A friend of mine is deep in debt – about $50,000 in credit card debt. She complains about it, but that is about the only action she undertakes when it comes to debt. We recently invited her on an outing to a movie, where we paid, having some free passes. Our family modus operandiwhen it comes to movie snacks is to buy a few boxes at the dollar store near the theater and sneak it in. The total cost is less than a large simulated-butter flavored, Styrofoam and sawdust tasting popcorn at the theater. My friend did splurge on popcorn and a soda for herself. When her child asked for a couple of pieces, my friend excused herself, went to the concession stand and returned with popcorn for both her kids and mine. My children didn’t even want it. She may have some kind of guilt complex which prompted here to dish out $20 for popcorn that nobody wanted. When her child asked for a sip of her soda, she promptly dashed off to do the same. I didn’t even want my kids to have any more sugar – but I guess she did it to less guilty about going to a movie for free rather than the $50,000 in credit card debt. Perhaps it was a vein effort to keep up appearances.
This is where Benjamin Franklin’s virtues of Tranquility, Order, Sincerity, Resolution, Frugality, Moderation, and apparently Humility would serve her well. If she asked me for advice (which she doesn’t) I would tell her to stop putting her children into paid activity programs like dance, ballet, and other money-suckers, because unless they get a guaranteed scholarship to Julliard, Mommy and Daddy won’t be able to help much in the way of college. Stop dining out once a week. Promote at-home family activities instead of wasting gas and money thinking your children need paid activities to be well rounded. There is a lot more than just eliminating the effort to keep up pretenses; some no-kidding cuts have to be made. Continuing with long term credit card debt lowers your credit rating, diminishing your ability to receive affordable loans, and more importantly, affects your long-term financial security, and that of your children.
If you are in a hole, do you keep digging or start climbing? If you find yourself in the same situation, then you only need to do three things right away:
- Don’t Panic (Tranquility)
- Make a Plan (Order, Sincerity)
- Follow the Plan (Frugality, Moderation, Resolution, and Humility)
See – it is already just three steps.
Step One – Don’t Panic
Do step one right now, and you are one-third of the way done. Really – stop panicking. I can also promise you that you will feel absolutely wonderful after you complete Step Two.
Step Two – Make a plan
Included here is a nice calculator you can use to figure out how much you need to spend a month in paying off your credit card debt. You can use this to refine your goal of how much time it will take you depending on your income, necessary expenditures, and the size of your debt.
In the case of my friend, I recommend three years to pay off $50,000. Why? Because two years may be two difficult and 4 years may be too long a time. Three is a nice number anyway. So, to pay off $50,000 in credit card debt, with a 2012 average interest rate of 15% will take about $1,733 per month. But instead of settling for the national average, call your credit card company and have them lower it. All you have to do is ask and they will probably agree. They don’t want you to transfer all that money making (for them) interest to another bank card, so negotiate what you can. If you can get them to lower your rate to even 8%, that brings your monthly payment down to about $1570. See if you can go lower.
Next, you need to make a list of ALL income and ALL expenditures no matter how small. This may take some hard thinking as you may have forgotten that pack of gum, foofoo coffee, manicure, or whatever you spent money on needlessly. To make this easier, go to http://WealthVirtues.com/tools/ and download the free spreadsheets you can use to help simplify this process. You should also explore the great free services at Mint.com to help you get started.
Step Three – Follow the Plan
Once you have honestly captured all of your expenditures, start making cuts starting with the easiest to the more difficult ones. Yep, you may have to give up that vacation this year, but borrow a tent, find a free or inexpensive campground, and the kids will still love you. Do you have a premium cable package? Take it down to Basic cable and save $50-$100 per month. I recommend buying a Roku Box for about $80 and pay $8 per month for streaming video from Netflix if you still want something beyond the basic channels.
Clip coupons, or better yet, take advantage of online deals at Coupons.com. You may even be able to save money with bulk grocery shopping. Do you really need a smart-phone with a $50 per month data plan? Stick with the semi-intelligent phone and save some cash. Most importantly, stop thinking that you have to keep up with fashion trends, or the neighbor’s appearance of a lavish lifestyle. More often than not, they are deep in debt as well. There is where you humility will save you money.
Other more drastic measures may be to slack how much you contribute to your retirement. NEVER take a loan from you 401K. Some recommend this, I do not. The cost of a 401(k) loan on your retirement savings progress can be minimal, neutral, or even positive, but in most cases it will be less than the cost of paying “real interest” on a bank or consumer loan. However, you will have to repay the loan in full before you take a plan distribution. Otherwise, the full unpaid loan balance will be considered a taxable distribution, and you could also face a 10% federal tax penalty on the unpaid balance if you are younger than age 59 and a half. If the market does well, you will have lost any earnings that would have occurred on the money you used for a loan. If you, like I, are already saving the maximum federal amount ($17,000, or $22,500 after the age of 50 for 2012), then you may be able to cut back on that to use toward your debt reduction rather than take money out of the retirement account. You will not have the tax advantage that come with pre-tax savings, raising your adjusted gross income, but it may be worth it.
Cut up your credit cards. If you’re strong, have one on hand for an emergency. Pay with cash. Understand your wants versus needs. This is hard, but you have to do it. As you see your debt decrease, you will become more motivated. After the three years, you will have trained yourself through the practice of the virtues you used to eliminate debt to rapidly grow your wealth faster that you would have before your debt reduction actions. You will be able to restore your full retirement savings contributions, and hopefully be able to make the maximum allowable contributions.
The key is to change your behavior. Start with practicing the virtues of Benjamin Franklin and apply them to your finances. Wealth Virtues will help you do this. If you don’t want to spend $11.95 on the paperback version, download the free Kindle reader to your computer, and buy the Wealth Virtues Kindle edition for $2.99.