt on their own because they sat down together, looked at the numbers and made a debt reduction plan. Perhaps you can too.