Why I Focus on Debt Freedom over Investing

Over the last few weeks, my wife and I have taken some serious looks at our overall financial state, our happiness with our current lifestyle, and whether or not one of us wants to become a stay-at-home parent.

Although we’ve not reached a consensus on all of these issues, we have agreed on one fundamental fact: all of our leanings point toward debt freedom in the short or intermediate term as the best possible solution for our extra money.

Here’s why.

First of all, there’s a decent chance that one of us will become a stay-at-home parent. That means loss of income in the next year or so, meaning that our surplus money now will dry up. Instead of investing it, we can use the next several months of that surplus to eliminate some debts, thus reducing the size of our monthly budget and making it easier for us to breathe.

Second, it reduces the risk of potential career change. If I ever work up the courage to make a go of it and be a full-time writer, the case for it will be strengthened by a reduced debt load at home. If our debts start eating up a smaller and smaller percentage of our monthly budget, then I’m more and more likely to be willing to make that leap.

Finally, it somewhat reduces the risk in almost every aspect of our lives. Our current debt payments (home mortgage included) add up to over $2,000 a month, and actually make up a large majority of our expenditures in a given month (we spend less on utilities and food and cars combined than we do on those debts). $2,000 each month, floating free in our budget, changes a lot of the risks we face in life – the financial risk of having more children, for example, is a big one on our mind right now.

Thus, we’ve decided to focus primarily on repaying debt for the next year and halt our non-retirement investing plans. Our tentative goal is to pare things down to just our home mortgage within a year, and when we reach that point, re-evaluating things to see where we’re at.

What’s the plan?

First, we figured up all of our debts, and then ordered them by interest rate. Our total debt right now is actually $211,218.92, which is a scary number when you sit there and look at it. Thankfully, that number is all below 8% interest, which makes it somewhat better.

Next, we will make all minimum payments out of our normal monthly budget. This means that from the pay from our “regular” jobs, we’re going to make the minimum payments on all of the debts each month.

Then, we’ve committed all extra income (from side businesses and freelancing) entirely towards this goal. All of that money, once taxes are paid, will get swept directly into debt repayment. Note that this is after minimum payments are made, so this is all directly attacking the principal on the debts.

This will continue until all but the home mortgage is eliminated (which also happens to be our lowest interest debt), at which point we’ll step back and re-evaluate the situation.

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