My grandmother never learned how to drive. She moved to New York City fresh out of her teens and learned the transit system. "Women don't need to drive," she would say, with a sly smile. "Not with an M-A-N around." Grandma had some "old" ways of thinking and operating about her. When my grandfather (her chauffeur) passed away, I became grandma’s designated driver for any travel beyond a five-block radius. I remember taking her to the bank in the fall to withdraw a large sum of money from her Holiday Club. (For those who have never heard of such a thing…a Holiday Club is a savings product at local or regional, and some commercial, banks that offer a low-interest rate for gradual saving over the course of several months.) Grandma would take out her balance in November and always paid cash for her holiday shopping. Today, I’d be hard-pressed to name five family members or friends who use a cash only method to pay for their holiday shopping. (Me, included.)
Remember…our goal is financial peace and freedom in the coming year. Maintaining and increasing debt load is incongruent to this goal. So, our next “to do” is to…
Develop a Debt Reduction Plan.
Debt is a common nemesis. Statistics reveal that consumer debt (i.e., credit cards) has risen to an average of about $16,000 for households that carry balances from month to month. In 2017, American credit card debt has risen nearly 8% since last year to a tune of $905 billion. That does not include basic needs debt such as a mortgage. If you are debt-free, kudos to you! The rest of us needs a strategy to chip away at the prison walls of debt. There are many ways to approach debt reduction out there. Two that I like are the debt snowball and the debt stacking methods.
Debt snowball: Pay off the credit with the lowest balances first while maintaining just the minimum payments on all others. If you have $250 to spend on paying off your debt each month and all your minimum payments total $200, the remaining $50 would be applied to the credit vehicle with the lowest balance. Once that card is paid off, then apply its minimum monthly payment to the card with the next lowest balance. And so on. Basically, you are working from your lowest balances to the highest.
Debt stacking: Pay off the highest interest rates first while maintaining the minimum payments on the others. Using the same example, this strategy would have you attack the credit with rates like 20% or higher with that remaining $50 of debt reduction money. Once the credit card with the highest interest rate is paid off, then apply that payment to the card with the next highest rate. Get the picture?
Caveat-I would suggest that you compare the payoff timeline for each method before employing one. One may seem like the best approach upon first look but once the numbers are plotted out, you may find the other works better for your situation.
In my 20s, I got into serious credit card debt. My dad had given me an additional card on his American Express account, to be used “frugally” were his words. That introduced my credit eligibility to other creditors. I had offers from every creditor from hither to yon. I didn’t understand that treating my roommate to dinner off campus once every week or picking up a few new clothes every month would translate into so much debt. When I finally took a good look at (assessing) where I was, I think my total balance of all my credit card debt was hovering somewhere just north of $5000. For a young adult, in graduate school, that was a lot!
I didn’t know anything about snowball or stacking…I just figured it out on my own. And it began in my head. I made the decision not to allow those balances to balloon anymore and to I apply the money from extra work hours (my side hustle tutoring business) to the reduction of that debt. I paid it all off within a year, which is an accomplishment given my humble teacher’s salary at the time.
I wish I could report that I have not incurred any debt since that time in my life. Alas, that is not the case. Life happens. However, that bend in the road of my journey always stands as an encouraging reminder to me that with discipline and a debt reduction plan, I can move out from the grip of debt.
I invite you to join me in this pursuit.
Pick a debt reduction plan that appeals to you. Each of the approaches I mentioned above work. And they may be used for both your personal and business finances. Just pick one and go at it. My personal hack is to use a debt reduction worksheet to keep track of my progress. It has a positive psychological effect to see those balances going down.
Though there is wisdom in the approach, I'm not yet ready to operate like my grandmother, using only cash everywhere. But I like the sense of control I feel when I know the resources that are coming in are going where I want them to go, not where they have to go. That's why debt elimination is key!
Stay tuned for the last “to do” on my list. This final one is probably the most important them of them all.
Until next time…