How would you like to be able to pay all of your credit card statements in full each month? How cool is that to know that it is possible? Even if you have a lot of credit cards with balances on them, it is possible to get there and within just a few years! What does this have to do with snowballs? Want to know how? Read on!
Two-Pronged Focus: Stop Digging Then Fill the Holes
There is going to be a story behind every credit card debt. Perhaps it was an unexpected medical situation that racked up bills that were put on the credit card. Perhaps it was the need for an expensive house-related expense (replace the furnace or septic system, anyone?) that was put on the card. Or it might even be as simple as not tracking use of the card very well and you say you’ll spend less next month (but don’t).
Regardless of the reason for getting into the situation, in order to get out of debt, we need to do two things at the same time. First, stop getting more into debt by not adding to the problem. Second, find money that can be applied to the credit card balances to cause this eventual payoff of debt.
In order to find some initial seed money to get out of debt, it is time to look carefully at expenses. They are going to come in two categories – expenses that cannot be changed, and expenses that can be changed.
The first category is going to consist of must-spend items, which are called non-discretionary expenses. Examples of that are going to be the car payment, insurance premiums, water, food, electric, and gas bills. Without incurring drastic consequenses, we have to pay those each month.
The other category are the want-spend items, which are called discretionary expenses. While life might not be as fun, cutting back on these expenses won’t have long-term ramifications. Examples here are eating out with friends, grabbing pizza for dinner, the 500+ channel package on TV, the more expensive makeup and haircuts, and subscriptions to streaming services like Netflix, Hulu, and HBO+.
While each person has their own set of discretionary purchases, the key is to identify one area or more than one area to cut back on. Set (maximum) limits on how much will be spent in each category. If everything is done online, apps such as YNAB and Mint can help notify when those limits are close or at risk of being exceeded. With the lower expenses, the difference now becomes the seed money for filling the holes of debt. We’ll call this our “found money”.
While making those decisions won’t be painful, they will be inconvenient, and that’s the incentive to get out of debt. Once there is no interest being taken out of credit card payments, that represents a possibility of returning to some comforts that were given up temporarily. Another helpful tool, particularly for all those “small” charges that seem to add up, is to stop using the credit card for those and give an “allowance” of cash each week from the ATM to use for those expenses. When the cash is gone, those small expenses end until the next week’s allowance. Using cash will also help really focus on spending in this area because of the ability to see the bills disappear as they are spent.
Fill the Hole
Now that we have some money to work with – even just a couple tens of dollars – we can get to work on getting out of debt and “filling the holes” of debt on the cards.
For this exercise, I am assuming that the minimum amount is being applied to each card already. If you look at a card statement, there will be a place where it documents how long it will take to pay off if just the minimum is paid. But that’s only if the minimum is being applied. Instead, we’re going to apply more than the minimum and we can see how that payoff date changes each month.
Which Card to Start With?
The question to ask, though, is which card to pick first? This depends. If all things are equal, such as the interest rate on each card is about the same, then I recommend picking the card with the lowest current balance. By adding our found money to the minimum payment each month, that number is going to go to zero pretty quickly. And that’s what we want! We want something to celebrate, and paying off the first card in a couple of months can be worth celebrating!
Granted, we might have a card that was a balance transfer that gives us a year of deferred interest. Or perhaps a car with a much higher interest rate. In these situations, picking the deferred interest card to pay off before the deferral expires or the card with the highest interest rate might make more sense.
Boom! There it is!
Now that we’ve used this found money to pay down a card, what happens when we pay off that first total balance? We celebrate! Take that monthly amount you were using and spend it on yourself to give yourself a present (no more than that amount, please!!). Then the following month use the total amount we were paying on that first card to add to our minimum payment on the next card. Now this next card balance is dropping at an even faster rate than the first card!
Now that we’ve used this found money to pay down a card, what happens when we pay off that first total balance? We celebrate! Take that monthly amount you were using an spend it on yourself to give yourself a present (no more than that amount, please!!). Then the following month use the total amount we were paying on that first card to add to our minimum payment on the next card. Now this next card balance is dropping at an even faster rate than the first card!
We’re creating a snowball! At first it was small and filling that first card’s hole. Now it is bigger and rolling along, and each card that gets paid off means even more money available to pay the next one. Within a few years, all those cards will be paid off and no more interest and fees!
All Paid Off! Now What?
With the freeing up of your credit card debt, we might find that we have an extra $500 or $1,000 or more each month available. What do we do with it? Part of it can be used to restore those creature comforts that were temporarily curtailed. This is a good time, though, to revisit those categories of expenses and decide what makes sense to spend in them. If there isn’t one already, add a savings category to your list of categories of expenses and put that monthly amount toward an emergency fund of 3-6 months of expenses. If that is funded, then saving toward the future makes sense, whether that is money to be invested to grow it further, or toward a trip or children’s college. Rather than having to look at income as just paying debt, it can be seen as a tool to use as you wish.