What type of debt do you have?

 

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.

 

Final Thoughts

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!

 

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21 Replies to “What type of debt do you have?”

  1. It’s so important to be aware of how you accumulated your debt and have a plan for decreasing it as well. Getting a hold of your finances is very important as well.

  2. Great post, always to good to know what debt your in and how one will be able to finish it off without being to strict at the same time. All in all it does take time.

  3. I always find its my medical debt that starts to impact everything. I do owe a significant amount of student loans and I do stay on top of them fairly well until I fall ill, cannot work for months, and rack up medical debt. Its like constantly making progress then falling way behind. Super frustrating

  4. I do have some debts and then bills to pay. But everything is manageable and we still have savings. We are also saving for the things that we want. We are thankful that we still live with in-laws because we get to save.

  5. We don’t have any credit card debt, which is awesome. The only debt we currently have is the mortgage. I just hate being in debt, so I hope to pay it off sooner than needed.

  6. Debt is such a hard thing isn’t it – it can definitely feel like it never ends – like it is forever getting bigger rather than getting smaller.

  7. This is informative. It is really important to know your debts and clear it, without getting unwanted penalties. Happy that, i don’t have any debt right now 🙂

  8. This is a very important topic and one that people don’t want to talk about or are ignorant of.

  9. Debt is such a tricky thing and its so easy for people to get themselves into debt quickly without really realizing it. Great write up here about what debt is and where it is.

  10. All I have is my house and it is close to being paid off. It is a great feeling to be almost debt free.

  11. Nice post, I do have debt but it’s only in a minimal amount and also a bills to pay but it is manageable.
    This post is really a great help who do needs to know how to manage their debts.

  12. My husband and I have college debt. Mine isn’t as bad as his because I’ve been paying mine longer, but we try to pay extra wherever we can. For ex: house payment got lowered to $750, but we still pay it like it was when we first bought our house and the payment was $900… so we pay $1000 a month. If we use credit card at ALL we pay them off right away. Sometimes I’ll pay off my credit card right in line. If I go to Kohls or somewhere that has their own credit card, I’ll pay with that, then pay it off right in line with my debit card. I get the perks of having the card, but since it’s paid right away, I owe no interest. Another thing we do is when we get our tax returns, if we get anything back, we keep some for ourselves and then put the rest towards loans or car payments.

    Again, you feel strapped for money, but in the long run, it will be totally worth it.

  13. I’m trying to keep my debts low and paying off some small credit cards this year. I’m going to try to be less wasteful because I could save a lot of money with that one little change.

  14. I am trying so hard not to max my credit cards and I have to say it has costed me a lot!! But it is not impossible! With self control and a game plan you can get rid of debt! You just have to keep focused!

  15. Great topic! I’m not a huge fan of debts. That’s why I only have one credit card and pay as I use it.

  16. Most of my debt when it comes to debt is school date. It’s not something that I can get out from under. And so I just need to find ways to pay more to be able to survive. Still haven’t worked it all out yet.

  17. This is a very nice and informative read. What kind of debt and how to finish it are the things that were well-said.

  18. My husband and I try to keep our dept in moderation. We don’t want to end up with nothing in the future. We try to save some amounts as much as possible. Thanks for sharing this informative post.

  19. I keep my debt in bare minimum. I never go on shopping if it’s not on sale. And I always look for terms with 0% interest. That way, I keep my debt under control.

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