What’s Your Number?

By Lauren Byrne

No…not that number. But, I bet I caught your attention. I’m talking about another, much more significant, number. A number that will play a role in your self-esteem, your major life decisions and your ability to make choices that allow you to live a fun and fulfilling life. A number that will stick with you far longer than “Blonde Guy From Club,” a product of poor judgement and three too many margaritas. I’m talking about your debt number, or the total amount of money that you owe to another person or company.

Statistically speaking, being in debt is normal. If you are in debt, know that you are far from alone. As of 2013, the average U.S. consumer held over $7,000 in credit-card debt alone. This number becomes even scarier when you factor in student loans, mortgages, auto loans or any other sources of debt. While some amount of debt is certainly “normal” and, in many cases, necessary, it is the single largest barrier to building personal wealth and is the most common, and overwhelming, problem facing twenty-somethings today. We can all agree that debt is damaging financially, but I would also argue that debt can be equally damaging psychologically. As I’ve stressed in previous posts, I am all about balance. I am equally passionate and excited about the math and numbers behind personal finance, as I am about using personal finance as a path toward self-empowerment, happiness and a rewarding life. Tackling debt is a huge win on both fronts!

I am proud to say that, as of today, I have $0 in credit-card debt, but, this has not always been the case. A few summers ago, I had recently graduated from college and had two glorious months of freedom ahead of me before my first day of work and the pending gloom of entering the real world. Two months of no responsibility sounded like a dream come true. However, there was one big problem. I had no income…yet. My spontaneous, free-spirited and, at the time, naive self decided that the obvious solution would be to apply for a credit card. After all, I was receiving dozens of applications in the mail every week. Why not take advantage!? Huge mistake. Those two months of fun, quickly, came to a close and I received a daunting bill in the mail. In just 60 days, I had amassed a balance of $4000! While reviewing my statement, the only thing I could remember doing in the prior months was attending far too many Mariners games at which I spent a little time watching baseball and a lot of time in the beer garden. A few years later and a great deal wiser, I can, jokingly, look back on this experience as my $4000 Coors Light bill. While somewhat embarrassing, I wanted to share this story, so that you can see that, if you have debt, I have been there and there is a way to get out. It takes persistence and a game plan, but you can do it!

For those who are following my 20/50/30 budgeting method, you can begin to tackle your debt with The 20. After all, the 20 is all about your future self and turning your dreams and fantasies into a reality. You definitely can’t live the life of your dreams with a huge debt cloud looming over your shoulder, so feel free to contribute as much of The 20 as you like toward paying down your debt. In fact, if you are comfortable doing so, after you have built an emergency savings fund, you might want to redirect your savings contribution toward your debt. Mathematically speaking, the interest rates on your debt far exceed the interest rates on your savings account. Therefore, your money will go further being redirected toward your debt, than into a low yield savings account. Alternatively, if you decide that paying down your debt is a huge priority to you, but do not want to decrease your contributions to savings or to other future goals, you can cut back, temporarily, on The 30, or the lifestyle portion of your budget, until you are debt-free.

Whatever amount you decide to contribute toward paying down your debt, below are three of my favorite methods to do so, one of which made my Coors Light bill a thing of the past. To help illustrate the methods below, let’s assume you have three sources of debt: a.) $3000 car loan at 8% interest, b.) $15,000 student loan at 4% interest, c.) $7,000 AmEx bill at 16% interest.

1) The Snowball Method

As I mentioned earlier, being in debt is a huge psychological burden for many people. If debt is especially harmful to your self-esteem, the snowball method may be the right method for you. Popularized by well-known financial celebrity Dave Ramsey, The Snowball Method suggests listing all of your debts in order from smallest to largest and paying as much as you can on the first/smallest debt and the minimum amount due on the remaining debts. While financially speaking, this is not the most prudent option and will, likely, cause you to pay more in interest in the long run, it is a HUGE psychological win and accomplishment every time you can cross one debt off of your list. This snowball effect has proven to keep many people motivated and allows them to see quicker results. Based on the debt sources above, the debt repayment plan for the Snowball Method would look something like this:

  • $3,000 car loan - Pay maximum amount that you can afford
  • $7,000 AmEx bill- Pay minimum amount due
  • $15,000 student loan - Pay minimum amount due

While the car loan does not have the highest interest rate, it is your lowest balance and you will be able to tackle this debt more quickly than the other two debt sources. This method is all about seeing the fastest results and celebrating psychological wins.

2) The Interest Rate Method

This method is the most financially and mathematically efficient approach. If you are the kind of person who cares less about the psychological win and more about giving as little money as possible to a credit card company, this is the method for you. This method would encourage you to list all of your debts, in order, from highest to lowest interest rates, ignoring the total amount due. Tackling your highest interest rates more aggressively will allow you to pay less money in the long-term, but could take a little bit longer to see results or to cross any debt sources off of your “To Pay” list. Based on the debt sources listed above, the repayment plan for the interest rate method would look something like this:

  • $7,000 Amex Bill, 16% interest- Pay maximum amount that you can afford
  • $3,000 car loan, 8% interest - Pay minimum amount due
  • $15,000 student loan, 4% interest - Pay minimum amount due

3) Good Versus Bad Debt

Financial planners, as well as individuals charged with your fate when it comes to applying for a mortgage, car loan or any other request to borrow money, differentiate between good debt and bad debt. Bad debt is a debt that doesn’t help you make any money later, but, instead, brings you farther away from your goals and dreams, such as credit card debt or payday loans. Good debt is an investment in your future, a means to a desired end, such as a mortgage or a student loan. In other words, bad debt depreciates and good debt appreciates. The third method would encourage you to rank your debt, in order, from bad to good. In this method, you want to pay off the debt that is most harmful to your future, and that prevents you from living the life of your dreams, first. Based on the three sources of debt above, you would structure your repayment plan as follows:

  • $7,000 AmEx Bill - Pay maximum amount that you can afford
  • $3,000 car loan - Pay minimum amount due
  • $15,000 student loan - Pay minimum amount due

This third method is less black and white than the others. The first two methods rely strictly on numbers, whether it be the interest rate charged or the total amount due. This method, however, is, somewhat, up to your personal discretion and opinion. There is a story behind how and why we owe the money that we do. While at first glance, a large credit card balance might appear to be bad debt, in this case, the $7,000 AmEx bill might be a charge for a business or entrepreneurial venture that you believe will have strong payoffs for your life and future in the end. On the other hand, the $15,000 student loan, generally regarded as a good debt, might have been less for education and more for spring break trips to Cabo and new dresses for Winter Formal. If this is the case, you might want to restructure your repayment priorities.

Regardless of the method that you choose, the most important step is getting started and knowing that you are not alone. Paying off credit card debt takes patience, time and a great deal of willpower, but is the most important step that you can take toward living the life of your dreams and building personal wealth. As always, if you have any questions, feel free to email me at laurenkbyrne@gmail.com.

In case you missed last week’s post on creating a budget that actually works for the 20-something lifestyle, check it out here: https://medium.com/@laurenbyrne/ballin-on-a-budget-49bab5279a54#.805xz5etu

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