The biggest drain on your budget—and one of the biggest financial stressors around—is revolving debt: credit card and store card debt. The availability of easy credit in this country has had strange effects on the consumers’ psychology and on the way businesses work; IMHO it’s not especially good for either party.
The other day I saw an ad for those Bose headphones that are supposed to block out ambient sound, creating the illusion of silence. Like all things Bose, they’re expensive: three hundred bucks. So, the company offers an “easy” 0% payment plan on purchases between $299 and $1500.
Wow! For just $25 a month, we can have this miraculous electronic object, right now! Who can’t afford this? Let’s order one today…
What’s wrong with this picture? Well, to start with, that’s $25 a month that you’re committed to pay, not that you can pay if you happen to have an extra twenty-five bucks laying around. If something happens to stress your budget—you have a big dental bill; the kids need money to go on a school field trip to the marine biology station in Baja California; some chucklehead rear-ends you and you have to pay a big deductible on your car insurance—suddenly, it’s not so affordable. And to end with, when you realize you can get your hands on things you want without paying for them, quite naturally you’re likely to start grabbing everything you can get.
The result is your debt, most of it costing a lot more than 0% interest, soon gets out of hand. It starts to consume more and more of your monthly income, until you’re saddled with never-ending debt payments that leave nothing for you to spend on anything more than debt repayment and bare necessities. The cost of what you’re buying on the cuff increases by the amount of the interest: if you’re paying 18% interest on some credit card, a $100 purchase actually costs you $118. This means the value of every dollar you pay for an item is actually only 82 cents: $1.00 less 18 percent.
Meanwhile, businesses and lenders love it. Or so their management thinks… For the nonce, you’re buying with abandon and paying through the nose for the privilege. Merchandise is moving briskly, and you’re on the hook for a lucrative debt from which you may never get free. You are, in short, a cash cow.
However, eventually the cow will run out of milk. At some point, you will no longer be able to purchase much of anything, even necessities, especially if you lose your job or some other hardship comes your way. When people face hardship, as has been the case after the 2009 economic crash, they stop buying. And when consumers stop buying, businesses go belly-up.
That’s why, in the long run, revolving debt is as bad for business as it is for you and me. Eventually, it will drive us all into the hole.
The solution is easy: buy things when you can pay for them, not when you want them. If you can afford to pay $25 or $100 a month to a credit-card issuer, you can afford to pay $25 or $100 to yourself. Put the money into a savings account, and when you’ve accrued the $300 for the marvelous sound-blocking headphones, go to the store or the online site and buy them—and pay for them. In cash.
Now you own them; they don’t own you.
But what if you’re already in debt up to your schnozz? What if you’re at the point where all you can do is make the minimum payments on an array of credit cards that could be used to play Blackjack if only they had spades, diamonds, clubs, and hearts printed on them?
It’s discouraging, but it’s not hopeless. Lots of people have managed to get out of debt, and you can do it, too. Here are the strategies:
First, stop charging! Take the credit cards out of your wallet and stash them in your file cabinet. Until you get the debt paid off, if you can’t buy something in cash, don’t buy it. Put off purchases, large and small, until you have the cash to pay for them.
Next, try to consolidate credit-card debt on the lowest-interest card you can get. Some lenders offer rates as low as zero percent for limited periods. Try to transfer as much of your balance to a low- or zero-percent card as you can, giving yourself a period in which to pay down the balance that you can’t transfer first.
Call your card issuer and ask if you can work a better deal. Sometimes you can negotiate lower minimum payments in exchange for a higher interest rate, or a lower rate if you agree to make higher minimum payments.
I personally would never borrow against my house to pay off credit-card debt, because it’s too risky. However, if you still have equity in your house and you’re facing credit card debt in the range of thousands of dollars—and you know, beyond a shadow of a doubt, that you can be disciplined enough to pay it down and to stop charging on cards altogether—interest on a home equity loan is lower, by far, than credit-card interest, and it’s tax deductible in the same way mortgage interest is.
Once you have the debt moved into the lowest-interest instruments you can find, pay it off as fast as humanly possible.
To accomplish this, make a plan and stick with it. Write down your goals, figure out how to meet those goals, and write down your scheme. Post it on the refrigerator and check off your progress as you go.
The most commonly used plan is called “snowballing.” With this strategy, the debt-ridden consumer quits charging, continues to make minimum payments on all cards, and throws a specific extra payment toward principal on a specific debt. Say you owe on a Mastercard at 8 percent, a Visa card at 15 percent, and an American Express card at 21 percent. You would figure out what you can afford above and beyond minimum payments—suppose it’s $100 a month—and you would pay that toward the card that charges the highest rate. In the scenario above, you’d pay your extra $100 a month on the AMEX card.
As soon as that card is paid off, you take its minimum payment plus your $100 paydown budget and apply it to the next highest-interest card. So, if your minimum payment for the American Express card was $20 a month, you now have $120 freed up to pay toward the Visa card. Once the Visa card is paid off, you would add its minimum payment into your pay-down budget and apply that to the Mastercard. Supposing the Visa’s minimum payment was $15 a month, as soon as that card is paid off, you’ll have $135 a month ($120 + $15) to pay toward the Mastercard.
Your paydown budget is the maximum that you can afford. If you quit charging things and make it a point to live frugally, you may find that amount is a lot more than you expect. And building the paydown budget cumulatively will allow you to clear debt much faster than you may think.
Some people prefer to pay down the smallest debt first, rather than focusing on the debt with the highest interest rate. Psychologically, this is cheering: it feels great to get out from under a debt, any debt. Apply whichever strategy makes sense to you and will help you keep on track.
To “snowballing” you can add “snowflaking”: using every windfall that comes your way to pay down the debt. In this strategy, you apply your income tax return, your annual kickback on the Costco AMEX card, gifts in cash, yard-sale proceeds, income from side jobs, and every other nickel and dime to the debt you’re working on.
So…where do you get the money for that extra $100 or more a month? Two sources are at hand:
• Side jobs and incidental income sources.
Generate More Income
Take on an extra job and apply all the net income to the debt.
About a year before the ax fell, I began to realize the Great Desert University would likely lay off me and all my staff. I had a $30,000 equity loan against my otherwise paid-off house. I did not want to have to deal with that in unemployment, and so I took on an adjunct teaching job at the university’s west campus. At the time, GDU was paying Ph.D.’s about $3300 per class. When they double-enrolled my two sections, I demanded—and got—double pay, earning the equivalent of teaching four sections. Between this amount, freelance editorial income, assiduous snowflaking, and a payment out of my savings, I succeeded in getting rid of the debt by the time the official canning announcement came down.
Most of us can find some paid work on the side. Deliver Away Debt’s blogger Jeff discovered he could earn $1400 to $1800 a month delivering pizzas for 22 hours a week. At that rate, with just the side job money alone, you could pay down a $30,000 debt in about 16 months.
Another source of income is selling things on Amazon, Craig’s List, and eBay. Clean out the closets, get rid of the dustcatching book collection, buy items at yard sales and estate sales and sell them for a profit online.
My neighbors used to run an under-the-table yard sale business. They would spend three or four months running around to yard sales and scavenging throw-aways from the alleys (you’d be amazed at the perfectly good stuff people will discard!). They’d store the stuff in the garage, and then three or four times a year they would throw a huge yard sale. Over time, they learned how to price the stuff, and they made pretty good money at it.
Live Beneath Your Means
Your “means” is the actual amount of dollars you have on hand today, right now. Not tomorrow. Not next month. Not next year. Today.
That’s the principal behind frugality. Know how much you have on hand to spend, and spend only that. Or better yet: spend less than that—live beneath your means.
Remember, when you pay for something in cash, your dollar buy more because you’re not having to pay a premium in credit card interest. Each dollar is worth a whole dollar, not a dollar less 18 or 20 cents. Weirdly, when you don’t charge things, you have more money to buy things. So, as you can see, it actually pays you money to hold off purchases until you can afford to pay for them outright.
Much has been said about frugal living. Overall, though, its strategies look like this:
• Live light on the land. Distinguish between needs and wants, and purchase and use only what you need.
• Cultivate a minimalist lifestyle. Occupy only the space you need, and fill it only with the objects you need to live comfortably.
• Figure out how much money you can spend and how much you can save.
• Build a budget to manage spending and saving.
• Use it up, wear it out, make it do, or do without. Often you’ll find you already have something that does the job, or in fact you don’t need to replace an item because you don’t really need it.
• Buy things at a discount or don’t buy them at all. If a food or drug item you need is not on sale, buy the store brand, which is the made by the same suppliers that make the expensive brands and is cheaper.
• Eat in, not out. Learn to cook. It’s easy, the food tastes better, and it’s healthier. And by the way, it’s lots cheaper.
• Learn to fix things yourself. It’s not hard to change the oil in your car, and most of us can learn to use a screwdriver and a hammer. While some chores need a pro, many need little more than a few minutes of your time.
• Learn to make things yourself. From household cleaners and toiletries to simple draperies, DIY products save a ton of money.
• Shop at estate sales and thrift stores. Nowhere is it written that everything we purchase must be brand new. In fact, sometimes we can get better products by finding practically unused items second-hand.
Frugal habits can save quite a bit of money—enough that you will soon find yourself spending less than you budget. Use the amount to pay off that debt. Once you’re debt free, use it to live better or save it to live better in the future.