Not that long ago I shared that for the first time ever, student loan debt exceeded revolving or credit card debt. But revolving debt is still a huge challenge for many families and individuals. Even if you have a good credit score, struggling with managing debt can be a problem. It’s not uncommon for people to carry balances on 3 or more credit cards.
When you have multiple balances, you have separate interest rates, due dates and minimum payments for each. Even those with high incomes can find that managing debt can be unbelievably stressful. It can feel like you are buried under a mountain and unable to get out from under it.
I have been an entrepreneur for many, many years. There have been some wonderful successes but there have been some not so hot missteps that I had to get out from under. They were great learning experiences. I also have been extremely well trained by many sources on managing finances. Getting to financial freedom takes discipline and dedication but it is unbelievably rewarding. Below are my steps to gain financial freedom and become debt free – at least revolving debt if you live in a insane housing market area.
1. Remember Money is a Tool
Many people focus on money emotionally rather than logically. And I completely get that. Money is hard earned and the less we have – often the case when we are in debt – the tighter we want to be with our money. On the flip side, we can look for the instant gratification and pleasure that comes from buying the purse versus the long term satisfaction of a fully vested retirement. The old adage that “money makes a good servant but a lousy master” is so very important to remember. When it comes to debt, this is so true. When you are in charge of your money – telling it what to do – it works to build a peaceful and secure future. But when you allow it to be in charge of you, you become a slave to it. In other words, when we forget that money is a just a tool used to gain the goals we have in life, then we find ourselves in debt.
2. Pull It All Together
I think we can all agree that having to remember one due date is far easier than trying to remember three, four or more. Plus, with each having a minimum payment (typically defined as 10% of the balance plus 1%) and different interest rates, it can become a losing battle to stay on top. Many financial advisors, and me from experience, highly recommend consolidating your debt into one single payment.
This can be achieved with an unsecured loan, fixed rate credit card, personal line of credit, etc. Key to remember when consolidating a loan is to secure a fixed, preferably low interest rate. If you are using a credit card to consolidate debt, look a 4% or lower balance transfer offer.
3. Take Advantage of 0%
I want to qualify this tip by saying it is not for everyone. You must be diligent and disciplined. If not, skip this tip.
Many of your current credit cards or lines of credits offer temporary 0% interest offers for a limited period of time. By consolidating your debt on to these 0% interest cards, you can pay off your revolving debt far faster than with a consolidation that charges interest. For example, I have one business flop that I am currently paying off. By using this tip, I am personally paying an additional $1,500 off my debt in an 18 month period than if I were to leave it in a consolidated account that charges interest.
Look for offers with at least 18 month long periods and 4% or less on balance transfer fees. Transfer all your revolving debt to one interest free credit card. Make sure to account for the balance transfer fee. Calculate your payment by taking the balance fee and transferred amounts divided by the number of months at 0% interest. This will give you the payment you need to make each month to pay it off before the end of the promotional rate.
If that payment is more than you can afford, determine the amount you can pay consistently each month. This needs to be more than the minimum payment. Pay this consistently each month. Make sure to note when the promotional rate ends. Set an alarm, reminder or calendar item one month before the offer ends. The last month of the promotional, look for other 0% interest offers on your current credit cards. Do not apply for new ones. Most times the fee you pay for balance transfers is less than the interest you would pay on an interest loan over the time frame of the promotional. Think about it. A one time 4% fee on a balance transfer is less than a 6% interest on a balance calculated every single month.
4. Take Advantage of the Perks
Many credit cards offer cash back or payment perks. For example, one Chase credit card offers 1% cash back at purchase and another 1% cash back when you make a payment. This cash back can be used to pay off your debt. Even $25 back is $25 more than you had. Combined with a zero or low interest rate, paying down debt goes faster.
I personally like the Better Balance Rewards credit card offered by Bank of America. This card pays $35 credit toward your balance every quarter provided you make a greater than minimum monthly payment every single month. Combined with zero percent balance transfer offers, the extra $140 a year “ain’t half bad”.
5. Pay Off the Lowest Balance First
If you can’t consolidate, pay off your lowest balance first. I know many people say pay off the highest interest first and that’s not bad advice. But I know many people lack patience the same as me. Paying off the highest interest first can take a lot of time as much of the payment goes to the interest. I find people get discouraged because they don’t see the dent in the debt.
By paying the lowest balance off first, you can see progress. By seeing debt paid off, you are encouraged to keep at becoming debt free. For each debt, pay the minimum plus a little bit more – like $5. Even that little bit looks good to credit bureaus and helps bring the principle down. Throw every bit of extra that you can above the minimum payment to the lowest balance. You’ll be surprised how good it will feel to pay it off! I suggest a bill burning family party by making a copy of the statement from your zero balance payment and burn it in the fireplace. It feels wonderful and creates a sense of done-ness.
6. Use Compounding Payments
Whether you pay off the highest interest balance or the lowest payment, make sure to use compounding payments. This means once you pay off a debt, take that payment and apply it to the next in line. Say I pay off the lowest balance and was paying $100 a month for it. The next lowest balance was getting the minimum plus $5 for a total payment of $55. Take the $100 and combine it with the $55, and you are now paying $155 to the next lowest balance. This will pay this debt off faster. Once it’s paid off, add it to the payment of the next lower balance debt. By doing this, you can shave off hundreds to thousands paid in interests over the life off all the balances. You were not using it in your day to day monthly budget before so you won’t miss it.
7. Make Sure to Read the Fine Print
Whenever you are looking for a consolidating balance offer or loan or financial venture (for ease, let’s call them all loans). Always read the fine print. Look for application fees, annual fees, loan origination fees, processing fees, balance transfer fees and especially prepayment fees. It may be a good interest rate but if you are going to pay more in fees than the interest on a no fee loan, pass. It’s all about the bottom line.
8. Avoid Collateral Based Loans
Obviously the idea is to get out of debt, make payments and make the on time. You never plan to default on a loan. But let’s face it, life can take strange turns. The economic down turn of 2007/2008 has taught us that. Even the best financial situations can turn upside down with a poorly time perfect storm. Though I have never defaulted, I have experienced the poorly timed perfect storm. The last thing you want is to lose your car or home or other personal property because you put it up as collateral.
9. Avoid the Variable Anything
Always looked for the fixed rate on any longer term loan. A fixed rate at 6% can and often will cost you less than the variable rate that starts out at an appealing 1.99%. As prime changes, so a can your rate. Variable rates are an amount plus prime. It’s not uncommon to see 13.99% interest above prime and definitely not unheard of to see 24.99% above prime. That 6% fixed looks a lot better now, huh? If you can’t consolidate, at least try to move balances to fixed rates.
10. Having a Budget is Not as Important as Using Your Budget
I can’t tell you how many people I have heard say, “I have a budget” but at the end of the month they are not sure where the money went. That’s because having a budget is not enough. You have to stick to it! I use an electronic budget and that really works for me because if I have cash, I tend to give it away. But if I use electronic payments – tracking them daily – to know what I have left in each budget category, my budget works every time. I know where each cent went and was in control of my money. It’s my electronic envelope system.
But many people are not as diligent and need a more hands off method. Almost everyone knows or has heard about the Dave Ramsey envelope system. But if not, it’s really simple. Set your budget. Make envelopes for each category – home payments, debt payments, gas and car, food, etc. – and put hard cold cash in the amount budgeted in each envelope. As you make a payment to purchase, pull it out of the envelope. Guess what? When the envelope is empty, your spending stops. Keeps you on budget. And that is key to being financially free.
11. Take Advantage of Free Financial Tools
In this age of information, there are so many apps and websites that can help you with financial planning. My personal favorites for apps are EZ Financial Calculator, which is free and has calculators for credit card payoff, auto loans, compounding interests, etc., and Mortgage Payment Calculator, which is free and calculates loan payments and shows you the amortization schedule for the loan.
One great website is bankrate.com. I love the free calculators and the ability to search for different rates, deals, and offers for everything from CDs to checking and savings to mortgages, refinances, and credit cards. I used it to find my online banking for my savings. It showed that I could get a 5% APR from an online bank with a traditional savings account when my local bank was only offering 1% APR on a traditional savings account. (Actually to this day, it still outperforms any traditional bank I have seen and looking to online banks for better interest rates would probably tip 16, if there was a tip 16.)
12. Plan for the Future
We all know that the future is unpredictable but that doesn’t mean you shouldn’t plan for it. Up until recently many financial planners said get yourself out of debt, then start saving. However, 2007 pretty much changed that for everyone. While you pay off your debt, you need to be putting aside money into an emergency fund that you grow to have 6-12 months worth of your monthly expenses. This does make the debt pay off slower, but it is so vital or you could find yourself in a position where you are growing your debt, not paying it down.
And once, you pay off your debt, don’t start spending all that money. You have been living without it this whole time, so you don’t really need it. Take a little and add to your comforts such as saving for fun vacations, or the trip to Disneyland. But put the bulk of it toward savings – retirement being key, college funds, emergency funds, cash car purchases, home improvement cash purchase, etc. Use this money to save for the items you want or the goals you have, and then pay for them in a cash.
13. Avoid Impulse Purchasing
One way many people get in debt is with impulse purchasing, instant gratification and want it now attitudes. This can lead to some bad decisions. Ask yourself “do I really need this or do I just want it?”, “do I have the cash to pay for it now?”, “did I give myself time to think this purchase through?”, and “what am I saying no to by saying yes to this?”. If you think you still might be tempted to impulse purchase, take your credit cards, place them in a sealed Ziploc bag and place it into a bowl of water. Stick the bowl of water into the freezer and literally freeze your accounts. By the time the ice thaws, you should be able to determine if you really need it or just want it. But the cards will still be there in an emergency.
14. Buy It Out Right Cash
Once you are out of debt, the last thing you want is to get back into debt. Start thinking of spending as if you are spending cash. This makes it simple. If something costs $200 and you only have $150 in cash, then you can’t purchase it. Keep saving until you can purchase it in full in cash. This goes for big purchases too, with the exception being perhaps a house. Buy cars with cash. Appliances. Computers. Electronics. All cash.
Even if you use your credit card to make a purchase because you earn cash (we do this in our family; it’s like throwing away free cash not to), make sure you have the hard cold cash in the bank to pay for it in full. And pay the credit card off completely each month. This shouldn’t be difficult because the purchase always had the cash to back it up.
15. Start Now!
Waiting even a month to start paying down your debt and move toward financial freedom costs you that month’s interest. If you have $10,000 in revolving debt, that’s $123 in interest that one month has cost you. Carry an average daily balance of $10,000 in debt for a whole year and you are racking up a whopping $1,496.50 in interest. That is just that much more you have to pay off. So start now.
Hopefully you can take these steps to financial freedom and becoming debt free and adapt them to your personal situation. If you know you can’t or don’t want to deal with credit cards once you are debt free, even if they earn cash, then don’t. That’s the great thing about tips you can adopt them, adapt them or trash them all based on your situation!
Until next post!