How often have you read a personal finance article and wondered if the author actually has a clue? You know, that nagging feeling that the person has never struggled a single day in their life and gets all of their information from other personal finance blogs. Here is a little story about myself that may serve as a sort of resume of my qualifications to offer tips on personal finance.
The most crushing debt I had was a single credit card with a $10,000 limit. How I achieved such a limit; I have no clue. The company kept raising it and I kept spending it. So, what happens when you have maxed that card out? This is how I eliminated 10K in credit card debt in just 27 months.
Put A Finger In The Dike
The only way to eliminate debt is to stop piling it up. The easiest jumping off point is to stop any auto-drafts from your credit card. The convenience is nice, but it is time to pay as much as possible with cash. After those auto-pays are stopped, hide your credit card. Yes, it sounds childish to hide something from yourself, but it helps. I have a large toolbox in a shed in the backyard, I put mine in a locked drawer in that toolbox. How did that help? To use my credit card I would have to walk to the shed, unlock the toolbox, then unlock the drawer the card was in. I timed it once. Having the card out there afforded me nearly five minutes to think about what I was doing. I decided I didn’t need to use the card on several different occasions simply because I spent the extra time thinking about what I was doing.
Getting started sounds difficult because, like many people, I didn’t know where to start. I began with a budget. Filthy word, I know, but necessary. Building a budget is never a simple thing. It takes time and many revisions. You will want to spend three months continually working and reworking your budget before you start paying down your credit card debt. All you need to do about that debt during this period is make the minimum payments on time. Here are two steps to help you with a budget.
This step includes a quick trip to a department store. You should pick up a regular sized notebook and a pocket-sized one. Oh, a pack of pencils if you only have pens at home. Go home and start writing down all of your monthly bills in the large notebook. Be sure to include all of your recurring expenses like fuel, groceries, recurring medical expenses, entertainment, and all of your memberships(gym, NetFlix, GameFly, etc). When you add that list up, it can be a bit depressing. Don’t worry, you will find ways to lower that amount.
Now you need the pocket-sized notebook. You will need to take it everywhere you go for some time to come. This will feel a bit odd at first and you will forget to make notations in the beginning, but you will get the hang of it more quickly than you think. You will want to write down everything you buy other than your monthly bills. That means everything from a pack of gum to your portion of the tab when you and your friends go out. I was shocked to see how much cash I blew threw every week.
Where Does The Money Come From
After spending three months monitoring your spending and cementing your budget, it is time to pay down your credit card debt. Sounds great, but where does the money come from? After careful analysis of my spending habits, well it didn’t take careful analysis since I blatantly wasted quite a bit, I was able to see several ways to save money. I had a gym membership that I used once a week (if I felt like it), magazine subscriptions to periodicals that I never read, and an obsession with Tim Horton’s that bordered on addiction. Then there was the NFL Ticket and a home phone that no one had the number to. I was also eating out three nights a week, dining excursions that included drinks for myself and a few friends. Plenty of areas to cutback. Not that I was thrilled about cutting any of them, but it had to be done.
Cutting The Excess
So, where do you start cutting back? Trust me, you will know. Something will immediately jump out at you. It may be the home phone that never rings. Cut back to a cell only. Look at your cell bill while you are at it. Do you have useless apps that could be gotten rid of or a data plan that is much larger than your needs? Drop the premium channels from your cable package. That NFL Ticket sounded great when I talked about having it, but how many games can you possible watch each week? Why not save on your insurance premiums? Raise your deductibles, change coverages to the bare minimums, and shop around. I did the items listed above and saved myself about $90 a month, then I turned to the wasted gym membership, magazine subscriptions, and that Tim Horton’s affliction. I dropped the membership at a savings of $40 a month, I did not renew the magazines, and I chose to use a trip to Tim Horton’s as a weekly treat, which saved me $20-$30 a week. The areas mentioned here saved me a quick $160, then I scaled back on the trips to the local watering holes and eateries, saving myself a couple of hondos each month. Now, it is time to use all of this ”found” cash to attack that credit card debt.
Pay Down Time
This is the part that will take you the longest. Paying down any credit card debt takes time. After all, it took time to accrue it, right? One of the worst parts is living on the edge of your credit limit. Never knowing if you may accidentally make a late payment that will put you over the limit. If that happens you will have one helluva minimum payment to make: the normal minimum, late fee, and over-the-limit fee. It happened to me. A minimum payment close to $500 was the wake up call that set me on my path to getting this monkey off my back. For me the solution started pretty small. I made that ridiculous payment on time, then began to work my pay down strategy. At first, I committed to keeping better track of my due dates. Yes, that is a lesson that should be mentioned in the budgeting section. I came to it late, so I am mentioning it late, kind of a way to demonstrate how things can crop up in the best laid plan.
At first I was sort of cocky, thinking that I could tackle the whole balance in a single year. Imagine how deflated my ego was when I looked at how little the large minimum payment I had just made had affected the balance. I would have been trying to pay $800 a month when the minimum payment was often difficult to come up with, so I expanded my goal to a two year plan that seemed workable within my new budget. Spreading the payments over 24 months still means dropping a huge chunk of cheddar each month. I changed my plan again. I went with weekly payments. After that decision had been made, I needed a clear plan to rely on. I made my minimum payment on time, but kept the statement. The following week, I paid all of the interest listed on the statement plus $50. The next two weeks of the month I paid $50 each week.
Well, now that it is written, it looks easy, but living through the first few months was a nightmare. I cycled through anger, depression, and denial (that I needed this budget and pay down). I was tempted to give up on a weekly basis. You will be changing the same two habits that I had to: using my credit card, damn the consequences and spending money without paying attention. The whole process didn’t really make sound financial sense to me until the third statement I received after beginning to pay the debt down. My minimum payments were down just a little, but the second week of that month was pretty nice. The interest was down enough that I had a little extra cash and there were five weeks that month. Instead of making a fifth payment, I went out with my friends on a Friday night. Sort of a reward for the previous few months of self-deprivation.
If you work through the math of this plan, you will notice that you could pay your credit card debt off in less than 24 months. Just working those numbers you will miss the Murphy’s Law factor. Something is going to happen, a blown tire, car won’t start, or that week where being so frugal just overwhelms you and you use your card to go out with friends or buy something you don’t really need. These slips are normal and happen to everyone. Even after living frugally for several years now, I still have that occasion where I say ”Damn the torpedoes, full speed ahead!” I have found that building an occasional treat into my budget cuts down on those occasions.
While this plan worked for me, every situation is different. You may need to work a plan over a three year period or only be able to make your minimum payments one week and have to pay the interest later in the month. It all starts with a realistic budget and putting a stop to the use of your credit card. Work into it slowly, but work into it. You can do it!