If you are like most Americans, you are living paycheck to paycheck. Research released earlier this year by Bankrate.com revealed that more than 70% of Americans have less than six months of expenses saved. And 40% carry a balance on their credit card month-to-month. According to Alfred and Emily Glossbrennor, “paying off credit card debt may well be the single most important and most difficult of all financial goals.” Most important because getting out of debt means you can save, which is the first step to financial health. Most difficult because paying off credit card debt means you must be disciplined with your spending. So here’s why it’s so important to pay off debts.
Choosing to save at a .01-.05% return when you are paying 15-20% interest on your credit card balance doesn’t make sense. At the end of one year with $10,000 in a savings account at .05% you will end up with $5. Alternatively, if you have a $10,000 credit card balance at 15% APR, at the end of one year you will have paid about $800 in interest if you make a minimum monthly payment of $400. I don’t know about you, but given the choice I’d rather not spend $800 in interest than get $5 for saving.
Now that we understand the why, let’s get to the difficult. You can only spend what you have (difficult) and you have to be laser focused (difficult). But the process is actually quite simple. You can stop living paycheck to paycheck by turning your minimum monthly credit card payments into monthly deposits into your savings account. Here’s how.
Start with your highest-interest credit card and pay that balance off first. Throw any extra money (sell something, birthday money, bonuses, savings from cutting expenses, etc.) you have at it each month until it’s gone. Meanwhile, pay only the minimum on your other credit cards, and don’t take on any more debt. Leave your credit cards at home and shop with your debit card or cash. Once you’ve paid off the first card, move on to the one with the second-highest interest rate. Include the minimum payment from the first card plus any extra money you have each month, and repeat this process with the rest of your cards.
The process will take months—or even years—depending on how much debt you have, which is why staying laser-focused on paying more toward the highest-rate balance every month is so important. You can also apply this method to car loans and student loans by targeting the highest-interest loans first. Pretty soon, you’ll be out of debt and in a position to save—all without needing to add more income.
