Credit card debt is sabotaging your retirement.
A recent study by CreditCards.com found 48% of credit card holders have no idea what interest rate they are paying.
Chances are if you don’t know your rate, it’s probably not the lowest! To get the best interest rate, you would’ve had to do a little research and negotiation.
What you don’t know about your credit cards can hurt you.
If you are a late starter to saving for retirement, you need your money working for you not against you.
Turns out Baby Boomers carry an average balance of about $7,500 on their credit cards, according to the survey. What does that translate to in terms of dollars? With a credit card balance of $7,500 at an average percentage rate of 16.15%, that’s almost $1,200 a year.
What can you do with that money instead to move the needle and retire earlier?
- Bump up your 401(k) by $100/mo.
- Set up an automatic investment of $100/mo to your Roth IRA (if you qualify)
- Send $100/mo automatically to your emergency fund
- Save $100/mo toward a vacation fund so you don’t need to use your credit card for vacation
How do you start to pay off your credit cards?
The absolute first step to getting out of credit card debt is to stop using credit cards.
Avoid the temptation to immediately throw all of the available cash at your credit card debt, however. The key to long-term success is to have an emergency fund to tap into (so you don’t have to use the cards.)
Four step plan to getting out of credit card debt.
1. Make a list of your credit cards noting your current balance, interest rate, and minimum payments.
2. Find a specific dollar amount from saving in your budget each month or bringing in extra money (such as earnings from a side gig.)
3. Sell something you don’t use anymore so you can get a jump start on the payoff.
4. With these “found funds” use a dual-pronged approach to get out of debt – save for emergencies and pay down debt at the same time.
If you don’t have an emergency fund of at least one month’s expenses, start there. Pay the minimum on your cards (which you aren’t using.) Once you build your emergency fund to one month’s expenses, split your contribution toward savings and paying down credit card debt. This way if your refrigerator dies, you can pay for a new one out of pocket rather than putting it on a card.
Once you have three month’s expenses in an emergency fund, throw everything you can at the credit card debt.
How do you find money to pay down debt?
Look closely at your spending patterns and find a relatively easy win.
For example, a former client, a single guy working in the tech industry in Northern California, was making great money but spent most of it. He also had $20K in credit card debt and wanted to turn his financial life around.
Taking a quick look at his spending, I saw a way he could easily cut spending — convenience food! Eating out for breakfast, lunch, and dinner, he was spending $2K/mo. on food. When he wasn’t dining out, he was calling it in.
His financial plan was to learn to cook! If he cooked dinner at least three times a week, brought his lunch and made a quick and easy breakfast, he could save at least $1K/mo.
“Breakfast is easy,” I said. “Head to the grocery store and buy some instant oatmeal so you have it on hand. Then fire up your coffee maker in the morning. If you don’t want to eat at home, stash the breakfast makings at the office.”
Learn to cook 2-3 staples such as spaghetti and meatballs, sauteed chicken breasts, and fajitas with rice and beans. Have a family member or a friend teach you some basic staples that are quick and easy to make. Stock up on the supplies so you always have them on hand, then bring your leftovers for lunch the next day.
With some groceries and a few new skills, he could save $1,000/mo on food.
Check out this related post – Advice I’d Give My 20-Year-Old Self: Bring Your Lunch And Go To Paris
Change your money mindset.
This worked for my client because he also changed his thinking. He was a computer programmer for a startup and worked long hours. Every hour he focused on his business was an hour that got him closer to a long-term financial payoff in terms of a bonus and appreciation of his stock options.
It didn’t have to be “either – or.” While he appreciated the convenience of grabbing food on the go, he could have both convenience (making instant oatmeal at work) and cost savings. With easy to cook meals, he wasn’t taking time away from his high-pressure job.
While you may not be spending $2,000/mo on food for yourself, there may be areas where you can reduce your spending, too. Look at your outflow and find at least one area you can cut.
We’re cutting our food budget. In our weekly money meeting, my husband and I decided to “eat up the freezer” this summer. To trim our food budget, we’re going to plan out our meals better and defrost what’s in our freezer.
Check out this related post – These Five Money Moves Will Make You Wealthier
This last step is vital. Use the found money toward your financial goals.
When you save money in your budget or earn extra money on your side gig, you have to take the step to do something productive with it! Without taking the difference and putting it to use, you will just be spinning your wheels.
Acres of Acorns Money Challenge: What will you do in the next 30 days to reduce your spending? Once you save those funds, how will you put them to work for you to build your emergency fund and pay off your credit cards?