Are you trying to finally eradicate your credit card debt once and for all? The smartest way to get there is to actually put some cash away every month into a savings account in addition to paying down your debt. This may seem controversial and perhaps even contradicts other advice that you have been given over the years. However, if you are not saving cash, there is a large chance that during the process of paying off your cards an unexpected expense will arise that will force you to use credit. This can result in guilt and anxiety over your increased debt, which is detrimental to accomplishing your goal.
In this regard, breaking financial habits and reshaping your behavior is more important than a few hundred dollars in interest because if you change your habits, then you’re more likely to stick with something for the long haul. For example, let’s say you manage to save $2,000 in cash while paying down your credit cards and suddenly your car requires new tires. The act of paying for such a purchase in full will create a positive shift in your financial psyche by not ballooning your debt. You will be more motivated to pay off those credit cards than ever before because you will be consistently decreasing your debt over time.
How to Pay Off Your Credit Cards
The first step to get on your way to paying off your credit card debt is to analyze your past three months of spending to see where your money has been going. Once you evaluate what you have been spending versus what your budget should be, set up a play account for discretionary spending.
If you find that there is money remaining from your paycheck once you subtract your discretionary spending and all of your bills, including the minimum payments on all of your debt, then you’ll divide the surplus between the credit card with the highest interest rate and a savings account. How to divide that surplus varies on the situation, but let’s say you find yourself with $200 left over after subtracting all of your expenses. You should add $125 to $150 of that to the minimum payment on the credit card with the highest interest rate. This then leaves you with $50 to $75 per month to send to a savings account.
Where Most People Go Wrong
Most people set their sights on one financial goal at a time, i.e., “I’ll pay off these student loans before I start my retirement account,” or, “I’ll pay off these credit cards before I build my savings.” Then they proceed to take every extra dime and throw it toward that goal. The problem is that life doesn’t happen in such an orderly manner. The secret to success is not to focus on one financial goal at a time, but to make progress toward all of your financial goals while putting heavy focus on one or two of those areas. This way, you can see the long-term picture and save money over time.
Another bad habit people have in trying to reduce their debt is to throw too much money toward paying off their credit card — and then end up having to charge purchases at the end of the pay period. You’re less likely to succeed in paying your cards off by doing this, because your financial behavior has not been changed, which is the root of the problem. Complete a cash flow analysis, stop spending on the cards, and use the money you are now putting in your savings account for unexpected expenses. It is mentally deflating to pay down a balance, only to charge it right back up again. It’s the equivalent of dieting well for a month and losing some weight, only to gain it all back the next — you will feel worse than you did before. In turn, this makes it harder to commit to the long-term goal.
The key to knocking out debt forever is to make constant downward progress, regardless of accruing a little interest by not putting all of your money toward paying off your cards right away. In the end, you will actually be saving more.
Advisory services offered through Investment Advisors, a division of ProEquities Inc., A Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member FINRA & SIPC. Stable Waters Financial is not affiliated with ProEquities, Inc.
Katie Waters is a member of the DailyWorth Connect program. Read more about the program here.