In my endeavors to pay down my debt, I joined a financial Facebook group. I had asked a question about investing. The reply I got back, and rightly so, asked,
My first question would be what type of debt do you have?? Doesn’t really matter how you invest if you are getting hit with 15-23% Credit Card APR.
This question is correct because indeed if you have a lot of debt on credit cards (which I do) you absolutely want to get them out of the way so you are not paying an arm and a leg in interest. I had a similar discussion with a close friend regarding what I should prioritize in paying down my debt. For sure, the last thing you should be thinking about is using your money for anything else. Or so is the common financial thinking. I agree, mostly…
My debt: All on Zero
First and foremost, while my debt is on credit cards, it is all on 0%. There is a specific technique to this that I don’t recommend but I’ll write about my experience with that later. Here are the factors why I feel strictly putting all of my income towards the credit debt is not necessarily the best way to go. First, the amount of debt I have, $187,000. So lets run some numbers, I’ll use my actual payments so it is clear why this is not ideal.
The Bare Minimum
The minimum payment for all the credit card debt is $814. Now remember this is interest free, that $814 is going purely to principle. (As an aside, my payments before putting everything on 0% was above 2k. This was killing my wife and I, we were literally swimming… drowning quickly actually as I was dealing with reduced pay from a cut at work and a newborn baby at the same time. We burned through all of our savings faster than a hot knife through butter. That’s a tale for another day though.) So lets break this down, with the following formula:
debt / minimum payment = number of payments
number of payments / number of months in a year = years to pay off debt
Sound good? lets run it:
$187,000 / $814 = 229.73 …alright so for math simplicity sake, lets round this up to 230
230 / 12 = 19.16 …again for simplicity sake, lets round this to 20
So assuming minimum payments and assuming I’m always paying 0%, it will take about twenty years to pay off the debt. This makes a lot of assumptions that we know won’t be true. For example that the cards stay at 0%, which they won’t. That I don’t need to pay for say, consolidation fees so that I can move the money to keep it at 0%. (Again I’ll explain this technique in detail at a later time.) That I’ll have the same job and income level. I mean, hopefully I would at least get some raises in that time.
With Set Asides
So as mentioned above, I do put some money aside for investments, I also put small amounts aside for savings. (I’ll explain my account breakdown in a later posting.) So lets assume I were not doing that, and absolutely all free and free-able money was put towards paying the debt. In this scenario, the possible monthly payment would be about $1,164. So lets run those numbers again:
$187,000 / $1,164 = 160.65 …lets do our rounding again, 161
161 / 12 = 13.4 …rounded, 14
Better! 14 years. So, 6 years are saved. You’re probably going well hell yeah! You should do that! Go that route! Why would you not?! Well here’s why not. In this scenario we still have the above assumptions except we have some more now. So remember, that in this scenario all free money is going towards paying debt. No money is going to savings and those coffers are as empty as a free can of beer at a college party. So we’re basically saying that in 14 years, we are assuming no emergency of any kind ever occurs that requires money. Because guess where the money will need to come from if an emergency did happen… the payment for the cards. And if the payment for the cards is missed, guess what happens to that 0%? It goes up, but when your dealing with owed interest, bigger is not better.
So to the question of “what type of debt do you have??” The kind that seems will never end. The simple fact is if you need more than 3 – 5 years to pay off your debt, then you need a bigger change to occur to be serious about paying it off. So at this point, whether a few hundred get reallocated elsewhere, for all intents and purposes, is inconsequential at this time. I’d rather make sure that if, and lets be real here, when an emergency occurs, I will be able to handle it and not miss any payments. I want to feel like I’m making some progress in life, real or not, that some of my money is working for me in invested interest. They real key though is making sure everything stays at zero percent.
So what kind of big changes would need to occur to be real about handling this debt? We are talking about big raises, promotions, new jobs, big side hustles (… like this blog…), etc. Remember that this entire article is only talking about my credit debt. It’s not at all talking about my mortgage. In fact one big change that could potentially be done is selling my house. I actually haven’t run the numbers on this yet so maybe I’ll create a special post where I explore that. Bet you didn’t think I was being so literal about joining me on my journey to getting out of debt did you?
Have any thoughts or ideas on the things I write about? Let me know in the comments down below!