As part of a new series, the Credit Knowledge Center talks to Aja McClanahan, who is an example that for the willing, there is a way to pay off credit cards and stay free from debt.
Aja McClanahan, and her husband and kids, were forced to confront their financial habits when they found themselves $120,000 in debt. By embracing a more thoughtful approach to spending and making changes in the way they live, the Chicago–based family paid off credit card and other debts in only 4 years. We asked Aja, who blogs about personal finance at Principles of Increase, about how she and her husband were able to pay off their debt, and change their lives for the better.
What habits landed you in so much debt?
I think we would just spend without thinking about the ramifications. We'd say things like, "Sure, let's finance a car," but not take the time to think about how it might impact our budget.
There's a lot of societal pressure to keep up with the Joneses. We live in a consumer–based, image–obsessed society, where people are judged by the house they have, the clothes they wear, and the cars they drive. Sometimes, we're too easily led by these messages.
Related: Use Your Money to Improve Your Life
Tell me about the moment you realized you were $120,000 in debt.
It took us a while to process, but the trigger was realizing we had twice as much student debt as we originally thought. It was pretty scary. I was pregnant with our first child at the time and wasn't working. I knew at that point I didn't want to put my child into daycare, or work a full–time job, until she was school age.
My reaction was to finance a $30,000 SUV on an installment plan. I don't know what we were thinking. By this point I'd started my business, so we thought we'd get on with our lives and make payments wherever possible. I knew the debt was there, but it wasn't until we had notices from debt collectors and a court subpoena on the kitchen table that we took action.
How did you go about paying off your credit cards?
The key takeaway for us was the debt snowball method, where instead of tackling the debts with the highest interest rates first, you begin with the smallest dollar amount and only move on to the next once that one is paid off. This process sounds counterintuitive, but it helps you get quick wins and will keep you motivated enough to pay off everything.
Second, we created a detailed budgeting plan that assigned every dollar a purpose each month. Anything left over after bills, food, and other essentials went towards paying off debt. We learned to keep our "essentials" to a minimum – this increased our disposable income, so that it was large enough to make extra debt payments. Towards the end, we were paying off as much as $2,000 or $3,000 a month.
What obstacles did you encounter along the way?
The biggest obstacle was [our own spending habits]. We like to eat out, and we traveled a little bit, but I'd say we stuck to the plan around 90% of the time.
We did make a few concessions to avoid getting burned out, and there were some things here and there that we willingly spent on. For example, our kids went through private school for a couple of years, but I'm proud to say we paid for it without racking up any debt. We also renovated a house, and while I wouldn't call it a setback, we had to dip into our savings before we could move in.
Where did you make the biggest cutbacks?
We were lucky, because a relative of ours inherited a house in the inner city that didn't match up with their living requirements. By this time, we'd paid off a lot of our debt and were on a solid financial footing. They called us to say we were the only people they knew who would be able to take it on.
At first we were skeptical, but we quickly decided that cutting our housing costs to zero – not including renovation works, which had to take place first – would make paying our debts much easier. We took it, we fixed it up, and we've lived there for seven years. It really was one of the best decisions we've ever made.
Obviously, this isn't a luxury a lot of people have, and I'd say the biggest savings we made on items, apart from housing, were on cars and education. Not only did we quit financing cars, we downgraded so that we could buy a car out of our own pockets. The other big decision was to homeschool our kids, rather than keep them in an expensive private school.
When you talk to others about debt, are there any practical tips you give them?
If you are trying to get out of debt, I'd say the best thing you can do is create a plan – and make sure you put it into action.
Think about being drastic for a little while. For us, that meant moving in with my mom. It's not the best situation, but if you're desperate for financial freedom, you'll make it work.
Think about your biggest expenses and how you can cut or eliminate them. I know one couple who house–sit instead of paying rent or a mortgage. In many cases, they get their accommodation for free – and in others, they're actually paid to house–sit. The key is that you have to be willing to live a little differently to get the desired results.
How has your life changed for the better?
I think our marriage is better, because we've learned how to communicate about money, and how to achieve our goals. We tackled that whole mountain of debt together.
At one point, someone vandalized our air–conditioning unit. It was during one of the hottest summers on record – not only in Chicago, but across the entire Midwest. We kept getting quotes of $3,000 or more to fix it, but we were still about a year and a half away from paying off all our debt. In the end, we decided to put off the repairs and continue plugging away at our debt. It took a lot of sacrifice, discipline, and teamwork, but I'm glad we did it.
There's less to fight about when you have money to cover things, so that's definitely helpful. And I think we have a pace of life that's better for our family. I get to stay home with my kids, we travel tons, and working on a freelance basis means we get to be more flexible. It's nice to be there for friends, family, and community.