Debt Avoidance — The Everyday Crown Rocker

Apr 11

Apr 11 Debt Avoidance

Debt can be a major stressor in the life of any crown rocker. It has the potential to impact self confidence, cause bumps in marriages, and reduce quality of life due to lack of discretionary income. So before we get into the nitty-gritty of how to avoid and manage debt, I want you to take a moment to be grateful for what you have. Focus on the positives in your life. Write three to five things you’re grateful for as they come to mind. For these next few minutes as you read, it’s not about where you’ve been, but where you’re going. The best way to get out of debt is to avoid it. How? Read on.

When you plan where your money will go ahead of time and stick to that plan, you won’t be spending more than you make. Feel free to reference my first article for guidance on how develop a spending plan.

Establish an Emergency Fund.

Before getting overwhelmed with setting aside a huge lump sum of cash, focus on setting aside $1,000 into a separate bank account for emergencies. As you progress in your financial journey, you can then shift your focus to saving three to six months worth of living expenses into this account. This way when the car breaks down or the hot water heater goes out, you will be prepared to cover the cost and won’t look to a credit card for financial relief.

Avoid “browsing” or “window shopping”.

It can be easy to justify purchases outside of your spending plan once you see a great “deal.” Seeing an item on sale may seem like a good bargain, but the only way it will save you money is if you were already planning on buying it. By shopping with a general idea of what you are looking for (winter clothes, work pants, etc), it will help you stay disciplined and within the guidelines of your spending plan. Then you won’t receive that lofty credit card bill in the mail next month and wonder how you will pay it off.

Do NOT take out store credit cards.

These cards might save you 20%-30% today, but they generally have above average interest rates of 25%-30%. If you fail to pay the balance in full each month, you will pay more for your purchases over the long term due to the higher interest charge. In addition, a store credit card could lead you into the trap described in item three above.

Reduce or eliminate credit card use.

Many of you may be thinking, “But I get ‘free’ money in the form of cash back on my credit card.” Statistically speaking, the average person spends about 30% more overall when they use a credit card. When you hand over a $20 bill or see your bank account immediately decrease after a purchase, psychologically you “feel” it more compared to swiping a credit card. Instead of spending $100 in cash or debit, you would spend $130 on your credit card. Even if you earn 3% cash back, your spending would calculate out to $126.10 ($130 minus their 3%) which is much more than the $100 you would have spent in cash or debit. To put it simply, paying with cash or a debit card makes it much easier to stay on budget. If you do use your credit card, only use it for budgeted items and understand the dangers of it. So what if you’re already in debt? How can you manage to get out of the hole?

If you’re currently in debt take a deep breath; there is a way out! In my last article, I wrote about the debt snowball method in which you tackle your smallest debt first and then tackle your larger ones. In this article, I’d like to walk you through this approach in greater detail. To jog your memory, the steps are:

(1) List your debts (besides mortgage) from smallest balance to largest outstanding balance.

(2) Factor the minimum payment of each debt into your spending plan and pay each according to schedule.

(3) Choose the debt with the smallest balance and repeatedly pay down as much as you can.

(4) Once the smallest debt is eliminated, begin applying the payment you were making toward the next smallest debt. Now let’s apply this process to a real life example. According to Nerd Wallet, the following table outlines an average American household debt load:

We can check off Step 1 and 2, since the debts are arranged in order of increasing amount and the monthly payment for each is listed. Next, we would make the minimum payments on each debt, which totals out to $1,125 a month. Remember, these minimum payments should already be factored into our spending plan!

Now, let's say that our spending plan affords us an extra $300 a month to put towards our debts. We would then pay that additional $300 to the Store Credit Card for just over three months to eliminate that smallest debt entirely. With the Store Credit Card paid off, we would then take the $325 total we were paying toward it and start putting that money towards the next smallest debt: the Visa Credit card bill.

At this rate, we would be paying $375 a month to the Visa Credit Card until it is paid off. Then we would start paying an additional $375 to our Amex Credit Card, and so the snowball continues.

This approach helps us eliminate our debts one by one. We are able to celebrate the successes as each debt is eliminated along the way and maintain motivation as each subsequent debt is paid off. I hope you will find trust and confidence in this process as you tackle your debt free journey!