By making lifestyle changes and being disciplined about it, you can pay off your credit card debt in less than 5 years. Here's how.
The Typical American Is Mired In Debt
According to the Wall Street Journal Americans have racked up $13.5 trillion in total household debt at the end of 2009. That translates to $43,874 per person.
The average net worth of an American including house and investments less mortgage, credit card and other debts is $175,600. Now consider this. The cost of retirement home care is $72,000 a year. Do the math and you will find you will run out in a little over two years. Can you afford to continue to be in credit card debt? Hell no.
Cut Up Your Credit Cards Right Now!
According to CreditCards.com each American carries 3 1/2 credit cards. The Average credit card debt per household is $16,000.
Now let's suppose you are 25 years old and get behind your credit card payments. For whatever reason, you don't make any payments and look at your credit card statement 15 years later. How much will you owe? $205,000!. The following is a table showing how much you would owe at 20% APR on $16,000 in debt:
Year Interest Owed 1 0 16,000 2 3,200 19,200 3 3,840 23,040 4 4,608 27,648 5 5,530 33,178 6 6,636 39,813 7 7,963 47,776 8 9,555 57,331 9 11,466 68,797 10 13,759 82,556 11 16,511 99,068 12 19,814 118,881 13 23,776 142,658 14 28,532 171,189 15 34,238 205,427
I want to point out something here that few people pay attention to. Notice how the amount for interest grows larger and larger each year. Why is this so? Because when you don't pay off your credit card debt, the interest owed gets larger over time. You must make regular payments to your credit card to avoid getting hit with late fees and larger balances over time. And the larger those payments are, the faster you pay off your debt.
So do you want to owe $205,427 in 15 years? Of course not. First thing you need to do right now is grab a scissor and cut all your credit cards up. Do it right now! If you do so, you are now detached from using easy credit - a dangerous thing in our society. You will now only pay by cash and check.
The Road To A Disciplined Strict Budget Starts With Planning
You either put yourself on a strict budget or fail. In order for you to understand what got you into the hole you currently sit in, you must itemize all your expenses meticulously and start cutting back. Look at it this way, your life is in itself a personal business - YOUR business. No other person is going tell you whether you are succeeding in life or not. Only YOU are responsible for managing your money and it requires for you to be an adult and think like one.
So let's get to it. Open up Microsoft Excel. If you don't have Excel, you can download Open Office Calc for free.
Now type in the category and estimated monthly expense for each item. For year long expenses estimate the cost and divide by 12. For example you don't take vacations every month but say twice a year. Total up the vacation expense for the entire year and divide by 12. The same goes true for property taxes. Total the entire amount up and divide by 12 even though you may pay semi-annually.
Here's an example budget and expense spreadsheet:
Take a long hard look at each item and your total outgoing expenses for the month. Are you making at least 10% more (which is savings) than what you are spending? If not, you got a problem and need to budget before the situation gets worse.
Cutting Expenses To Pay Off Debt
Now comes the moment of truth. Create next to the monthly expense column another column and call it "budget expense".
Go through each line item again and try to reduce the expenses. For example, you no longer need a land line at home when you can use your cell phone instead. So take off the telephone expense. I just saved you $30/month or $360/year. That may not seem much to you, but extrapolate that out for 40 years (say you are 30 years old currently) and you can see the huge lifetime savings (over $14,000). Now aren't you glad you read this article!
Now some of your expenses will be fixed and you cannot do anything about it. Like your car payment, cellphone, Internet, cable tv, and property tax bills. But there are some things you can reduce if you really want to try. Search for cheaper insurance. If your employer carries your health and dental insurance, great. But if he doesn't then search online for better rates. You can lower expenses if you look real hard and make lifestyle concessions.
For food, go to your farmer's market, discount grocery store or even clip coupons and search for them online to save even more. How about bagging that lunch instead of that noon time feast that costs $10 each day? That one can save you enormous amounts of money over your lifetime.
Let's cut that entertainment expenses down by 50%. If you go to the movies, why not use Netflix instead? Who cares if you see the movie at a later time and can't talk about it at the office water cooler. Many people spend too much money dining out. Cut it out! Spend less money at the bar and nightclubs. $6 for a beer and $10 for shots of tequila may make you feel loose at the moment but was it really worth it the next day?
The thing I want to impress upon you is that don't just look at the difference you save each month. Look at how much you save each year, and then over your lifetime. If you can save $570/month (in this example), that translates to $6,840 a year. Now imagine how much that is over, say 30 years - $205,200.
Save Now. Enjoy Later.
By learning to do simple expense budgeting and restraining yourself on spending, you can wipe out your credit card debt. Type typical American carrying $16,007 today in credit card debt can virtually wipe out this out in 4-5 years. But you have to act today and take on a disciplined approach. If you don't, you may just lead yourself into bankruptcy with no financial standing at all.
About Kerry Kobashi
Kerry is the founder of KerryOnWorld. He lives in Silicon Valley and has worked as an engineer and project manager. He owns Kobashi Computing a consulting company.
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