In 2010 I purchased a car that was two years old. I couldn't pay the whole amount in cash so I put a certain percentage down and got a loan for the rest. A couple of years later I was laid off. I did get a new job about four months later, but the salary was several thousand less than I was making previously. I changed jobs six months later and a year after that I was laid off again. This time for about seven months. One month after starting my new job I was able to pay off my car - about a year before the end of my loan.
So how was I able to save enough to pay off my car a year early?
1. Set and stuck to a budgetThis was probably the most important thing I did to save money. To create my budget I used the site mint.com. With the help of mint.com I was able to see where I was spending my money and understand my monthly expenses.
Once I had an understanding of where my money was being spent I created a budget. A key thing to note is everything I had been spending my money on didn't make it into my budget. There were some areas I spent too much money in or didn't need to be spending in. Those areas ended up with small budgets or got cut completely if they weren't necessary.
In addition to expenses my budget included anticipated income. Income covered my paycheck and bank interest. It also accounted for transferred from my paycheck to savings and retirement accounts.
In order to stick to my budget I monitored it weekly. So if I was overspending in one area I could adjust and spend less in other areas to make up the difference and still come in at or below my overall monthly budget.
Related post: Resetting Your Personal Budget for the New Year
2. Created a rainy day fundI set aside a lot of the money I was able to save by sticking to a budget. I put it in a savings account that I wouldn't touch except for emergencies. My goals was to save between 3-6 months of living expenses.
To do this I set up a savings account with an online bank so it wouldn't be easy for me to access the money. I also set up automatic transfers from my everyday account to my rainy day account. I believe I started off with transfers each pay period and then switched to monthly.
The rainy day fund came in handy when I was laid off and had no money coming in. By having this rainy day fund I still had enough money to live off of. I could pay my rent, utilities, car payment and for food. Once I started working again I started putting money into my rainy fund account again to replenish it.
3. Lived below my meansHaving a budget helped me to live below my means so I wasn't spending more than I was bringing in. In fact I was spending quite a bit less than my income. For me this meant I
- Stuck to my budget. If I spend more in one area I spent less in another to make up the difference
- Didn't take expensive vacations each year
- Saved for large purchases such as a new computer, overseas vacations, etc.
- Kept my eating out to no more than once or twice a month
- Didn't spend a lot on clothes, furnishings
- Didn't buy things I didn't need like knick-knacks
- Buying a car I could comfortably afford even if it didn't have every single feature I would have liked
- Lived in apartments that were less than I could comfortably afford
- Stopped purchasing gifts for everyone I knew and spending a lot on gifts I did buy
- Didn't buy brand name at the grocery store without coupons
Related post: Four Ways to Save Money on Groceries
4. Found ways to bring in extra incomeWhen it comes to budgeting you can reach a point where you can't cut anymore and the only ways to make it work is to bring in more income. I've hit that point several times. So I would sell items online, participate in neighborhood yard sales and do some work from home jobs. While these things don't bring in thousands or even hundreds of dollars, they helped by covering the cost of a tank of gas or a weeks worth of groceries.
5. Refinanced my loanThis probably had the biggest impact on my paying off my car loan early. My initial loan was through a regional bank. I knew the rate was a bit high, but it was the lowest one I qualified for because I never had a loan before. After about a year into the loan I shopped around and found a better, much lower rate with a local credit union. With the lower rate my monthly payment decreased, but I kept paying the same amount I had been to pay down the principal.
What have you done to pay off debt?