I’m not sure why I didn’t realize this earlier, but it recently occurred to me that lots of people get themselves into trouble when it comes to money and I might be able to help them by offering a few tips.
I’m speaking specifically about debt in this case. Maybe you’ve learned about debt the hard way, or maybe nobody’s ever told you the basics before, but my goal for this post is to help some people get on the right track to worrying less about their financial situation so they can focus more on the purpose God’s given them. After all, with high levels of debt, it’s easier to lose focus on striving toward becoming the person God wants you to be. If you’re weighed down by worry about your debt load, I’d like to help you get started on a path that allows you to reach more of your God-given potential.
Money itself isn’t a bad thing, but a love of it is dangerous. Money is a valuable tool in this life. Having the knowledge to wield that tool effectively means you have the capacity to accomplish more by using it wisely, preferably to the glory of God. Because debt might be holding you back from doing the stuff God wants you to do, here’s some practical insight.
We’ll start with the basics. Let’s say you owe a lot of money to credit card companies. I can give you the first couple of steps you need to take, but it’s important for you to realize that even if you dig yourself out of debt, you’ll probably end up right back in the same hole if you don’t curb your tendency to buy stuff you can’t afford. That’s something you’re going to need to address right away. Make the switch to only paying cash if you need to. (Having to physically hand over something tangible has a way of making people question whether or not the purchase is actually necessary or if it’s more of a luxury.) Alternatively, enact a rule that you won’t ever buy something the first day you think about it. Forcing yourself to “sleep on” such decisions will help you cut out a lot of impulse buys.
Ok, after you get a handle on spending habits, the hard work begins. Here come three steps to follow. Each step should be completed (or nearly completed) before moving on to the next step.
(Before I get started, a note to the parents of kids under 18. Starting this month the Federal Government is giving advance payments each month for the rest of the year that will total half of the year’s child tax credit. If you normally have to pay taxes when you file, don’t spend this money, because getting an advance on your tax credit is going to result in a larger tax bill when you actually file. If you normally get a refund though, this is a great place to start for step 1.)
Step 1: Using money you can scrounge from your budget, money you can swing from a side gig, or even irregular windfalls like stimulus money, yard sale proceeds, or gifts, save up $500-2500 for your emergency fund. You determine the amount by looking at where you are on the scale of expenses. If someone else pays your rent and you take either public transportation or a ride-sharing service to get where you need to go, it’s okay to shoot for the lower end. If you have a mortgage and a vehicle or two, shoot for the upper end. This money is not to be spent unless…you guessed it…there’s an emergency. Cars break down, kids destroy stuff, water heaters reach the end of their life and quit working. The idea is to avoid going further into debt for unexpected expenses, and life is full of unexpected expenses. This money should be available quickly (not locked up in a certificate of deposit, for example), and should be considered your new “zero balance.” That means if you’re keeping $500 as your minimum, $500 in your account actually means you have zero. A balance of $510 means you have $10 to play with. The emergency fund is not to be used for regular bills…your regular bills should be covered by your budget. This is not for celebrations, splurges, or any sort of “I want” situation. The emergency fund is kept for unexpected but necessary expenses. If you use money from your emergency fund when you’re in a later step, halt progress on that later step until you replenish your emergency fund.
Step 2: Start tackling the debt. This is the one that takes time and persistence. After you’ve established your emergency fund, continue using the same type of income you were saving to build the emergency fund and instead apply it toward paying more than the minimum payment on your credit card bills. Credit card statements are now required to have a section that tells you how long it will take you to pay off your balance if you only make the minimum payment. By taking several months to pay off a purchase, you’re not getting away with anything…you’re actually inflicting a good amount of financial harm on yourself. With high interest rates in the teens, even a minor balance will take a ridiculously long time (and a ridiculously large amount of money) to pay off a small balance. So if you want to get out of debt, you’re going to have to make more than the minimum payment on your accounts. The best way to use a credit card is to pay off the balance in full every month. (And no, don’t just buy stuff to get the points or rewards for your credit card’s rewards program!)
Lots of people that are heavily in debt carry balances on multiple accounts, and they play a version of a shell game to shuffle the debts around from one account to another while carrying a debt load on yet another account. If you really want to get out of debt, you need to make your money work more efficiently for you. Let’s say you’ve got five accounts that you’re reliably making minimum payments on. It’s good that you’re meeting your obligations, but let’s start retiring some of those debts. Now that you’ve built your emergency fund, it’s time to keep the momentum going. The additional funds you were using to establish your emergency fund should now be added to the minimum payment of one of your accounts. Even if it’s only an extra $20 per paycheck, add it to the minimum payment you’re making on one of the accounts.
Your success will likely depend on the type of person you are. If your attitude is “I want to get out of debt without paying one cent more than I have to,” then your plan should be to start throwing all the extra money you can possibly muster at the account that’s charging the highest interest rate, regardless of how large the different balances are. Once you pay that off, you’ve grown the potency of your arsenal; you’ll now be able to use the money you used to build your emergency fund plus the amount you used to make the minimum payments on the account you just paid off. If your monthly minimum payment was $30, your new capability will be that $30 per month plus the amount you used to build your emergency fund. One of your debts is paid off and you’re gaining momentum.
This strategy is the one that makes the most rational sense, but in reality it can be disheartening for some people because it might feel like it takes forever to make any progress. If you know you’re going to need some small victories to encourage you along the way, you may need a different approach. If that’s you, take a look at your complete list of debts and start making extra payments on the account with the smallest balance. Add whatever additional principal you can to the minimum payment, and keep chipping away at it until that balance is down to zero. After that, do the same thing as in the other example: add your newfound cash flow to the minimum payment on a different debt. The bigger the debt that you pay off, the more cash flow you’ll be able to create and apply to paying off other debts.
The idea is to concentrate your extra cash on one account at a time. By all means, continue making your minimum payments on all your accounts, but any leftover capacity you’ve got should be directed at only one account. (If you’ve got an extra $20 a month for paying down debt, it’s better to throw that whole extra $20 at one account rather than throwing an extra $4 at five different accounts. Persistence is important, hang in there. It may take some time, but being debt-free is within your grasp!
Step 3: Built your savings large enough to contain at least three months (but up to six months’ worth) of living expenses. Even without global pandemics, this is a common goal for a lot of folks. Mortgage or rent payments are likely going to be the largest expense, but don’t forget car payments (if applicable), grocery bills, utility bills, any subscriptions that you don’t plan to cut in the event of financial hardship, insurance expenses, gasoline/commuter costs, and anything like alimony or child support payments. Layoffs, natural disasters, market downturns, and any number of other triggers can set off a financial catastrophe for earners, and having a cushion large enough to last you a few months will give you more options as you await resolution (find a new job, wait for the insurance check to arrive, sell your house, or whatever that resolution looks like).
By the time you’ve completed all three of these steps, you’re in a much better situation than you were before you started. Persistence and focus are your key assets in this fight.
You don’t have to be religious to put this advice to good use. Know someone that could benefit from it? Please pass this along to them. Too many Americans are living paycheck to paycheck. Whatever your life story or wherever you come from, our society is better off if people and families can effectively manage their cash flow and keep their financial house in order. Spread the word!