One of the first steps to financial independence is freedom from high interest debt. Notice I didn’t say freedom from debt. Contrary to what some say, debt is not all bad. For example, I have a low interest 15 year fixed conventional mortgage on my primary residence. There are plenty of other sites out there with detailed analysis on paying off the mortgage vs investing. For sake of argument, using simple math, pouring everything into a 4 percent mortgage to pay it off early, will not net you the financial gains of taking those extra dollars to pay off high interest credit cards and loans or investing in a balanced portfolio. We will discuss this in more detail in a future blog post.
Credit cards are also not the enemy. Don’t overspend and pay off the balance each month. If you are like me, and occasionally use shopping as therapy, maybe leave the credit cards at home that day. Without some debt, your credit score may suffer. I also find using cash is difficult to keep track of my spending. Since all credit and debit transaction are electronic, it’s much easier for me to track and budget.
So, the $1million question, how do I get out of high interest debt? There is no secret pill or fairy dust. You could win the lotto, but the odds are against you. That doesn’t stop me from playing for fun when I have a couple extra buck in my pocket. 🙂 If you are struggling to pay your bills, I wouldn’t advise the lotto!
The hard truth is, you have to evaluate your spending and make some hard choices. I highly recommend using the Personal Capital App to track your spending. How much are you spending on needs vs wants? Where can you trim the budget? Can you make smarter spending choices? Depending on the severity of your situation, this could be as simple as cutting off the expensive satellite subscription, which I did, to as complicated as selling your house and renting or downsizing.
For my debt situation, I reduced my monthly expenses, consolidated my high interest debt into a lower interest line of credit from my bank and changed jobs for a higher income. If changing jobs isn’t an option for you, consider a side hustle. There are plenty of websites out there with examples of side hustles and one may work for you!
I am fortunate enough to get an annual bonus. We don’t count these dollars as part of my salary, so we don’t rely on the bonus for expenses. The first 2 annual bonuses went straight to paying down the high interest debt. For us, we used the snowball method. We paid off the lower balances first and used the extra monthly savings to pay extra on the larger debt. Financially it makes more sense to pay off the higher interest debt first, but psychologically, the snowball worked better for us and helped to keep us motivated. Moral of the story, do what works best for you, but do something. Don’t wait or hesitate. Start today!
Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.
Fire Dog Personal Finance 