January 12, 2017
It’s that scary time of the year: Your December credit card statements start rolling in. I hope that you have everything under control and can pay off every balance in full. But if that’s not doable, I want you to promise me that you will be extra smart in how you take control of your spending hangover.
• Don’t Settle for Paying The Minimum Due. Fight the temptation to only make the minimum payment due. Push yourself to pay more. That not only will save you money in the long haul-you’ll get the balance paid off faster-but it is such an empowering move: You are making the choice to do more than the minimum.
• Get Into Full-Blown Trim Mode. Okay, if you are determined to pay more than the minimum, you need to come up with the cash to make it happen. Going on a “wants” diet for a few months might do the trick. Scale back your nights out with friends, or take a longer break between manis, pedis and haircuts. Add it up and you might find $100 or more extra in savings each month. I also want you to write down the cost of every subscription or monthly service you have. Anything you don’t use needs to be cancelled. Everything you keep needs to be trimmed. There is a cheaper cable package. There is a cheaper cell package.
• Give yourself a Deadline. I hope you realize that the credit card company wants you to take forever to pay off the balance. Every month they get to collect interest is good business for them. And a lousy deal for you. The average interest rate is around 15%, and rates will continue to rise in 2017 if as expected the Federal Reserve continues to raise its target interest rate. The smart move if you can’t repay a balance in full is to commit to a payback period. When we set tangible goals we are more inclined to make it a priority. A credit card repayment calculator will tell you how much your monthly payments should be to have a balance paid off in the time frame you choose.
• Focus on Highest Cost Debt. If you have unpaid balances on multiple cards, you need a comprehensive strategy for how to attack. It’s really quite easy:
1. The card that charges you the highest interest rate is your priority to get paid off first. So on that card you must pay more than the minimum due each and every month. The goal is to get rid of that balance ASAP.
2. At the same time, just make sure you are sending in the minimum due on any other cards.
3. Once you have paid off the entire balance on the first card, make the next card with the highest rate your new focus. Take all the money you were paying each month on your first card and plow it into the second card. Keep at it until that balance is paid off. And if there is a third card in the mix, just make the minimum payments. Once you get the second card paid off, follow the same strategy with the next card.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.