Want to make your credit card debt go away?
American households with at least one credit-card carry an average of $15,950 in credit-card debt. How do you make that go away? We all know we should only charge those items we can afford to pay off at the end of the billing cycle, but what about old debt? And what about emergency purchases? How do you get rid of those high balances once and for all?
First, be realistic about paying down your credit card debt.
The biggest reasons most people have credit card debt is because they don’t have an emergency fund. Are you guilty of this? If the brakes went out on your car tomorrow, how would you pay for the repair? What if your cat needed surgery to save her life? Or you had to buy plane tickets to get to a funeral? Most people charge their credit card with the thought: I’ll just throw money at this until I get it paid off.
While you might have the best of intentions, most people don’t get the first emergency paid off before another one comes along. As the numbers start to rise and the job of getting to a zero starts seeming impossible, we get a little careless and think, what’s another $25 going to matter? And so the debt rises.
Forget everything you think you know about paying off your credit card.
The only way to avoid this trap is to build an emergency fund. That’s right: paying off your credit card starts with establishing a savings account. I’m going to outline a formula below. Try it. The reason this formula works is because you aren’t just paying off your debt – your building something. As money in your savings account grows, you’ll grow more financial confidence, knowing you don’t have to react with a desperate sense of helplessness next time an emergency strikes. Instead, you’ll be ready.
- Step 1: Create an emergency fund. Examples include a money market account or a regular savings account, anything that you can easily access in the event of an emergency.
- Step 2: Find the extra money to start your emergency savings by making only the minimum payments due on your credit cards. Put the rest into your emergency savings account.
- Step 3: Treat your savings like a bill. Deposits into your savings account need to happen just like paying the rent or the cell phone bill. Just do it. Continue until you have accumulated one month’s worth of living expenses in your emergency fund.
- Step 4: Start hammering the debt. Once you have one month of emergency savings, divide your income into a percent you can live off, a percent to save and a percent to go towards debt. Start with the smallest amount of debt first and go for the easiest pay-off.
- Step 5: Double your savings. Once the debt is paid off, transfer the amount you were using to pay down your debt and put that in your savings instead. Build a nice 3-month cushion and then start savings towards your next goal – college, Hawaii, retirement . . .
If you feel like you are drowning in debt, I really encourage you to start using the formula TODAY! For a more detailed plan to help you get out of debt, I HIGHLY recommend this article I wrote several years ago for the 100 Day Debt Free Challenge we sponsored! During the challenge, 29 people paid off over $100K in debt by getting really clear about where their money was going and finding ways to manage it better!
Let me know if you are going to use this simple formula to get out of debt. Tell me about your plan and your results in the comments below. I’d love to share your experience with our RichLife community.
Do you have a question about success with money, your business, or life? You can ask Beau anything by visiting AskBeau.com and sending your question(s) in to RichLife HQ!