When my wife and I got married in 2009, we had combined credit card balances of more than $22,000.
The grand total was pretty intimidating. It was spread across store cards like Best Buy, as well as regular credit cards from Visa and Discover. At that time, we had balances on at least 7 different cards. As you can imagine, tackling a problem like that seemed impossible.
Do you find yourself in the same position? You probably know how I felt back then. I didn’t want to look at my credit card statements. It was just too embarrassing and ugly. Avoidance was my tool of choice as I constructed an insulated, oblivious wall around my financial common sense.
At best, we were in a deep hole we could dig ourselves out of with the right planning and motivation. At worst, we were buried in a black hole that was devouring our hope. Either way, things weren’t looking good.
Over the next few minutes, I’m going to walk you through how we used a budget to pay off our credit card debt. We’re going to talk about confronting debt, creating a budget, generating a plan of attack and using credit cards to your advantage.
I’ll wrap up with some general thoughts about paying off debt as well as some helpful links to other Highya articles that will boost your financial life.
The First Step to Defeating Debt is to Stop Denying It
Debt is a funny thing. When it’s small, we’re more comfortable with it. But as it grows bigger and bigger, we try to ignore it. We throw away the credit card bills without opening them. We delete the emails and refuse to log into our credit accounts.
Basically, the bigger the problem gets, the more we act like it’s not there. But you know what? Our body and mind knows it’s there no matter how hard we try and shovel distractions on top of it. And what happens when we deny the existence of a very real, very burdensome problem? We stress. A lot.
Denying that our debt exists doesn’t help anyone. It doesn’t help your body. It doesn’t help your bank account and it certainly doesn’t help any loved ones who might be affected by your situation.
So let’s stop all the avoidance tactics and start with a simple confession. You have debt. A lot of it. And it’s controlling you no matter how hard you try to deny it.
You might think that “control” is a weird word. “How does my debt control me?” you might think. Let’s put it this way.
Say there’s a lion that randomly shows up in your backyard. A really big, really fierce lion. It freaks you out. You don’t go outside because of it and you barricade your doors and board up the inside of your windows. Finally, you feel safe enough to live a normal life. But guess what? You can’t even get out of your own home! The blocked doors and shuttered windows control where you can go and what you can see.
That’s how debt controls us. And we augment that control through avoidance. You don’t’ have to live like that. It’s time to break down the barricades you’ve built between you and your debt.
Write Down Your Debt, Card by Card
If you’re ready to face your debt, then you’ve got to be willing to confront it head on. Shortly after my wife and I got married, I sat down one day and logged into every credit card account we had. I wrote down what our balance was along with how much we were paying in monthly payments.
At the end of it, I had a pretty long list of credit card balances and monthly payments. I added all those up and came to a grand total. It was ugly; real ugly. Our overall balance was north of $22,000 and our monthly payments were creeping toward $600 per month.
Remember the analogy of the lion roaming around in your backyard? Well, when you total up your debt and figure how much you have and how much you’re paying every month, you’ve basically walked up to your back door and stared the lion right in the face.
You can’t come up with a solid plan for paying off your debt without owning it. So, own it. Write those numbers down. If you want, put the biggest balance at the top and then work your way down from there. Then, put that paper in a place you can see it every day.
This might sound a little silly, but it’s important to acknowledge the debt and to keep it in front of you on a daily basis. Why? We’ll talk about that more later, but for now, just know that it’s not meant to throw you into a state of financial depression.
Create a Budget
You are never going to be able to pay off your debt in a consistent fashion if you don’t have a budget. We’ve got a great guide on why a budget is important. We aren’t going to go as in depth right now, but we are going to cover the basics.
In the first few months of my marriage, we had a budget printed out and taped to our fridge. The budget included all of our costs – the ones that changed every month (groceries, personal care items, gas, etc.) and the ones that didn’t change (auto insurance, car payments, etc.).
Since we both worked salaried jobs, we knew exactly how much money came in each month. We subtracted that from the budget we created and figured out how much extra we had on a monthly basis.
That surplus was wasn’t a solid number because each month we had miscellaneous expenses that we couldn’t project. Whatever was left over after subtracting those added costs was what we had to pay our debt.
Tracking Daily Spending
In order to keep our spending in line, I printed out a basic spreadsheet that included a column for each of our variable costs. Each column had 34 rows. Thirty-one of those rows represented each day of the month. The 32nd row was the “Total” row and the 33rd row was the “Budget” row. The 34th row was reserved for how well we hit our budget.
Anytime we spent money in one of those variable cost columns, we wrote it down. At the end of the month, we totaled up the spending and put it in the Total row. We then subtracted it from the number in the Budget row and wrote down the difference in the row below it. This way, we knew exactly how much we were spending.
Now, even though we had a good budgeting and spending system in place, we were missing a very important aspect of paying off our debt: a clear plan.
Coming Up With a Plan
About two years into our marriage, we managed to cut our debt in half. This might sound amazing to you, but here’s the problem – we were making about $1,000 extra every month. So, in theory, we could’ve tightened up our spending and knock all of our debt off in the first 24 months.
Granted, we would’ve had to cut back on vacation, birthday and holiday spending. But, if we really wanted to pay the debt down, I think we could have. However, I don’t see our efforts up to that point as a failure. There was progress, after all; we cut that $22,000 beast in half.
Yet one morning I was troubled by the fact we still had $11,000 in debt and our surplus each month was pretty big. So, that morning I went to my laptop and hammered out what I called our “Nine-Month Plan”.
Why Do I Need a Time Limit?
Say someone invites you to run a race. Knowing that it would be a great experience – not to mention the training would get you in great shape – you say “Yes”. But something weird becomes clear. Your friend never says how long the race is.
So, one day you call him up and say, “How long is this race we’re going to run?” His answer? “I don’t know. I just know there’s a finish line.”
How can you prepare for a race when you don’t know how long it is? How can you come up with a training schedule when you don’t know if the goal is to run 5, 10 or 20 miles? That’s what it’s like to pay off debt without setting a time-based goal for yourself.
Having a time goal – nine months, in my case – adds a sense of urgency to your debt repayment. You have a goal. There is a destination. It’s not just “pay off our debt”, but it’s, “pay off our debt in nine months.”
Making It Happen
The reason I knew we could pay off our $11,000 balance in nine months is because I knew how much surplus we had at the end of the month.
You have to know this number in order to come up with a good timeline. It’s much easier to do if you have a salaried job or an hourly job with set a set schedule. Freelancers will have a harder with time this.
Once you know your surplus, you can work out how many months it will take for you to get your debt paid off. For us, we owed about $11,000 and had a surplus of about $1,000.
If you’ve done the math, you’ll see that $1,000 a month over nine months amounts to $9,000. We knew our tax return was coming and would be around $2,000 based on the previous year’s number. That return would make up the difference.
So now you’ve got the general idea of how you can use a budget to pay off your debt: know your surplus, know your total credit card balance and know your monthly payments.
But there’s more to this story. How do you know which cards to pay off? What do you do about vacations and birthdays? Should you sign up for credit cards with balance transfer offers?
To help you answer those questions, I’ll walk you through what we did about each of these issues.
Which Credit Cards Do You Pay Off First?
Since we had our credit card balances listed on one sheet of paper, we knew which cards had the highest balances and which ones had the lowest.
I researched different theories on paying our cards off. Some people suggested paying off the cards with the highest interest rates first. So, if we had a card with a $2,000 balance and a 20% APR, the interest-rate theory says pay that one off before the card with the same balance and a 15% APR.
There is some wisdom in this, mainly because you end up paying off the card that’s eating up your money on high interest rates.
But we decided against this philosophy and chose instead to adopt the “snowball” approach taught by Dave Ramsey, a popular personal finance expert whose book, “The Total Money Makeover: A Proven Plan for Financial Fitness”, is a New York Times bestseller.
Basically, the snowball approach means you pay off your smallest balance first. You cross that card off the list and then tackle the next card. As each card gets crossed off the list, you feel more empowered and gain more momentum, kind of like how a small snowball rolling down a snow-covered slope gains speed as it collects more mass on the way down the hill.
This method was really effective for us. Mentally, it was such a relief to cross a card off our list. We felt the little victories and those small successes pushed us to pursue our goal of paying off our credit card debt in nine months. That’s why it was important for me to have our credit card debts posted on our fridge – it motivated me to keep going.
What Do You Do About Vacations and Birthdays
The “dark” side to being committed to paying off debt is that you have to sacrifice a little fun in order to meet your goal.
I came up with our nine-month plan in May of 2011 and we launched it the following month. Between May and February I knew we’d be celebrating my wife’s birthday and our anniversary. Those are two pretty big events that would normally cost us about $500.
I didn’t want to have a dreary anniversary just because we were paying off our debt, so I explored some “hacks” for getting a free vacation. During my search, I found that Visa was running a promotion for their Hyatt credit card, in which members would get two free nights in a Hyatt hotel and 1:1 points accrual on all purchases. Also, members were awarded a free night on the anniversary of opening their account.
We’d stayed at a Tampa Hyatt on the night of our wedding and loved it. In fact, to this day that hotel is our favorite. So, getting a Hyatt card was kind of a no-brainer.
When I saw that idea, two things struck me. First, it was a fantastic way to get a two-night vacation. The annual fee was $75. My thinking was that we could celebrate our anniversary in Savannah, Georgia, by staying at the Hyatt Regency for two nights. Only $75 for a two-night stay in a nice hotel? I’ll take it.
We got free Platinum status, which meant complimentary upgrades were a possibility. When we checked in, they upgraded us to a river-view room. It was a small perk, but a great one for a two-night stay that cost us a $75 annual fee.
The second idea that struck me is that, because the card accrued points on all purchases, we could make the money we were spending work for us simply by using the card for our purchases and then paying it off in full each month. And that’s exactly what we did.
So while we were paying off money that was working against us (debt), we were also making our money work for us (credit card points for our favorite hotel chain).
As for birthdays and Christmas presents, we dropped our budget for gifts down to $10 per relative.
Also, before we made our nine-month plan, we’d promised my parents we’d fly out to San Diego to see them. We wouldn’t meet our goal if we took the trip, so I had to make the tough decision to call them and let them know we’d have to skip our visit that year in order to pay off our debt.
Did You Do Any Balance Transfers?
Yes, we did. And this decision was purely mathematical. Near the end of our nine-month plan we had a partial balance on one card and a substantial balance left on our final card. Around October, my wife got an offer for the Chase Freedom card – 0% APR on balance transfers for a year (I think) and a $100 bonus with the first purchase.
Our final card’s balance hovered around $3,000 and the percentage rate was somewhere in the neighborhood of 20%. So, each month we were paying about $50 in interest.
The transfer fee on the Chase card was 3%, which meant we’d pay about $90 in fees to transfer the balance. Since it was going to take us about four months to pay off that last card, we’d end up eating $200 in interest payments. And when you threw in the $100 bonus, we ended up saving about $210.
After looking at these numbers, it made a lot of sense to get the card.
I think it’s important to point out that, after we were married, we didn’t add to our credit card debt. So, adding another card wasn’t an issue because we were at a point in our financial lives where we were disciplined with how we used them.
If you don’t have discipline with your cards, what we did to get a mini-vacation may not work for you and cause you to build more debt.
Final Thoughts: Yes, It Is Possible to Pay Off Your Debt
We know that every financial situation is different. Your income may fluctuate so much that setting a monthly budget is really difficult. Or, maybe you aren’t making enough money to come up with a realistic timetable.
But if there’s anything that you take away from my financial journey, it’s that paying off your debt is totally possible, whether it takes nine months, 12 months or two years. You’re going to have to exercise discipline, make some smart financial moves and cut back for a season. But, you can do it.
Start by adding up all your credit card balances and monthly payments. Then, create a budget as well as a way to keep track of your daily spending. Tools like Mint and You Need a Budget weren’t as popular back then, but I’d definitely recommend using them if you prefer apps over paper.
With this system in place, you’ll be fully aware of how much surplus you have at the end of the month. Once you know that, you can set up a timeline.
If there are big events like anniversaries and birthdays during your payoff plan, don’t scrap them. Just because you’re paying off your debt doesn’t mean you can’t celebrate. It does mean, however, that you have to be creative in how you find low-cost options.
As you’re paying off your debt, do the math and see if it’s worth it to sign up for a credit card that has a low APR on balance transfers. Just keep in mind that, if you don’t pay off the balance by the time the promo rate is over, you’ll have to pay interest.
With all these different tools and tips in place, you have a bright future. I can’t tell you how much of a relief it was to finally have all our debt paid off. Everything they say about being debt-free was true -- less stress, less worry and a fantastic feeling of having a burden lifted off your shoulders.
Life After Debt
Cutting back on your spending for a season is definitely worth the liberty of being debt free. And do you want to know the biggest advantage to doing this? You’ll have a tremendous level of confidence when it comes to financial matters, sort of like how a climber feels deep satisfaction after scaling a precarious peak.
With your debt out of the way, your financial life will look much more clear. You might even start thinking about long-term financial goals.
When that happens, stop by Highya and check out our two-part series on hiring a financial advisor or financial planner. We think you’ll really enjoy learning about who needs which financial expert, when you need them and how you can make sure your financial planner or advisor has a clean record.
If you discover that you aren’t quite ready to hire a professional money expert but you still want to dabble in investing, consider using a robo-advisor like Betterment, Acorns or WealthFront. These easy-to-use platforms invest your money into relatively stable assets that are designed to slowly build wealth in good times and bad.