Over my career, there’s one topic that no one wants to talk about when divulging their finances to me. I’m not sure why this topic is so taboo when it’s everywhere. Most of us have it, and some of us are better at handling it. It starts with a small purchase on your favorite store’s credit card and then another. Before you know it, you have a couple of hundred dollars on that card and only enough money in your bank account to make the minimum payment.
As a society, we live beyond our means and buy more and more stuff on credit. The average American household has almost $17,000 in credit card debt, and household debt has increased over 10% per year over the last decade. Now there are a variety of reasons why this has happened, but largely this debt is simply due to living beyond our means.
We live in a world of the now, and it’s the norm to have debt, but I’m here to tell you that you aren’t going to reach your long-term financial goals while you have thousands of dollars in debt. So now that you may be swimming up to your eyeballs in debt, what can you do about it?
Try the following three steps to tackle your debt.
- First start by creating a spreadsheet that captures the following information for your debt: Name of the account, current balance, current interest rate, minimum payment due and due date. The purpose of this spreadsheet is to organize your debt in one place and to determine your minimum payment due each month. If you need a template, message me, and I will send you one that I’ve created.
- Now for the most important part of the process, you need to analyze your cash flow and determine where your money is going, aka creating a budget. Remember that most of our debt is due to things we don’t need, so take a long hard look at those expenses and determine your essential needs. Every expense that isn’t crucial to your lifestyle could be used to reduce your debt.
- Once you've determined your essential needs, the remaining cash flow can be applied to paying down your debt. More specifically you should make the minimum payments on your accounts except for the one account with the highest interest rate. The largest payment should then be applied to this account, which will save you the most interest over time. Then after the account with the highest interest rate has been paid off, you’ll apply those payments to the account with the next highest interest rate. This snowballing of payments will wipe your debt away faster than paying the minimum payments each month.
Here are some other ways to accelerate your debt payoff:
- Try and combine your debt into one monthly payment through consolidation. A web search will give you a list of the top companies available. Consolidation offers a more convenient way to manage your debt. It may get you a lower interest rate, or it could increase your monthly cash flow by eliminating some of your minimum payments. There may be fees associated with this consolidation, and it may lower your credit score for a short period of time, but it can accelerate your repayment plan.
- Another option is to negotiate the interest rates or payment options with your creditors. For example, credit cards are constantly competing against each other for your debt, and you can leverage promotional offers against each other. It doesn’t cost you anything to ask so give it a try. The worst thing that can happen is that they tell you no.
- Lastly and probably the least favorite option is to cut expenses or make more money. Try giving up cable for a year, don’t eat out for a month, stop drinking for a month, or get a seasonal part time job and then apply the savings or extra income straight to your debt.
Congrats on reading this and considering making a change for the better, you can have a plan to tackle that debt and be part of the 20% of America without any debt. I didn’t cover all of the options available so if you want assistance with your debt situation, message me, and I’ll do my best to help.
Thanks for taking a look!
Chad Duppong, ChFC®, CLU®, CFP®