The other day I drove into the bank parking lot and noticed an attractive, well-dressed guy using the ATM. I tried to quickly park and "accidentally" bump into him to strike up a conversation, but he was too quick as I watched him speed away in his shiny BMW.
Hmm, he left behind the transaction receipt. My first thought was "cool, I'm going to be on an episode of What Would You Do?" I removed the receipt with ATM Hottie's account information on it and pretended to throw it in the trash so I could tell John Quinones I did the right thing.
After confirming TV cameras were not sneaking up on me, I finally took a look at the receipt. How in the heck does someone with a BMW and hip clothes have such a small one? Mine was bigger than this by the time I was 12. Of course, I’m talking about account balances.
Now maybe this guy shouldn't be thrown under the bus so quickly. It’s possible ATM Hottie diligently transfers his weekly spending budget into his checking account. Or he keeps the bulk of his cash in a higher interest savings account. Both of these things would be a huge turn-on for a finance geek like me.
But it did get me thinking about how many of us live beyond our means and how we use debt to subsidize our unrealistic expenditures (see last month's article on the cost of being gay). The average American consumer has $5,000 in credit card debt so there are plenty of us living a little too richly.
The next few paragraphs outline an easy trick to get rid of that nasty, expensive credit card debt. It'll only take two minutes and will be totally painless (I seem to say that often …)
Let's say our hypothetical consumer has two credit cards: a Visa carrying a $5,000 balance with a 12.99 percent interest rate and a $100 minimum payment; and a Mastercard carrying a $2,500 balance with a 17.99 percent interest rate and a minimum payment of $50.
In total, that’s a balance of $7,500 and a minimum payment of $150.
Two huge things have to happen now for this trick to work.
First, the credit cards CANNOT be used anymore. Yes, you read that correctly. Cut 'em up, freeze them in a block of ice, mail them to a trusted friend or family member. Do whatever it takes to make your cards inaccessible and difficult to use.
Second, $150 per month must be paid towards the credit card balances every month until they are paid off. If this happens, then the next month looks something like this:
The Visa balance is $4,950 with a minimum payment of $99, while the Mastercard balance is $2,475 with a minimum payment of $49.
In total, that’s a balance of $7,425 and a minimum payment of $148.
The minimum payments now total $148. That's just $2 less than last month because no new charges were made and the balances decreased. Take the extra $2 and add it to the Mastercard minimum payment. Why? Because it has the higher interest rate. It doesn't seem like much at first, but it adds up. Soon you'll be making an extra $10, $25 and $50 a month to pay down that highest interest rate credit card. Eventually it will be paid off! And then you move to the next credit card while still paying $150 per month regardless of the minimum payment.
If your budget can afford it, commit to paying more than the minimum amount to begin with. Using the above example, pay $200 per month instead of $150 per month to turbo-charge your debt paydown plan.
The credit card companies really, really want everyone to only make the minimum payment. But you can’t afford to do that. In this example, it would take 26 years and $10,500 to pay off the $5000 Visa. The $2,500 Mastercard would take 34 years and $9,000 to pay off. Do you really want to be in debt for that long? Did whatever you bought on the credit cards double or triple in value? I didn’t think so. You must pay more than the minimum payment to break out of credit card hamster wheel.
Getting control of your debt is the first step to financial independence. Do not delay any longer. Make a plan, stick to it, and track your progress!
Steve Doster, CFP®, is a Certified Financial Planner offering fee-only, hourly financial advice for do-it-yourself investors. www.dosterfinancialplanning.com