Eliminate Consumer Debt
There can be various types of household debt including a mortgage on residence, a car loan, and consumer debt. I define consumer debt as debt a household incurs to finance their lifestyle. Most often this credit card debt.
Note, if a household has accumulated $3,000 of credit card debt during the course of a month and pays it off at the end of month, this is not consumer debt. It is sensible money management using the credit card as financial tool.
If you do not have consumer debt, congratulations. If you do, your not alone. One study found that about 43% of credit card holders have a revolving balance that is carried from month to month.
A hard truth for those is it difficult if not impossible to reach your financial objectives if you have ongoing consumer debt.
For example, if a household accumulates $4,000 on a credit card debt during the course of month and only pays $3,000 on the card at the end of the monthly, the remaining balance of $1,000 will carry forward at 20% or higher interest. This is the beginning of consumer debt. If the balance and interest charges increases over the course of the year, the consumer debt becomes an increasing financial burden.
Continuing the example, if the household starts the year with zero credit card debt and ends the year with $5,000 credit card balance, this means their expenses exceeded their spendable income. Keep in mind, each month they are paying an interest rate of 20% or higher on the debt being carry forward.
To pay off the $5,000 in 12 months at 20% interest rate it would take an extra monthly payment of $463. At the end of 12 months, the total interest cost would be $558. If it takes two years to pay off the $5,000, the additional monthly payment reduces to $254, but the total interest increases to $1,107.
By comparison, if an investor invested $254 for 24 months at 7% the investor would have $6,523. If the investor than put the $6,523 it into a separate investment account for the next 28 years, [total of 30 years], the market value at the end of 30th year would be $43,370.
Who would you rather be. The one paying off debt or the one investing money. You want your money working for you, not paying interest to someone else.
A $5 coffee at a coffee shop is enjoyable. A $5 coffee at a coffee shop that becomes part of a credit card balance being carried forward for months or longer is very expensive.
You can pay off the debt and It starts with a an honest detailed budget which covers all expenses and a commitment to stay within the budget. If possible, the budget should include reduced spending in some discretionary areas with the savings used to pay extra on the debt.
If you have one credit card balance that is being carry forwarded, minimally you should pay the expenses incurred during the month plus an additional amount to pay off the balance.
If you have more than one loan/credit card debt, list each debt, the current principal, interest rate, and monthly payment. Use this information to calculate the time required to repay each loan. As you pay off one loan, add the amount of. payment to the highest interest loan payment to pay it off sooner. Continue this process until you are debt free.
Once the consumer debt is gone, save or invest your total monthly loan payments going forward to create a cash cushion and accumulate funds for short-term and long-term financial objectives.
It’s simple in concept, but takes courage and determination to implement. But if you got into consumer debt, you can also get out.