Writing about debt sends chills up my spine. It’s a concept that I’m hyper-aware of when dealing with my financials and planning my life. I can’t express how blessed I feel to be debt-free and well on my way to saving 250K by 2024.
However, I see too many of my friends and co-workers, usually in my age group (18 – 35), struggle with credit card debt. Although I find it frustrating and difficult to comprehend how people spend more than they make, it happens. It’s better to figure out ways to help your friends get out of the woods, rather than yelling at them that they are lost in the very scary debt forest.
If you didn’t know! This is how banks make their money. Let’s say you go on a shopping spree and spend $5,000 on your credit card. The creditors will put you on a 30-year minimum payment program and adjust the minimum amount as you rack up more debt. By the time you pay your debt ($5,000 principle) you have already paid about $19,000 to the bank in interest. In total, you have paid the bank about $24,000 for a $5,000 debt. This is unacceptable, irresponsible, and the sad reality if you are following the minimum payment plan.
$5,000 (principle) + $19,000 (interest) = $24,000
Now, let’s take a step back and use a persona to understand how to approach a credit card debt-free life. Sarah, 23 years old, (a totally fictional character of my imagination) is a good example of a combination of what I see many of my colleagues and friends do:
Sarah makes $45,000 a year and is renting an apartment with 2 roommates.
This is what Sarah’s expenses look like for a given month:
Income after NYC Taxes: $2,826 (+)
Rent: $1,200 (-)
Electricity: $60 (-)
Internet: $30 (-)
Gas: $50 (-)
Transportation: $127 (-)
Groceries: $350 (-)
Student Loans: $800 ($80,000 of debt with 7% APR) (-)
Credit Card Min Payment: $105 (of a $5,000 debt with an APR of 25%) (-)
Hanging out with friends: $175 (-)
Shopping online: $190 (-)
Waxing at the Boutique: $75 (-)
Essential Expenses: $2722 vs Extra Expenses $440
Total Monthly Income – Total Monthly Spending = -$336
If you did the math, you would see that Sarah is living a life that is $336 more expensive than what she can afford with her income. “But it’s only a couple of hundred dollars”, one might say, “what’s the big deal?” Sarah is adding $4,032 to her credit debt principal every year. This prevents her from paying off her debt during the allotted 30 year period, which puts her in a very bad situation. At this rate, she will increase her debt about 150% in one year, along with her minimum payments.
My advice? Sarah needs to STOP. As simple as that. Friends, shopping, and self-care are amazing and irreplaceable, but it adds up to costs that she can’t afford. Those luxuries are financially toxic to Sarah. In my opinion, it also isn’t worth it. But Sarah isn’t me, so let’s see how Sarah can deal with her situation.
My advice to Sarah, and other individuals like her:
Before the process:
- Stop using Credit Cards. I don’t need her to cut them into a million itty bitty pieces. Just keep it in your wallet and let it chill while we figure out how to get debt-free. After we achieve this, we can talk about healthy spending habits.
- Pay off the accrued debt: Plan A versus Plan B
Plan A: I want Sarah to recognize that after her essential expenses, she has $104 leftover from her monthly paycheck. If I were Sarah I would put this money straight into the Credit Card Payment Plan, making the total to $209
$105 (credit card minimum payment) + $104 (leftover money from income) = $209
This will allow Sarah to pay off her debt in less than 3 years instead of the planned 30 years.
Plan B: If Sarah is much more motivated, and can get to this point, I want her to be more aggressive and cut her grocery bill to $200 , bringing her new total payment to $359
$105 (Credit Card minimum payment)+ $103 (leftover money from income) + $150 (Saved money from cutting grocery expenses) = $359
Allowing her to pay off her debt in 18 months (1.5 years). During this time Sarah WILL NOT use her credit card. She needs to go on a cash-envelope budget for all expenses that are not directly paid by her checking account, such as groceries, eating out, etc.
During the process: Sarah is motivated and is sticking to paying $359 on her credit card payment.
- Sarah needs to figure out how to make more income. With the extra money, Sarah can be even more aggressive and pay off her debt sooner, use it to still maintain her lifestyle, invest in the stock market, or start saving for her future. There are a couple of ways Sarah can do this:
- Sarah can ask for a raise
- Sarah can take up a side hustle
- Sarah can move to a job that allows her to keep her expenses the same but pays her more.
- Sarah needs to be social. Hanging out with friends is important. Being on a debt-free journey doesn’t have to be a lonely process. A support system will allow you to stay confident, motivated, and of course, supported! There are hundreds of low cost-to-free activities out there to explore.
- Please note that if Sarah’s friends are not supportive, then BYE! No one needs that kind of negative energy in their lives. I can’t imagine the following scenario:
- Sarah: I’ve decided that I want to become debt free, and pay off all my credit card debt
- Sarah’s friend: That’s dumb. I don’t support you.
- Please note: if you do have unsupportive individuals in your life that do make these kinds of comments, remember that I’m in your corner the ENTIRE TIME. 🙂 (in case that wasn’t obvious enough).
- Please note that if Sarah’s friends are not supportive, then BYE! No one needs that kind of negative energy in their lives. I can’t imagine the following scenario:
After the process:
- 18 months later Sarah is Credit Card Debt free! She now has $359 extra each month to play with. That means it could go into a savings account, into her lifestyle, use to invest in the stock market, or use it to pay off her student loans! (I highly encourage the last two options).
- So Sarah wants to use her credit card again? I don’t blame her, with so many reward systems out there why not redeem some points. To use her credit card again she needs to make a deal with herself.
“I will only spend up to 50% of what I have leftover from my essentials.” If she follows this, she will STAY credit card debt free. She should minimize her spending regardless, but this is now up to her to figure out.
18 months is tough. But just with these steps you can be credit card debt-free just like Sarah! And when it’s time to tackle Sarah’s student loans, it’s going to be an even longer process. Paying off these debts should not demotivate you, but rather make you realize that you are taking back control of your financial life. So good for you!
Simply Prepared 