Creating passive income is just one part of an overall strategy to becoming financially independent. The other part of the puzzle that my family is working to achieve is living debt free. That means paying off all of our debts (i.e. home, auto, etc.) while at the same time increasing our income streams. It involves an all out attack on reducing our debt while increasing our income both at the same time. Ultimately, overtime multiple income streams will be built that can support our monthly expenses and any remaining debt that we carry will be wiped out.
There is no secret formula or debt free solutions that will magically help you reach financially independence. It basically comes down to common sense and old fashioned hard work. With proper planning and dedication, my family will eventually become financial independent breaking any ties that we currently have to active income streams.
The journey towards living debt free for my family starts with paying off our existing auto loan. We plan to use a combination of passive income earnings and budgeting to build a plan to pay off our vehicle early. The goal is to pay off this debt in 13 months following the steps laid out below.
Step #1 – Identify the Existing Debt
We have several years of debt that remain on our auto loan that we hope to payoff early. The details of our current auto loan are highlighted below -
- Monthly Payment – $285.63
- Remaining Number of Payments – 64
- Total Remaining Payments – $18,280.32
Step #2 – Refinance Existing Loan
While we could just decide to pay extra principal on our current auto loan each month and avoid refinancing, there are a several reasons why it doesn’t make sense.
- Interest Rate – The current auto interest rate on our loan is 7.94%. We can actually refinance right now with a rate of 5.79% for a 12 – 36 month term.
- Closing Costs – There are no closing costs or additional fees for this refinance so we don’t have to worry about paying anything extra. Be sure to check with your lender about any closing costs and additional fees before you decide to refinance.
- Few Restrictions – The new loan will have a late penalty of $100 if you pay off the principal within the first 12 months. As long as you pay off the loan in month 13 or later, there are no penalties.
The details of our refinanced auto loan are highlighted below -
- Monthly Payment – $445.96
- Number of Payments – 36
- Total Payment – $16,054.56
- Total Savings – $2,225.76
The worst case scenario of refinancing our vehicle is that we will save over $2,000 on the cost of the vehicle and will need to pay an additional $160.33 per month.
Step #3 – Identify Income Streams
The 3rd step in our journey towards living debt free and paying off our vehicle is to identify income streams to cover the additional payments. Since we are refinancing the loan and will need to come up with an additional monthly payment, this is the first income stream we need to identify.
- Additional Monthly Payment – We have identified approximately $200 in extra income that will be generated through our eHow earnings. This is based on current monthly earnings and is a realistic estimate. The additional income should more than cover the required extra payment, provided there are no major interruptions with the income source.
Our ultimate goal is to payoff the new refinanced auto loan in 13 months. In order to accomplish this, we need to come up with an additional $700 (rounded for simplicity) per month on top of the new $445.96 monthly payment. Here are some identified income streams or buckets of money that we plan on using.
- Preschool Payment – Last year our oldest son attended preschool which took $135 out of our monthly budget. This expense has come off the budget as he starts Kindergarten this year. Instead of using this money to buy things, we are choosing to put it to use so we can eventually live debt free.
- Utility Cost Savings – We have been doing a great job on our monthly budget and working to reduce our utility costs, primarily our natural gas and electric bill. I estimate approximately $75 per month in combined savings that we are now going to be using to pay down our debt.
- eHow Earnings – I am estimating an additional $50 in eHow earnings (on top of the noted payment above) that can be used to pay down our principal.
- New Income Streams – Based on the previous identified sources of money, we will need approximately $450 in new income streams in order to meet our goal of 13 months.
Step #4 – Take Action
The 4th step in this process is to act on the previous steps. All the other information looks really good on paper, but doesn’t mean anything if actions are not taken. Living debt free requires sacrifice, hard work, and planning. Starting in one month, this plan will be set into motion and will be adjusting each month depending on the results of the previous months.
Step #5 – Repeat
Hopefully in 13 months time, we will have over $1,000 (current payments + additional income streams) each month in additional income and savings that can be put to use. Sticking with our strategy, the plan is to take that additional income and allocate it to another debt to be determined later!
How is your debt free living plan coming along? Do you use any of your passive income earnings to pay off debts?
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Great new look!
I just completed $17K of credit card debt in 1 year. Pretty pumped about that, but I hate how lazy I have been with creating passive income streams to take care of some of the bigger debt (Car, mortgage, student loans).
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passivefamilyincome Reply:
September 2nd, 2009 at 10:13 pm
@My Journey – Hey Thanks. Paying off $17K in debt is great! Way too go. Fortunately, most of our debt is in our vehicle and home which I hope to get paid off as fast as possible.
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