BY: BYRON MOORE, CFP®
posted March 5, 2018
Question: I have gotten into so much credit card debt that I don’t think I can ever save any money. How can I turn this around?
OK, you are absolutely correct that things cannot keep going in the direction they are going or you’re going to keep getting broker and broker. And the credit card companies are just going to get richer and richer.
What I want you to see is what’s right about your situation and what’s wrong with it.
What’s right. I’m going to guess that you pay at least the minimum on your (probably) maxed-out credit cards.
My standard advice on saving is to set aside 15% of your income until you have six months of income saved safely in a bank. The pained expression of disbelief on many a face when I say this tells me (a) they know they need to be doing this, and (b) they don’t see any way they could possibly do it.
However, when someone is saving no money, it is usually the case that they have borrowed money with their credit cards or some other form of consumer debt. Consumer debt is just as its name implies – it is money borrowed to purchase items that will be consumed and ultimately have no value.
So the same person who finds it impossible to imagine they could ever save 15% may be paying 15%, 20% or even 25% of their income in monthly payments to credit card companies, lending institutions or finance companies.
So “what’s right” about what you are doing is the consistency of the cash flow. But…
What’s wrong. The problem is the order.
In your case, you made the purchase first, and now you’re making monthly “deposits.” But those “deposits” are really payments to the lender, paying back both the cost of the item purchased and the interest rate (often exceeding 20%) on each dollar borrowed.
For example, a $1,000 purchase on a credit card charging 18% interest would require payments of only $25 a month. But that adds up to $1,500 over the five years it would take to pay off the debt. So what so many Americans are doing is spending $1,000 for the thing, and $500 in interest charges because they didn’t have the discipline to save up for it first. So…
What’s got to change is the order of things. You’ve got to get on the other side of those payments so that all that interest you are sending each month to the credit card company stays in your pocket.
Don’t let anyone fool you. This ain’t going to be easy.
What to do now. The first thing you do if you are serious about a new diet is to clear out your pantry. If you keep cookies, chips and Coke around the house, while declaring yourself to be on a diet, I can predict the outcome. So…
Admit you have a problem with credit cards. Get rid of them. You’ll need a debit card to function in the 21st century, but you don’t need a credit card. At least not one you carry around with you.
Cancel all your credit cards but one. And do the same with stores you are used to shopping that have issued you a store charge card. Don’t tell me about points, discounts, frequent flyer miles or cash back. Those are not for you now. For now, we’ve got to get the cookies, chips and Coke out of the pantry.
Choose a payment and double it. Even if it’s the smallest one, pick one of your payments and start sending in double the amount. This will accelerate the pace of your payoff, freeing the entire payment to…
Do it again and again. Once you’ve paid off the first debt with your doubled payment, you can pile that payment onto another debt until it is paid off. Then take the sum of all the payments and direct them to the reduction of yet another debt. Keep doing this until all your consumer debt is paid off.
I’ve seen folks who thought they were hopelessly in debt forever use this simple method to become debt free in one to three years. I believe you can, too.
Once your consumer debts are completely paid off, make sure 100% of the cash flow formerly going towards debt repayments get re-directed into savings. Do that for two or three years and you could easily have your six months of income I recommend you have in the bank.
I believe you can do it. Do you?
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