By: Rachel Richards, author of “Money Honey: A Simple 7-Step Guide for Getting Your Financial $hit Together.”
You. Yes, YOU. With the credit card debt. Whether a few hundred dollars or several thousand, that debt is putting a weight on your shoulders that you may not even realize you carry.
Owing money to anyone makes you dependent on and obligated to them. You are not free. As long as you owe money to someone else, any money you might make or have on hand does not belong to you.
That’s true whether you owe money on a mortgage, a car, or the drinks that your friend paid for last night. Credit card debt, though? That’s its own beast. Minimum payments just don’t cut it when the 20% interest rate keeps you from paying down the balance, or worse, keeps your balance climbing ever-higher. Becoming trapped in credit card debt is a lot easier than most people think. Just take a look at how easy it is to justify a credit card purchase in this excerpt from my book, “Money Honey: A Simple 7-Step Guide for Getting Your Financial $hit Together:”
Here’s how credit cards make money from you. You go to the store and see a classy AF $250 trench coat that you must have. But then you cry a little on the inside because you have $11.85 in your checking account. Then you remember that you have a credit card, which means you can buy it right now even though you don’t have $250. So, you do. Then, you make minimum payments of $15 per month until it’s all paid off. Ah, the beauty of credit, amirite? Isn’t $15 per month way better than $250 up front?
NOPE. Let’s say that your credit card charges you 20% interest, which is pretty common. Guess what, Sherlock? It will take you 19 months to pay that bad boy off, and when all is said and done, you will have paid almost $50 in interest, making the total cost of that trench coat $295.37. Are you still happy with your decision? If you answered yes, go and stand in a corner and think about what you did.
Maybe you’ve recently realized how scary and overwhelming your CC debt has become. Maybe you’ve been in denial. Either way, fear has paralyzed you. Where do you begin? You don’t even want to look at the balance anymore. You’re afraid of it, you feel lost, and you feel defeated.
Never fear, my friend. If you’re reading this, it’s because you’ve realized most of what I just stated rings true, and you need help getting out of CC debt, ASAP. Let’s dig in.
Getting out of credit card debt, while not easy, can be summed up in five simple steps.
1. Pay only the minimums on all other debt
First, take a look at any other debts you have and make sure you are only paying the minimums. When a friend did this, she was surprised to find she was paying $100 more towards her mortgage each month than was necessary. She had set up her payments that way a long time ago so that she could pay down her principal faster, which is a smart move. For this exercise, however, I recommended that she temporarily take a break from doing that to free up as much extra money as possible.
So this will be a quick step; just login to your accounts and ensure you are paying only the minimums on any debts you have.
When it comes to any retirement contribution you may be making, I want you to stop doing that, with one exception. If your employer offers a match or contribution of any kind, make sure you are contributing at least enough money to take full advantage of that company match. If you are not offered an employer match or contribution, then temporarily stop contributing to your retirement accounts altogether.
2. Grow your Golden Number
In my book “Money Honey,” I talk about your “Golden Number” which is simply the amount of money you save each month. Your Golden Number equals your monthly after-tax income minus your monthly expenses. The bigger this number is, the more you can put towards saving and/or paying down debt each month.
There are two ways to grow your Golden Number:
Brainstorm a list of as many ideas as possible in each category. Think about renting out a room on AirBNB, starting a side hustle, walking dogs, babysitting, getting a part time job, and anything else that can bring in some extra income. On the expense side, what bills can you call and negotiate down? What subscriptions can you temporarily give up in the name of financial freedom? Where else can you cut back or sacrifice?
Once you have a huge list, focus on the top 2-3 easiest things in each category and implement them right away. This should increase your savings rate instantly so that you can save and pay down debt even faster.
3. Save $1,000
This might sound counter-intuitive, but you must set aside at least $1,000 in a savings account BEFORE tackling the CC. Why? Because you need some money set aside for emergencies and unexpected expenses.
Exhibit A: Jane Doe is killing it. She’s paid off $1,300 in CC debt in just under one month. She’s cut her expenses in every way possible, she’s been scrimping to get by, and every extra dollar she gets goes straight to her CC debt. UNTIL…
Inevitably, one day, Jane’s car breaks down, or her son has to go to the ER, or her dog ate her medication and had to be taken to the vet. And since Jane Doe doesn’t have anything in savings, she has to put that unexpected expense on her CC, wiping out all the progress she’s made.
How discouraging is that? Here’s the thing: there’s nothing wrong with having those unexpected expenses. Things come up; that’s life. But you can and should be prepared for them. You must expect the unexpected. You must have some money set aside so that WHEN, not IF, those emergencies come up, you can pay for them out of your savings instead of putting them on your CC.
Not setting aside money for the unexpected is the most common mistake people make. They start to aggressively pay down their CC, and then five weeks later, an emergency expense comes up and they have no way to pay for it, so it gets charged to the CC. And normally it’s so discouraging that they give up altogether.
Don’t be that person. Use your newly inflated Golden Number to get $1,000 saved as fast as humanly possible.
4. Set your timeline
Now you can get started. Everything is in place and you are ready to go. I recommend doing one last thing, which is taking a look at how long it will take you to pay this bad boy down. Simply take the total balance on the credit card, and divide it by your Golden Number, to calculate the approximate number of months it will take to pay off. (It’s approximate because interest will keep accruing so it will likely be a tiny bit longer.)
For example, let’s say your CC balance is $9,000, and your Golden Number is $500. It will take you $9,000 / $500 = 18 months to pay off.
“18 months?!” you might say, shocked at how long this will take. If that’s how you feel right now, you have exactly one lever you can adjust that will get you there faster: your Golden Number. Feel free to revisit Step 2 and see how else you can increase your income or decrease your expenses. (Most people take another look at that step once they do this calculation).
YOU have the power to speed this journey up. It’s all about how much YOU are willing to sacrifice. You’ll likely have to sacrifice time to increase your income, and quality of life to decrease your expenses. You can be as aggressive as you want to be.
In the example above, if you double your Golden Number to $1,000, then it will only take you 9 months to pay off your CC. Now you know how long you will have to commit in order to achieve this goal and you can mentally prepare. You can even set up milestones along the way or make a fun calendar or countdown to put on your fridge.
Get at it! Take it one day at a time. Feel free to share this exciting journey with your friends or family. Trust me: most of them probably have credit card debt too, and you never know who you could positively impact by sharing your goals. Paying off your CC debt is not something to be ashamed of; it’s something to be proud of. Plus, sharing your goals has two benefits: encouragement and accountability from your peers.
You will hit roadblocks, but don’t let that discourage you. We are all human. We are flawed. There’s no sense in beating yourself up if you get off track one day. Just forgive yourself, get back on track, and vow to be better. I promise you that it will be SO worth it in the end.
Remember your Golden Number? This next point will encourage you: think about what you will do with that money after you get your CC paid off. Maybe you’ll take a month off and splurge on yourself! Maybe you’ll immediately put that towards your student loans or other debt. Maybe you can use it for that trip you’ve always wanted to take. The possibilities are endless!
You can do this. Go get ‘em!