In the Part I of this series I had you develop your personal budget using the Personal Budgeting Spreadsheet.
This budget should detail all your cash inflows and outflows for a given month. Under the Quick Budget Section you should be able to get a snapshot view of Income and Spending. If this is your first time developing a budget you will know that it is very difficult to forecast spending for any given month. I would recommend that you look at last months income and spending habits by reviewing paycheck stubs, receipts, ATM and credit card statements to get an idea of real historical values. This will allow you to develop a more thorough and accurate budget.
This part of the series deals with credit card debt. If you were like me 5 years ago you had several credit cards of varying balances yielding ridiculous interest rates (ranging from 15% to 24%). Looking at those interest rates you are better off sometimes borrowing from the mob and risking the chance of losing a couple fingers or limbs for failing to repay. However, what’s done is done.
Stop using your credit cards (but don’t cancel them, you can cut them up but don’t make the mistake of canceling the credit card, I will explain this when we get to the Credit Score part of this series)! Setup a payment plan and pay more than the minimum payment. If you have the ability to pay double, triple or quadruple the minimum payment do so. The interest you will pay over the course of paying the minimum payment is almost enough to give you a heart attack.
If you are planning on putting a purchase on credit ask yourself, “Can I really afford this if I am paying with a credit card?”.
The plan is to evaluate how much money you will allocate (in your budget) to paying down credit card debt.
Let’s look at a hypothetical scenario. Let’s say that we have the ability and means of allocating $500 per month to repaying credit card debt. This number is dependent on your Personal Budget Worksheet. It’s basically a financial commitment you are making for credit card repayment. Try to stick with this allocation from month-to-month. As I stated before, your financial budget worksheet should be a “living and breathing document” and after editing and modifying this worksheet from month-to-month your monthly allocation may go up, sometimes down due to unforeseeable circumstances. However, in most likelihood, the number should go up over time.
The logic is as simple as it gets. Payoff higher interest charge cards first. Why? Because, they yield the highest interest from month-to-month! It’s pretty much common sense, however I’ve seen may people make the mistake of paying their cards in an even distribution. Let’s say they have $500 allocated to paying credit card debt, they pay $500/3 = $166.67 to each credit card but don’t realize that this is the wrong way to approach this type of debt. So here is the plan. In the chart above you will notice three credit cards varying in interest rate, minimum monthly payment, and balance. The plan as I stated earlier is to pay minimum payments on the lower interest rate cards and (what I call) “front-loading” the highest interest credit card.
For Example:
Monthly Allocated for Credit Card Repayment = $500.00
Month 1
* Does not include monthly accrued finance charges
Month 2
* Does not include monthly accrued finance charges
Month 3
* Does not include monthly accrued finance charges
As you can see, what you are doing is deferring principal payments on Credit Cards #1 & #2 to make larger principal payments on Credit Card #3. Once Credit Card #3 is paid off completely you will employ the same technique to the remaining credit cards (Credit Card #1 should be “front-loaded” while Credit Card #2 will get minimum payments. I would create a spreadsheet and develop a plan until payoff. Whatever you do realize that this is only as effective as your commitment! As you can see, if you increase your monthly allocated dollar amount for credit card repayment the life of your plan will decrease as you are paying these cards off faster!
Summary
- Compile a list of your credit card balances, interest rates and monthly minimum payment
- Never pay minimum payment on all cards
- Develop a plan or schedule for pay off
- Develop an allocated monthly payoff amount
- Pay minimum on lower interest cards first and “front-load” higher interest cards with remaining amount from allocation.