How should I get out of debt?
I currently owe about $18,000 in credit card debt with a minimum payment of about $500 a month, $1,300 on my car with a payment of $250 a month, and I have about $12,000 in student loans, on which I pay $200 a month. Rent costs me $750 monthly. I work at a university where I make just over $45,000 with no state income tax. I feel like I am drowning in debt. What should I do to get out of debt?
Other than the credit card debt, your other debt and your housing costs actually look quite good. If you can get the credit card debt paid off, you'll be doing very well financially. Your best bet is to make minimum payments on your student loans and your car loan and put everything you can toward your credit cards. Once you have killed those credit card debts, you'll find a lot more flexibility in your budget.
To accelerate your debt payoff, look for opportunities to get rid of unnecessary expenditures which don't add anything to the enjoyment of your life (the linked article will help give you ideas). Also, look for any opportunity to put extra money toward your credit card payments. This could include tax refund money, bonus money from work, or money from a side job. Finally, look for items you own which you don't use anymore, but you could sell them to raise money for paying off the credit cards (I had one student in my Personal Finance class pay off $20k in credit card debt with this strategy).
I'm going to guess your take-home pay after taxes is approximately $2,600 to $2,750 per month. With this income, a reasonable budget might look something like this.
- $1,000 - Housing (rent, utilities, & other housing bills)
- $300 - Groceries & household supplies (toilet paper, shampoo, etc.)
- $400 - Car (loan payment, insurance, gas, & maintenance)
- $200 - Student loan
- $100 - Entertainment & discretionary
- $50 - Miscellaneous
- $550 to $750 - Credit card repayments
Once you pay off your car loan in 6 months, you'll have another $250 to put toward your credit cards, which will make them disappear that much faster. It is reasonable to assume you could be out of credit card debt in about a year to eighteen months!
If you want help building a more specific budget, this article will guide you in building a budget in about 15 minutes.
The credit card debt will eat you alive with the high-interest rates if you can't make more than the minimum payment. I don't mean this personally by any means, but the fact that you have racked up so much credit card debt on such a small salary is a red flag and may very well suggest you need to revisit your spending habits and lifestyle. With that said, you do have options here. I'd leave the student debt and car debt alone. The student debt is likely at a pretty low interest-rate and the car loan is close to paid off. If your credit score is good enough, you could consolidate the credit card debt into a personal loan. Hopefully, this will get the minimum payment for the credit card debt down to a more manageable level. Once you've done this, it's imperative you build a budget you can adhere to that allows for some positive cash flow every month after all your living expenses are paid. Then you can use the debt avalanche method to tackle all this debt. This is where you pay off your loans highest interest-rate first. Any additional cash flows you have each month should go towards the highest interest-rate loan first in addition to the minimum payment while you make only the minimum payment on the other loans. Once the highest interest-rate loan is paid off, tackle the next highest one. A great way to help you figure out exactly how much to pay each month would be to use a website like unbury.me after you've built yourself a budget.
First, curtail as much discreationary spending as possible to free up some funds to aggressively attack the debt. Honestly question every dollar you spend and ask, "Do I really need this?" You will be surprised how often the answer is "No." Then, list the credit card balances by interest rate being charged, highest to lowest. Make minimum payments on all but the one charging the highest rate of interest. On that one, pay the most you possible can, each month, using the money you are not spending on those things you didn't really need. You will be amazed how quickly the balance will begin to drop. Also, you can easily make multiple electronic payments each month, as soon as the money is available. That will help shave off additional interest charges and prevent you from spending it on something else before the next statement arrives. When that card is paid off, go to the one with the next highest interest rate and repeat. It also looks like your car loan will be paed off in about five months. Use that $250 per month to apply to credit card debt as well.
In the meantime, do not use any card that has a balance on it because you are immeditely being charged interest on your purchases, while other people with no balance get a 30 day grace period. If you do use a card that has no balance, for necessary purchases, do so only if you can pay it in full when due.
With the credit card debt and car payment gone, the student loan payment should seem more manageable. Check for any refinance opportunities that may lower the interest rate. You may also choose to pay this off as aggressively as you did the credit cards. While student loans seem to be more "acceptable" they still cost money in interest charges and may best be eliminated as quickly as possible. Before doing that, however, I suggest taking a serious look at your need to save. At least build up an emergency fund equal to about six months essential expenses before working on the student loans.
I am sorry if that sound like a flippant answer. Please understand I am very serious. You didn't dig that $18,000 hole all at once. You dug it by living beyond your means. That's perfectly understandable -- lots of people do this -- but I consider your question to be sincere and I hope my answer will apply to lots of others who are reading this too.
Make a game of it. Make a thorough budget and stick to it. Live like a pauper if necessary -- at least for a while. See how much you can save, and then send all of that savings, every month, to the credit card company. Interest on credit cards will eat you alive -- 20% or more in some instances -- and your primary goal over the next couple of year is to eliminate yours.
You mention $1200 per month in expenses that can't be cut (rent, car, student loan). I will guess that your take home pay is about $3200 per month. That gives you $2000 to play with. You need food, you have utility bills,of course, but you are actually not in that bad shape. See if you can up your credit card payments to $1500 per month (and stop using your credit card). Assuming a high interest rate it will take you a bit more than a year. Get going. It's not as bad as you think. You'll miss a vacation -- so what? And you don't really need new clothes, right? Along the way, if you do this, you will develop good spending habits that will serve you well all the rest of your life.
Hi! My colleagues have some great advice about how to reduce and manage debt. Another aspect of this to think about. When you are short on money, you have two possible solutions: spend less or earn more. And if you can do both, you’ll solve the problem much faster.
You could maybe consider getting a part-time, second, or seasonal job - finding one can be hard, though! You might have better luck during the Christmas season when stores do a lot of extra hiring. Look into this tactic in September or October so you don't miss out. Be creative about what you can do. My husband and I are 59 and 56 and throughout our careers we have always had at least two jobs – a main job and one or more on the side. Even if your career is not the type that lends itself to consulting, maybe you could earn some extra money by baby-, dog-, or house-sitting or food service or lawn work. Having a second job brings in more money each month and reduces what you spend on entertainment because more of your hours are taken up by working.
Hopefully over time you will be able to pull yourself out of debt and prevent future debt! Thank you for writing to us!