Are you carrying balances on your credit cards and paying the minimum payments or just a little more? Do you have a car loan for that shiny new Tesla in front of your fancy house? Did you finance your kid’s dentist bills or your new dining room set? Well, you aren’t alone but you are in a heap of trouble financially if your situation is like this.
When I discovered the FIRE (Financial Independence, Retire Early) community and Mr. Money Mustache in 2020, my eyes were opened wide on how to and how not to use credit, especially credit cards.
I took a trip to Italy with my mom when I was 30 and the cost of that trip was still on my credit cards 10 years later. I was making minimum payments on that card and just paying interest, the principle never went down. All I had done was pay the interest for 10 WHOLE YEARS!
I was horrified at my own spending behavior. I had no savings, no investments and carried high interest debt. There was simply no way to get ahead by doing this. Does any of this resonate with you?
Let’s reframe how we think of debt.
Debt is not a tool to be used at every whim. Debt is an emergency. Like your house is on fire sort of emergency. It’s not something that you should carry with you month after month while you go about your days drinking your fancy coffees and paying way too much for your cell bills or Jimmy Choos.
The best presentation that I’ve seen on reframing how we think about and use money can be found on Youtube and it’s Mr. Money Mustache. It’s well worth the watch, it’s both entertaining and incredibly eye opening!
Debt happens.
It happens to all of us. Or at least most of us. Why is this?
- Debt is readily available today. Even if you’re just entering your first semester of college, the credit card companies are on campus ready to give you money.
- Lack of savings available to handle emergencies. When your refrigerator breaks or there’s an unexpected medical expense, do you have money set aside to cover these unexpected needs?
- We live in a culture that rampantly overspends.
What can we do about it?
- Stop ALL unnecessary spending. Those dollars need to be diverted towards paying down your debt.
- Review and cancel subscriptions
- Hold off on any big purchases, this includes vacations and that new, larger TV
- Take in a roommate
- Eat grilled cheese (and a side of veggies of course) instead of steak. Here is a post all about healthy eating on a budget that will help make lower cost choices.
- Stop driving your car. Or at least reduce your driving.
- Stop all savings (besides holding a small emergency fund) until your debt is paid off. Your 0.2% interest earned in your savings account is more than gobbled up by the 30% interest that you’re paying on your credit card debt.
- Earn more money. This can be from any source; side hustle, babysitting, gifts, sell items you don’t use on marketplace, ask for a raise or more hours at work. The options really are endless here.
- Determine how much you owe and make a plan to tackle it. There are a couple of good options for this that are included below.
Ok, so now you’ve realized that carrying debt is a REALLY BIG PROBLEM but how are you going to tackle it? There are two popular ways to tackle debt repayment, the snowball method and the debt avalanche method. Both are effective for some people and less so for others but both strategies will give you a clear plan of repayment so that you can start seeing improvements in the very first month.
It will be easiest to demonstrate with an example:
Jerry and Meg’s debts
| Debt | Interest Rate | Balance Owing |
| Mortgage – Primary home | 4% | $450,000 |
| Jerry’s 2019 Ford F150 | 8% | $6,000 |
| Meg’s 2022 Toyota Camry | 6% | $25,000 |
| The Bay credit card | 35% | $8,000 |
| Mastercard | 21% | $4,500 |
| Visa | 22% | $2,000 |
Snowball method
The debt snowball method involves making minimum payments on all debt each month, then paying off the smallest debts first before moving on to bigger ones. This strategy gives you the satisfaction of seeing the overall number of debts decrease more quickly so it’s psychologically a great way to go.
| Debt | Interest Rate | Balance Owing | Order of Payment |
| Visa | 22% | $2,000 | First |
| Mastercard | 21% | $4,500 | Second |
| Jerry’s 2019 Ford F150 | 8% | $6,000 | Third |
| The Bay credit card | 35% | $8,000 | Fourth |
| Meg’s 2022 Toyota Camry | 6% | $25,000 | Fifth |
| Mortgage – Primary home | 4% | $450,000 | Sixth |
Avalanche method
The debt avalanche method involves making minimum payments on all debt each month, then using any extra funds to pay off the debt with the highest interest rate. The benefit of this method is that you will pay less interest overall during the repayment process which should make that process go by more quickly and cost you less overall.
| Debt | Interest Rate | Balance Owing | Order of Payment |
| The Bay credit card | 35% | $8,000 | First |
| Visa | 22% | $2,000 | Second |
| Mastercard | 21% | $4,500 | Third |
| Jerry’s 2019 Ford F150 | 8% | $6,000 | Fourth |
| Meg’s 2022 Toyota Camry | 6% | $25,000 | Fifth |
| Mortgage – Primary home | 4% | $450,000 | Sixth |
So you’ll see here that if you chose the Snowball Method it would be quicker to pay off the $2,000 Visa bill first which would be satisfying, but while you are paying that off, you are paying even more interest on The Bay credit card. I recommend using the Avalanche method as long as you can stay motivated while you work through those larger amounts.
Should we have any debt? Surely some debt is good.
With the exception of the mortgage on your primary residence (and even this is debatable) or loans for investing purposes or business, we should not carry any debt.
This includes car payments. In most cases, and this won’t be a popular opinion but it is definitely my opinion – if you can’t afford to buy a car in cash, then you shouldn’t buy one. There are plenty of good cars out there for under $10K that will run well for you for years if you take care of them.
What to do when the debt is too high.
In certain circumstances, especially when leaving a relationship where your partner was the higher wage earner, you may find yourself in a position where you are unable to pay back your debts. If this happens, please reach out for help. I had to do that when we left a 6 figure household and all I could find for work was barely above poverty level and I had to pay for lawyers out of that to boot. After speaking with professionals, it was determined that I would never be able to repay the debt that came out of the relationship and I had to declare bankruptcy.
Now, just to clarify, I have not defaulted on any other bills at any other time in my life, it was a circumstance of a bad relationship and that might be your case too so please don’t feel too badly about it. Just do what you have to do to take care of you and your kids.
Final thoughts.
We all start somewhere so please don’t be too hard on yourself for having debt but realize that it’s absolutely important, like your hair is on fire important, that you pay it off as quickly as possible. You will be amazed at how many extra dollars you have available once they aren’t going towards interest payments each month.
Now that’s something to celebrate!