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Credit Card Debt: Where to start?

Credit Card Debt: Where to start?

| June 26, 2018
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Pro-Bono Financial Advice is a particular area where we can make big impacts on people’s lives.  Unfortunately, the need is immense, but surprisingly the opportunities to help don’t come as often as you might think.  It’s hard to ask for help in this area, or even know that it’s available.  When people are willing to engage to try and improve their circumstances, we like to help where we can and pay it forward.  Here is an example, (names and specifics have been changed for privacy purposes).

 

 Joe,

It has been my pleasure to have had the opportunity talk with you and assist with your financial goals. I admire your fortitude in the more-than-challenging circumstances you have faced. Your selflessness, love, and care you offered your parents in the late stages of life are admirable sacrifices worthy of recognition.

Unfortunately, the sacrifices you made have had a lingering effect on your personal finances, and have been an obstacle that has been, by no doubt, difficult to address. I respect your openness and appreciate your desire to tackle this challenge.

Credit card debt is an area that will require diligence to overcome. The most important item for you to focus on, in the near-term, is your monthly budget & cash flow. Attached, I have included a spreadsheet that identifies the monthly cost of your debt. While most may measure the cost of their debt on monthly payments, the real gauge of cost is the interest rate associated with the debt. For this reason, I have sorted the various accounts based on their interest rates (largest to smallest) and then by total debt amount (smallest to largest). This may seem counter-productive, but there is a method to the madness.

As we have already had some discussion, there are two sides to financial planning; there is the math, and on the other hand, there is the emotional side. As a planner utilizing a bit of math, I have organized the most efficient way to conquer this particular challenge. While the emotional win of paying off one account and having it “behind me” is important, it is not always the most efficient way of paying off multiple credit accounts.

This is where I will circle back to the method in the madness. My recommendation is that you pay off the most expensive (highest interest rate) accounts first. When accounts carry the same interest rate, I suggest paying the account with the lowest balance first, this allows for the emotional wins of paying off a balance to build the momentum necessary to continue with the plan.

Circling back to the very beginning, putting this strategy into action requires a fine study of your monthly cash flow to identify the amount of cash flow that can be directly contributed to debt repayment. If this is something you would like my help with, please let me know.

I have a great amount of respect for the personal sacrifice you made to care for your parents and hope that with diligent planning we can help you get back on a path for your own retirement.

 

Thanks,

Charlie

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