I recently read an interesting yet obvious fact: all millionaires have one thing in common; they all live within their means. Of course they do. And you’re thinking, well sure it’s easy to live within your means when you’re a millionaire. But the obvious point is that they didn’t get to be millionaires without living within their means. Since college, I have not lived within my means. I’ve had times when I made $20,000 a year and lived as though I made $25,000. I’ve had times when I made $50,000 and lived as though I made $75,000. But I’ve never made $75,000 and lived as though I made $50,000. It’s a slow creep in your standard of living. It happens very gradually and so discreetly as to go almost unnoticed.
Until one day you realize, I really can’t remember a time when I didn’t have some amount of debt. I’ve always had school loans, but I never really worried about it. I’ve had on average about three different credit cards at once that have carried balances ranging from $1,000 - $12,000. I honestly tried my best to handle my debt responsibly. I would auto-debit the minimum amounts so that I wouldn’t incur late fees or unnecessary interest rate hikes. I kept an eye on my interest rate and balanced transferred to a no interest or low interest rate card when needed. I felt that I was managing my debt pretty well.
But let’s face facts: debt is both financially stupid and emotionally burdensome. If I didn’t have credit card debt, how much could I be saving for a vacation to Costa Rica? Or how much could I be using to build my business, save for my kids college fund or save for my own retirement? Or better yet, how much could I have so that I could make a real choice about what I do with my time and how I make a living?
So please make this commitment with me right here and now to get rid of credit card debt as fast as humanly possible. Pull out all of your credit cards. Grab a piece of paper or create a spreadsheet. List all the credit cards. Go online and look up each balance, minimum payment due, due date and interest rate. Rank the list by highest interest rate. Take all the credit cards except for the one with the lowest rate and put them in a drawer in an envelope and mark the envelope “Danger” or “Don’t be stupid” or “Get a grip”, whatever works. If you are not good at self-control, I suggest you cut up all but one card for emergencies. Do not close credit card accounts because it reflects negatively on your credit rating.
Make sure all credit cards are set up to auto-debit the minimum payment each month from your bank account. All accounts like Netflix, Amazon, iTunes link those with your debit card instead of your credit card. Look if you’re one of those people that pays off your balance every month and you like to get the miles, just ignore this blog post, but if you’re like me and you want to get out of credit card debt ASAP then just suck it up and use the debit card until your debt is paid off. I’ll blog later once I’m out of debt about cool ways to take advantage of credit cards.
Okay here is the thing you cannot ignore: you have to pay more than the minimum payment each month. If you don’t, it will take you 30 years to pay off your debt. If you don’t believe me look at the front of one of your credit card statements. Credit card companies are now obligated to tell you the cold hard facts that if you pay only the minimum payment you’re totally screwed. So figure out what you can afford to put towards your debt every month. I estimated I could forgo a latte every morning and make coffee at home and save $106.50 per month so that’s what I am putting towards my cards above the minimum payment.
So I have 3 credit cards:
A: $4,500 at 14.25% interest rate, min payment $80
B: $11,250 at 7.5% interest rate, min payment $205
C: $8,500 at 0% interest rate, min payment $150
All are set to auto debit my bank account before the due dates. Next I take $10 above my minimum payment and put that towards each card.
A: gets $90
B: gets $215
C: gets $160
My worst card is A so that needs get paid off first so I distribute the balance that I am going to put towards my debt to card A. ($106.50 - $30 ($10 to each card) = 76.50)
A: gets $90 plus $76.50 = $166.50
Once A is paid off then I move to card B and do the same thing.
Getting out of debt is a tremendous milestone. I personally will be celebrating in Vegas once all of my cards are paid off. Just kidding.
So the next question is how to stay free and clear of debt once you’re out. Let’s just worry about getting out first and the next post will be dedicated to techniques of staying out of it.
I will leave you with the best quote about debt that I’ve found so far:
“Don’t let your mouth write no check that your tail can’t cash.”