Debt, debt, and more debt. If you’re as “lucky” as I am, you have lots of different creditors lining up every month to have their way with you and take your cash. Whether it is the studly student loan, the oh-so-seductive credit card, or even the sexy line of credit, they always seem to seduce me into giving them my money – and believe me, none of them leaves me feeling satisfied or proud of my time spent with them. At the end of each month I feel so ripped off because so much of my money is being pi$$ed away on these temptresses - a whopping $353.31 in interest to be exact! In this article I hope to help you resist these suave creditors and remind them that “no means no!”I have four different kinds of debt that I am currently paying off (successfully – woohoo!): my MasterCard, student loan, student line of credit, and regular line of credit. Each of these lovelies has their own interest rates and terms. It’s pretty gosh darn important to make sure that you figure out what you’re paying in interest for each of your debts if you’re starting a debt repayment process. This is the part where you have to do a bit of work, I know, I know, you can’t do this while you’re at work surfing the internet, so when you get home grab all your credit statements – it’s spreadsheet time!
My “new roommate Gail” has a book that is full of wonderful tools to help you get your debt in order. This exercise is a summary of what she taught me in her book. Let’s start with a credit card bill (because these are usually the most awful). Find your current interest rate (the rate should include the prime interest rate to get your total); in my case my MasterCard rate is 12.5%. Now take the amount that you owe to the credit card; I’m an excellent spender of other peoples’ money so my balance when I did this exercise was $14,581.45! Try and beat that! Actually if you do have a higher balance than that you REALLY need to follow financial blogs religiously and set your credit card on fire RIGHT NOW!
Take your balance and multiply it by your interest rate to find out how much you’re paying in interest every year. For example $14,581.45 x .125 = $1,822.68 = Bull$hit! Think of all the great things I could be getting with that money! That’s an all-expenses-paid trip to Cuba
Debt | Interest Rate (%) | Amount Owed ($) | Annual Cost in Interest |
MasterCard | 12.50% | $14,581.45 | $1,822.68 |
Personal Line of Credit | 10.25% | $4,991.57 | $511.64 |
Student Loans | 5.50% | $9,174.74 | $504.61 |
Student Line of Credit | 4.50% | $8,445.36 | $380.04 |
When you add it all up, I’m paying $3,218.97 in interest only - every year! Now you look at these numbers and think, well I only have a student loan and I’ll have it all paid off in 9 years using their payment plan. Okay, let’s say you have a $20,000 student line of credit at an interest rate of 5.5%. If you only use the plan given you by student loans, in 9 years you will pay $12,381.89 in interest alone! Don’t believe me, calculate it yourself here.
 |
| I'm fuh-reaking out!! |
So now you’re freaked out and you’re saying: “Help me John! Help me!” Okay, since you were nice enough to read this blog and send me those scandalous pictures of you I will help. If you want to save some money and avoid the interest monster, you’re going to have to bite the bullet and commit to paying off your debt faster. I gave myself 3 years. Most people should be able to get rid off all their debt in three years. It’s a really tough thing to do at times, especially when you’re on your own and trying to get rid of $40,000 of debt on less than $50,000 annually but you can do it!
The first part to Gail’s amazing debt repayment tool is figuring out how much you are paying in interest each month. The formula for this is TOTAL DEBT multiplied by INTEREST RATE divided by 12. My MasterCard monthly interest is $151.89! Next part is to take the balance that you owe for each of your debts and divide them by 36 (3 years, 12 months in a year) to figure out how much you need to pay to get the debt paid off in 3 years. For MasterCard, I need to pay $405.04 each month. Now add the two numbers together to calculate what you actually have to pay each month. My monthly MasterCard payment to get my debt paid off in 3 years is $556.93. Do this exercise for all of your debts and you’ll get numbers like this:
Debt | Rate | Amount Owed | Monthly Interest Cost | Payment Cost | Average for paying off in 3 years |
MasterCard | 12.50% | $14,581.45 | $151.89 | $405.04 | $556.93 |
Personal Line of Credit | 10.25% | $4,991.57 | $42.64 | $138.65 | $181.29 |
Student Loans | 5.50% | $9,174.74 | $42.05 | $254.85 | $296.90 |
Student Line of Credit | 4.50% | $8,445.36 | $31.67 | $234.59 | $266.26 |
Total | $37,193.12 | $268.25 | $1,033.13 | $1,301.38 |
Alright, you’ve got all the numbers crunched and then you say, oh $hit, I have to put how much of my effing money into debt repayment? At least that’s what I said. I looked at these numbers and thought that my minimum payments were no where near these numbers, and they weren’t. Minimum payments are a horrible trick that that banks came up with to get you to think that you’re doing good because you’re making them, but you’re really not doing good for yourself, you’re just giving them more money which they really don’t need. If you want to get serious about kicking your debt in the ball$ you need to do this exercise and figure out what you should be paying. The longer it takes you to pay these mofos down, the more money you lose to interest.
As a Canadian, I am no stranger to snowballs so Gail’s snowballing trick is excellent and it works oh so well! If you have debt that is costing you a lot of money like my MasterCard and you have other creditors to pay, consider snowballing your payments. How do you do this you ask – here’s how. Identify your biggest problem debt (my MasterCard). Now, find out what your minimum payments are. You can find this by looking at your statements or simply calling your creditors. Take the total of your average for paying off your debt ($1,301.38) and subtract your minimum payments for everything but your biggest problem debt.
Debt | Average for paying off in 3 years | Snowballed |
MasterCard | $556.93 | $966.03 |
Personal Line of Credit | $181.29 | $141.94 |
Student Loans | $296.90 | $107.99 |
Student Line of Credit | $266.26 | $85.43 |
Total | $1,301.39 | $1,301.39 |
So now, I make $966.03 payments to my MasterCard instead of $556.93 and only make the minimum payment on my other debts. The reason I did this is to save money on interest. Once you have your biggest debt paid off, redistribute that $966.03 onto your other debts, and so on until you have no more debt! If you do the math, I will have ZERO debt in 3 years! How cool is that?
Still not motivated to put down your credit card? Consider this, if you can’t pay off your balance in full every month and you buy something (new clothes, a fancy meal, tickets to a Miley Cyrus concert – you’re only going to keep your friend company – riiiiiiiight) then think about how much it will really cost you. A new pair of jeans for $200 for example, will cost you $39 in interest over 1 year at 19.5% interest. Sure, it’s only $39, but that $39 could buy you a great shirt to go with those jeans. Why waste money when you don’t have to?
Listen, you can do this! If I can get my $hit together, anyone can. I know that I am a rare case for carrying this much debt amongst my friends (which is a good thing) but if you’re like me and you’re the lone wolf $hitting their pants over your debt, don’t panic for fox snakes, we’re in this together and we will kick this debt right in the pants!
*(hugs)*
John
(Pssst!! Burning your credit card won't work if you are like me, and have the number memorized!)
ReplyDeleteKeep up the good work!!