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How to Get Out of Debt?
chrismsx
Registered User regular
Registered User regular
I managed to over the course of the last year get myself into 10,000 dollars worth of credit card debt because my job gave me a pay decrease for a few months and I still maintained my current life style. I've since gotten a new job that pays more but I've still got the debt.
What hurts more is the debt is equal to one of my student loans, which means this money could easily of aided in getting me to a better place financially. I'm pretty mad at myself but being mad won't exactly fix the problem. I've decided to try my hand at expediting the process by taking on freelance projects and cutting out things like nights out where I buy drinks for myself and others. I still think there's more I can do though.
Does anyone have any personal stories or advice for getting out of debt sooner than later or even just tactics?
What hurts more is the debt is equal to one of my student loans, which means this money could easily of aided in getting me to a better place financially. I'm pretty mad at myself but being mad won't exactly fix the problem. I've decided to try my hand at expediting the process by taking on freelance projects and cutting out things like nights out where I buy drinks for myself and others. I still think there's more I can do though.
Does anyone have any personal stories or advice for getting out of debt sooner than later or even just tactics?
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If you have a total of $25-30k in debt, you are probably looking at $300 a month for ~7-9 years, but potentially considerably more for not paying that. If you go out and buy a round for a group of mates that's probably an easy $100 by the end of the night, that one night could have cut your monthly debt payments by a third.
Whenever you get windfalls, you will want to save a quarter, put at least half down towards your debt, and only use a quarter of that windfall money for new expenses.
The sooner you get that debt gone, the more freedom you will have long term to do the things you want and the less you will pay overall.
Other quick things:
-Cut any monthly expenses you can live without (do you need $160 cable or could you be perfectly entertained with $60 high speed internet and youtube; do you need a $200 cellphone plan or could cutting down to a $50 work better for you)?
-Don't take any new encumbrances. Don't get another credit card, don't buy a new car, don't add a netflix subscription (unless in doing so you are "trading down" from your current encumbrances). Trading a giant cable bill for internet you already have and a $9 netflix subscription is a net gain of money, for example.
-Don't buy stuff you don't need until the debt is cleared. Yeah, you could get that new computer or outfit or whatever, but right now that money would be better invested getting you out of debt.
-Don't eat out all the time. Seriously, groceries and alcohol can eat your entire income if you go out frequently. You can cut back here in a big way and save money (and probably be healthier too).
If you can get to tossing a big chunk of change each month at that debt and be patient, soon it will be gone. And what's better, once the debt is gone that 3-500 a month you were putting towards it can go towards savings, stuff, and experiences rather than the debt without having to worry about that burden.
An alternative is the "avalanche," where you start off by paying down the debt with the highest interest rate first.
SNL also has some good advice (with tongue planted firmly in cheek :biggrin: )
Good luck!
The Avalanche method is like keeping that original Skyline in Gran Turismo and continually upgrading it until you have this monster car that can outpace a formula 1 prototype by the end.
The math between the two methods never works out for the snowball method. Interest always wins.
For the op: you need to sit down with a year's worth of expenses to sift through and note the things you expect to "need" (food, shelter, transportation), things you'll want that are close to needs (new clothes once in a while, medical things like do you need a constant stream of psuedafed so you can go to work during cold season like me), and then the list of all the things that you can just excise from your budget.
If you can sit down with last year's expenses and truly categorize things this way, you'll more than likely find all the money you need to knock out your debt in a reasonable amount of time. It takes discipline, which is not easy in our world of course, and I'd say it takes budgeting in fun too. A lot of people will tell you to cut out entertainment and trips but I find that unsustainable. As noted above, an Internet connection and your choice of streaming service is a good deal for in home entertainment, and if you can afford it, I'd include in your budget every month or three something "big" and fun outside the house such as a concert or sports event or whatever it is that strikes your fancy.
You can totally do this type of budgeting on a day off and have a pretty good timeline for getting to debt free and implement the plan and immediately feel better about your situation.
My girlfriend warned against this but I have a safety net in my parents. I know it sounds bad but it's absolutely true. If i lose my job, I could survive fine until I land the next one. I also know that with the debt gone I'd be able to get my savings back in pretty short order.
Thoughts?
Bad idea.
Your savings is your safety net, in case reality decides to take a croquet mallet to your knees. You want, as a minimum, $500 in case of "oh shit". Ideally, you want about a half year to a year of living expenses.
The difference between snowball and avalanche is not really significant unless the interest rates are deviating by more than 5%. You're better off paying the lower balances off sooner in those cases. It's sort of a mental game you play with yourself, and it helps make you feel better.
its not that bad of an idea. he's paying 20% on 10 grand, the money in savings does nothing.
if he has an emergency, he has two empty credit cards to handle it with
Pay your credit cards off before your student loans. Credit cards are extremely bad debt. Get rid of it aggressively. Stop using credit cards unless you are sure you can pay them off quickly. If you have an option, consider deferring your low interest student loans to more quickly eliminate your credit card debt.
we also talk about other random shit and clown upon each other
I feel the better answer here is a "why not both."
Out of your 100% left over income after basic living needs, maybe 10-25% of that should go towards optional encumberances (at most) like cable or fancy cellphone plans or going out on the town, 50% should go towards your debt, and the last 25% should go in savings (at least).
It's good to build your savings, and to keep building it (and leaving it for a rainy day) as much as possible. But that debt has to take priority or it will keep eating more and more of your income.
If it's easy to get your transaction history from your bank/credit cards, try making a categorized list of your expenses over the past year. That will help you budget for the future when you realize how much of your income is actually disposable, and let you make better judgments about the entertainment/debt debate. In reality that's a personal decision you have to make and taking percentages from the internet isn't necessarily going to be super helpful.
Any money that you decide to pay towards debt (above the minimum payments) should be on your cards, highest interest rate first.
Once you get rid of your credit card debt, consider this: You should be saving 20% of your income when you're in a good working situation (employer match contributions count if you get those). Living at your means when you're in your earnings prime is a recipe for dependence down the road.
If you really do have a safety net, I say use some of it to put a dent in the cards. If things go south, you can always put the debt back on the cards later, and they won't be accruing interest in the mean time.
Just make sure that you then setup a good budget and aggressively build up your savings again asap so you don't run into the same problem again.
Doc: That's right, twenty five years into the future. I've always dreamed on seeing the future, looking beyond my years, seeing the progress of mankind. I'll also be able to see who wins the next twenty-five world series.
$10k over a few months would have to be what, student loans plus rent? Assuming the "pay decrease" was actually to not pay you in money. Did you work for pizza and promises for 3 months?
I know your question is really how to pay down debt. I think the posters above have given some good advice.
But please also pay close attention to the budget suggestions you're getting as well. Since you stated it was a 'lifestyle' and not a medical emergency or something, you really, really need to examine your priorities and spending habits.
Not the OP, but wondering - how does working for the government affect these things?
There are a lot of student loan repayment offers for some government workers. Usually things like teachers or healthcare workers in inner cities, rural, or Indian Service.
Some types of federal student loans are eligible for forgiveness plans after a period of time working in public/government jobs.
Public service loan forgiveness program. If you have direct loans and work for the government or another public service, you can get them forgiven after the 120th nonconsecutive on-time payment while employed at an applicable institution. So essentially your loan is gone with 10 years public service no matter how big it is. Generally the payment plans amenable to this, like income based repayment or pay as you earn if you're a baby are very lenient in terms of allowing you to live in budget.
Doc: That's right, twenty five years into the future. I've always dreamed on seeing the future, looking beyond my years, seeing the progress of mankind. I'll also be able to see who wins the next twenty-five world series.
Well worth a read since he goes into great detail on the strategy he used and how his tactics played out. Don't follow his method of cutting out his 401k contributions, but everything else he did looks sound.
Yeah and unless the difference between the interests are huge, it does not make a significant difference to pay off one vs the other.
Student loans are a good debt, so paying them off is a good idea, and the interest can be deducted off your taxes. Which gives you more money. Don't avoid paying student loans at the expense of credit cards.
However, if you've got a $500 card with a 25% APR, and a $4000 card with a 27% APR, you're better off slamming the $500 one out first, in my opinion. Plus it'll make you feel good, which helps reinforce actually paying off debts.
This just means that student loan debt is better to keep around than other debt. The interest you pay here is tax deductible while the interest other places is likely not, so paying this off and keeping other debt means you're paying interest on the other debt that is not tax deductible when you could have been paying off the interest on student loan debt which is, while having paid off the higher-interest (probably) non-deductible interest debt.
However, you can use the interest payment deduction to adjust your taxable income to deliver more money to your bills. But yeah, it's 'good' debt.
41% of Americans don't have $500 in savings, only 17% have 3 months worth of savings. All the tax-deductions, investment earnings versus interest payments, and cash on hand liquidity considerations kinda go out the window in those situations. At that point outside of 'need a car or lose your job' kind of situations there is no good debt to be taking on.
Because the gurus in question are mostly talking to people who already eyeball deep in debt to begin with. It's like Hoarders, you don't tell someone 'well some hoarding is okay' because it makes it too easy to rationalize the behavior that got them into debt to begin with.
@chrismsx I was where you were a few years ago and I ended up going sans-savings while I paid things off, and was ultimately very glad I did. I'd also look into getting a copy of your credit report and seeing exactly how badly your credit utilization had damaged your credit scores. If you haven't missed a payment it shouldn't be that bad, but maintaining more than a certain percent of total credit utilization is definitely marked as a negative when pulling your credit score for basically anything.
As with everything its all about interest vs return. If the expected investment returns are low enough or the interest high enough then it can absolutely be better to pay off the loak first
One of my friends sells plasma twice a week for 70 a week(35 a go). I don't like needles so I never did. But he combines the two for 4K-5k a year in savings.
The amount of things that are viable to hold with long-term debt can be counted with one hand. And one of those things is a house. Which, as the recession showed us, isn't as viable as people think.
The only people who can afford to dick around with sizable debt are the ones who have tons of money in the first place (read: having money lets you make money).
Everyone else should be spending much less than they earn. Period.
If you have a credit card, you are technically buying something via "debt", but anything you put on that card should be paid off each month. Basically, you should be carrying a zero balance always. Which means that you should have the money on hand to pay for anything you buy with a credit card. Which means you are still functionally not carrying any debt.
OP: I'm going to reinforce your assessment that you are living beyond your means. The amount of debt you have racked up in such a short period of time is significant. Beyond all the quibbling you will hear about which debt to pay off first and the like, the fundamental issue you should be managing, first and foremost, is figuring out how to live within your means and spending well below what you take in each month. Other than that, kudos to you on figuring this out before it became an insurmountable issue, and best of luck in getting back in the black.
The avalanche method is better for people who wake up BEFORE the red ink is neck deep and better for people with multiple pools of similar sized debt they will be paying on for a while. It's also better for people with larger asset pools and/or more secured debt.
I often had people snowball all things under 1k for six months, then show them how much headway they'd made and show them how much applying their "snowball" amount to their bigger balances would save them. (I worked in collections/debt relief for a while)
I host a podcast about movies.
I don't like needles either, but if collecting £40-80 a week selling blood was an option in the UK I would have absolutely done it when I was in debt. Heck, I'd have done it when I was a student, and not gone into as much debt.
Talk to a bank about a loan, if they can offer you a lower interest rate, take it. Pay off your credit card with the loan and either cancel your credit card or reduce the limit significantly. I had about $12,000 credit card debt at 19.9%. My bank took it over as a loan at 5% paid over 5 years. Dropped my credit card to $2000 limit (you could probably go lower if you don't have dependents to worry about paying for.)
The benefits are:
1) Lower interest rate
2) No way to re-spend and increase it again
What bank is this
Doc: That's right, twenty five years into the future. I've always dreamed on seeing the future, looking beyond my years, seeing the progress of mankind. I'll also be able to see who wins the next twenty-five world series.
Royal Bank of Canada (RBC)