Where To Start With Your Money

At A Glance – Are you feeling stuck with your finances? Do you wonder where to start with your money? Here is a step-by-step guide to help get your finances in shape. No matter where you’re starting, this guide will help.

Getting your finances in order can be a scary task. Where do you start? Who do you trust? What if you get it wrong?!

Don’t worry, I’ve experienced all these emotions, and I did sometimes get it wrong! After all, most of us weren’t taught any of this personal finance stuff.

So, I’ve put together a step-by-step guide to help you get on track with your money. This is based on my own experiences and what I’ve learned. It’s not complicated and it is totally doable.

For me, the first step was changing my mindset about money. I learned to be in control of my money decisions and not let my money control me. I learned to be intentional. Every dollar that left my hands was scrutinized. Now, most of my money decisions are on automatic.

There are stand-alone articles related to most of the steps below. If you’d like to dive deeper into any of these topics, just click the link.

Step 1: Evaluate Where You Are Right Now

The best place to start managing your money is to evaluate where you are now. No guilt, no shame. Just look at where you are. This involves adding up all your debt (what you owe) and all your assets (what you own). The difference between those two numbers is your Net Worth. This gives you a feel for where you stand.

Here’s a guide and spreadsheet to help you determine your Net Worth: Figuring Out Where You Are Right Now.

Step 2: Track Your Spending

Your next step in evaluating your current situation is to track your spending. You need to know where your money is going. Every dollar that leaves your hands needs to be looked at. Track your spending for at least 3 months. Six would be even better. Life is lumpy and no two months will be exactly the same.

This article includes a spreadsheet to show you how to Track Your Spending: Tracking Your Spending And Why You Should.

Step 3: Use A Budget (At Least For A While)

I know, I know! For some people, budget is a dirty word. But it sets up your mindset and your money for success! You don’t have to use it forever, but for a season, it’s a good plan. There are many good reasons to use a budget. I still use a budget and track my spending. For me, it puts guardrails on my decisions so I don’t lose focus. Put together a budget that you will actually use. It can be pencil and paper, a spreadsheet, or an app. You choose.

Budgeting articles with spreadsheet: 1. How To Do A Budget and 2. Benefits Of Using A Budget.

Step 4: Set Up An Emergency Fund

An emergency fund is essential for you to be successful with your money. At first, it can be a baby Emergency Fund of $1,000. Then later your can fully fund your 3-6 months of living expenses in your EF. How good would it feel to have $1,000 in the bank!

Most Americans cannot handle a $400 emergency. If your car breaks down and you have to put the repair on a credit card, you have just unwound all the good you’ve been working for. An EF helps you get through life’s bumps.

This explains the Emergency Fund: Why You Need An EF And How To Get One

Step 5: Get Your Employer Match

If you have an employer plan, like a 401k, you need to get the match. Deposit enough money in this fund to get whatever match your employer offers. This is free money!

Step 6: Get Out Of Debt

All your non-mortgage debt needs to be paid off. Debt is the enemy of wealth and you will not be successful with your money if you are paying out 10, 20, or even 30% interest on your debt. It needs to be paid as quickly as possible. This is a Hair On Fire situation!

Debt Pay-Off Articles: 1. How To Pay Off Debt, 2. How To Pay Off Credit Card Debt, 3. How Credit Card Debt Can Get Out Of Control

Step 7: Start Saving Money

After all non-mortgage debt is paid, look at your budget and see how much you can save. How aggressively you save is up to you. The higher your savings rate, the faster you will reach a place of comfort with your money. How much you do or don’t sacrifice now is up to you. Put your savings on automatic whenever possible. That way you’re not tempted to spend the money on something else.

A getting started guide to Saving Money: How To Save Money

Step 7B: Save For Large Purchases

Along with saving for retirement and your awesome future, save for large purchases and pay cash. This is another tactic for financial success. Save up for the next car, set of furniture, or home remodel and pay cash.

The Sinking Fund: Coming Soon!

Step 8: Don’t Buy New Cars

A new vehicle depreciates dramatically in the first few years. According to industry experts, the value of a new vehicle drops by about 20% in the first year of ownership. Over the next four years, you can expect your car to lose roughly 15% of its value each year – meaning the average car will be worth just 40% of its purchase price after five years.

Buy a good, clean, and well-maintained used car – for cash. Let someone else take the depreciation hit!

Step 9: Start Investing

Your money can grow and work as hard as you do. The most common places for investing your saved money are in the stock market or rental real estate. I personally invest 100% of my retirement savings in stocks, bonds, and treasuries.

Investing: How To Start Investing – A Beginners Guide

Step 10: Keep Learning!

Keep learning. I do. Read books, listen to podcasts, and get an accountability partner. You know, that person who is willing to say the hard things because they care about you.

One great resource for someone just getting started is the ChooseFI Foundation’s FI 101 course. It is a self-paced online course that covers the basics. The best part is you’re not alone. There is a great online community where you can ask questions and share your wins.

If you haven’t already, please consider signing up for my monthly newsletter. It includes tips, life hacks, info about my latest articles, and a frugal and healthy recipe. I promise your email address will not be sold and I will not spam you!

What Does The Bible Say?

Here are a few examples of verses on frugality, saving, Emergency Funds, and wise money management.

When they were filled, He said to His disciples, “Gather up the leftover fragments so that nothing will be lost.” John 6:12

Then let them gather all the food of these good years that are coming, and store up the grain for food in the cities under Pharaoh’s authority, and let them guard it. Let the food become as a reserve for the land for the seven years of famine which will occur in the land of Egypt, so that the land will not perish during the famine. Genesis 41:36-36

There is precious treasure and oil in the dwelling of the wise,
But a foolish man swallows it up. Proverbs 21:20

She looks well to the ways of her household,
And does not eat the bread of idleness. Proverbs 31:27

Key Takeaway – Use these 10 Steps to help get a handle on your money and build a better future for you and your family.

Assignment – Start with Step 1 and work your way through Step 10. Your future self will thank you!

Coming Soon – The Sinking Fund

How Credit Card Debt Can Get Out Of Control

At A Glance – Out of control credit card debt is the enemy of your money and your future. Discovering your purchasing patterns will help break the cycle of debt.

Have you ever looked at your credit card statement and thought, “How the #@%$ did I get here?!” Or watched it inch up every month thinking it’s not THAT bad, only to realize it’s gotten bigger than the neighbor’s dog!

If you can identify, you’re not alone. Credit card debt is massively out of control. But what to do?

Here are a few thoughts on how credit card debt can balloon out of control and what to do about it.

How Did We Get Here In The First Place?

1. The Buy It Now Mindset

Credit card debt can get out of control because we have a “buy it now” mindset. Our culture has become one of instant gratification. If you want it, need it, or even think you need it, you should get it! Right? Your friends will tell you, “You deserve it!” If you don’t have the money today…No Problem…put it on the card. The only problem is all that “deserving” has to be paid for. Unfortunately, you are using tomorrow’s dollars to fund today’s lifestyle. This mindset will get you in trouble before you even realize what’s happened.

Keeping up with friends or family causes problems also. It’s hard to say no when everyone is going out for drinks after work. What about that new grandbaby across the country you want to go see? Or how about the latest iPhone? We want to appear we have it all together, and that doing what everyone else is doing is no problem.

What to do: Plan ahead for large purchases, save up and pay cash. Establish a 72-hour rule. Wait 72 hours before making any major purchases. You may discover you really don’t want it that bad.

2. Pay Attention!

Our credit card debt can also get out of control because we just don’t pay attention. We’re in a hurry, so we put it on the card. We mindlessly buy things and realize later that we really didn’t get any joy from that purchase.

Stephen and I dug a huge hole in our early years because we didn’t pay attention. There are still times when we have to unwind mistakes.

What to do: Pay attention! Don’t make purchases because you are in a hurry, or because you haven’t planned ahead.

3. Making Only Minimum Payments On Your Credit Cards

Credit card debt gets out of control when we only make minimum payments. Credit card companies make it easy to buy what you want and only make that small minimum payment. Lots of folks think the minimum payment is all that’s required. The problem is the balance will increase faster with spending than it will decrease with minimum payments. You’ll never get ahead like that.

Credit cards carry some of the highest interest rates in the lending industry. They are probably the highest rates of any loan you have. I received an email from my credit card company last month (February 2021) that informed me the rate on my card has changed and could go as high as 29.99%! What! This is a premium card and I have good credit.

Here are some examples of what minimum payments can do.

The first chart shows how long it would take to pay off $500, $2,000 and $5,000 balances with minimum payments and 18% interest. This assumes adding no new purchases to the balance.

Card BalanceInt. RateMin PymtHow Long to Pay OffTotal Paid (Int.+Card Balance)
$50018%$252 yrs$599
$2,00018%$752 yrs, 11 mo.$2,573
$5,00018%$1255 yrs, 2 mo. $7,692

This next chart shows how long to pay off the same $500, $2,000 and $5,000 balances with minimum payments and 29% interest. Again, this assumes adding no new purchases to the balance.

Card BalanceInt. RateMin PymtHow Long to Pay OffTotal Paid (Int.+Card Balance)
$50029%$152 yrs, 4 mo.$691
$2,00029%$753 yrs, 8 mo.$3,247
$5,00029%$12511 yrs, 11 mo. $17,804

Do you see the last one? If you bought a nice leather couch and put it on a credit card at 29% interest, you would pay over $17k for it in the end!!!

The reason these balances go up so quickly is that credit cards accrue compound interest and not simple interest. This is where compounding can work against you. If you don’t know how compounding works, read my article What Is Compounding And How To Harness Its Power. This explains what compounding is and when it works for you and against you.

What to do: Pay as much as you can each month to eventually pay off the balance. Once your balance is $0.00, pay the balance in full and on time every month.

4. Skipping Payments Or Paying Your Credit Card Bill Late

Credit card debt gets out of control if we miss the payment or pay it late. On most cards, the interest rate automatically increases if you are late with a payment or miss it altogether. If several payments are late the rate will go up to that 29.99% I talked about earlier. No thank you!

Also, don’t forget about the late payment fee. On top of the ridiculous interest rate, you will be charged a late fee. Right now my card is charging $40. This adds to your balance AND will also start to accrue interest.

This habit of making minimum payments and paying late sets up a downward spiral that can be devastating to your finances and your emotions. Many people wake up one day and find they are so deep in a hole, there’s no way out. I have been there, done that! It’s a hopeless and helpless feeling.

I’m not going to sugarcoat this. If this is you, then you need to take action. NOW! It won’t be fun, but YOU CAN DO IT! I’m here to help you through this. I’ve got your back!

What to do: Plan ahead so you have the money to make the payment and set an alarm on your calendar, or set up automatic payments.

What Does The Bible Say?

God calls us to be good stewards of everything we have. All we have comes from Him and belongs to Him. “…for every animal of the forest is mine, and the cattle on a thousand hills.” Psalm 50:10

Having large amounts of debt brings disorder and chaos to our lives. “For God is not a God of disorder but of peace.” I Corinth. 14:33

We are not prepared to join in on God’s plans or opportunities if all our money is spoken for before we even earn it!

What do you do now?

If you have discovered that you have too much credit card debt, there’s only one thing to do. Stop using them and pay them off. It won’t be easy, but it will be the best thing for your future self.

The entire process of how to pay off your credit cards is explained in How To Pay Off Credit Card Debt In 6 Steps. When you work through the process of paying off your credit cards, you will have freedom and control. Freedom from fear and anxiety and control of your future.

You may also have other debt in your life that needs to be addressed. After paying off credit cards, you will have the skills and the mindset necessary to attack the rest of your debt. You are now in a position to create the amazing life you want.

Key Takeaway – Out of control credit card debt is the enemy of your money and your future. Discovering your purchasing patterns will help break the cycle of debt.

Assignment – Look at each transaction on your last one or two credit card statements. Do you see a pattern? Do you see unnecessary purchases? Commit to using cash and paying off your credit cards.

Coming Soon – The Emergency Fund

If you need any help or encouragement along your journey, use the contact form to contact me, leave a comment below or go to the Started At 50 Facebook group.

Have you been able to pay off some of your credit card debt? Great! Leave a comment so we can all celebrate with you.

What Is Compounding And How To Harness Its Power

At A Glance – Harnessing the power of compound interest or compounding is probably THE most important factor in becoming Financially Independent.

What Is Compound Interest or Compounding

Compound Interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pays it.

Compound interest is the most powerful force in the universe.

Compound interest is the greatest mathematical discovery of all time.

Albert Einstein

Those are powerful quotes from a powerful mathematician! Why would Albert Einstein say that about compound interest? Because it can mean the difference between barely having enough money to get by in your retirement or being quite comfortable.

Let’s look at what compounding is and what it can do for you.

Definition of Compounding

Here’s a textbook definition of compounding. Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth (simple interest), where only the principal earns interest each period.

In plain English, compounding is interest on interest which magnifies returns over time.

Here’s an example. Let’s say you deposited $1,000 in a savings account and the bank will pay you 10% interest per year. (I know you can’t get 10% right now, but I’m just using round numbers).

In year One, you would earn $100 in interest (1,000*10%). Your account would then total $1100.

In year Two, your $1100 earns 10% interest or $110. Add that to your principle and you would have $1,210.

In year Three, you would earn 10% on $1210 or $121. This would total $1,331.

Each period that the interest is added to your account, it is calculated on the total amount in the account. Not just the original deposit of $1,000.

$1,000 Invested at 10% Comp. Interest per Year GainTotal
Year 1 (1,000*0.10)$100$1,100
Year 2 (1,100*0.10)$110$1,210
Year 3 (1,210*0.10)$121$1,331

Compound Vs Simple Interest

Simple interest can be defined as interest paid only on the original principal, not on the accrued interest. In other words, the interest will be calculated each period on the original deposit.

In our example above, simple interest would only be calculated on the original deposit of $1,000. So, each year the interest paid would be $100. With simple interest, at the end of 3 years, you would have $1,300.

$1,000 Invested at 10% Simple Interest per Year Gain Total
Year 1 (1,000*0.10)$100$1,100
Year 2 (1,000*0.10)$100$1,200
Year 3 (1,000*0.10)$100$1,300

Let’s look at the totals for these two examples side by side for 1, 5, 10, 20 and 40 years.

$1,000 Invested at 10% Simple Interest Compound Interest
Year 1 $1,100$1,100
Year 5$1,500$1,610
Year 10$2,000$2,594
Year 20$3,000$6,727
Year 40$5,000$45,259

You can see why compounding is described as a Mathematical Explosion! The difference is small in the beginning, but as the interest compounds over many years, the difference in your total investment is massive.

The Magic Penny

Here is a fun riddle. Would you rather have a penny that doubles every day or a million dollars? Interesting question. Let’s see…

Start of Day 1$0.01
End of Day 10.02
End of Day 20.04
End of Day 30.08
End of Day 40.16
End of Day 50.32
End of Day 60.64
End of Day 71.28
End of Day 82.56
End of Day 95.12
End of Day 1010.24
End of Day 1120.48
End of Day 1240.96
End of Day 1381.92
End of Day 14163.84
End of Day 15327.68

Which did you choose? Want to change your choice? That penny’s not looking very appealing, but let’s continue.

End of Day 16655.36
End of Day 171,310.72
End of Day 182,621.44
End of Day 195,242.88
End of Day 2010,485.76
End of Day 2120,971.52
End of Day 2241,943.04
End of Day 2383,886.08
End of Day 24167,772.16
End of Day 25335544.32
End of Day 26671,088.64
End of Day 271,342,177.28
End of Day 282,684,354.56
End of Day 295,368,702.12
End of Day 3010, 737418.24

As you can see, the effect of compounding is slow as molasses at first, but then later, takes off like a rocket! Your investments can make more money than you do. The effect of compounding on investments has been described as a perpetual money machine!

What does this mean for you? Invest early and invest often. And leave it alone. Don’t sacrifice your future for something you think you can’t live without today.

A Real-World Example

So far I’ve given you hypothetical examples in order to show you how this works. Let’s look now at a real-world example.

I’m going to use 2 people, Earl the Early Bird and Paul the Procrastinator. Earl starts saving and investing 20% of his $36,000 salary at 22 when he starts his career after college/trade school. This means he has $600/month to invest. He can invest 20% because he has not let his lifestyle creep until it takes all his income. Earl invests his money in low-cost, broad-based index funds that have returned an average of about 8%/year for the last 60 years.

Paul has graduated college with a great starting salary of $90,000/year. He has set up his life to reflect his hard work and good fortune. In other words, he has allowed his lifestyle to creep up to meet his income. He really can’t save much at first because he needs to buy a house and he has a hefty car payment. Ten years later at 32, he decides he should probably start saving for retirement. He saves and invests 10% of his salary which he feels good about. This means he is investing $750/month. Paul is putting his money into the same low-cost index funds as Earl.

Let’s see how they do at age 32, 42, 52 and 62.

EarlPaul
Age 32$111,837$0.00
Age 42358,764139,796
Age 52906,902448,455
Age 622,123,6751,133,627

Earl is only ahead of Paul by a little over $100,000 when Paul starts to invest, but ends up beating him by $1M! Even though Paul is investing more per month and has a much higher salary, the value of time was in favor of Earl.

What Does This Mean For You And What If You’re Starting Late?

The answer to this is simple, but not always easy. It means save everything you can as often as you can. You can see in the examples above that time and interest rate make a big difference in the end result. Compounding works FOR you as you grow your savings. The longer your money is invested, the more effect compounding has. Starting as early as possible will give you more time to save. Also, the rate affects the outcome of compounding. The higher the rate, the more your money will earn. As interest is added on top of interest, your money will grow faster over time.

What if you can’t save 10% or 15% of your salary? You might have money that is not working as hard for you as it should, you just need to find it. If you don’t know where to start, check out my other articles on Calculating Your Net Worth, Tracking Your Spending and Budgeting. These should give you a place to start looking for extra money to save.

What if you’re not 22?!!! I feel your pain. Remember the name of my website…Started At 50. That’s because I was 50 years old when I started saving. Literally, my Net Worth was Zero at age 50. If you are late to the game, first you need to know it’s not TOO late. You have time, just not as much time. Start saving everything you can get your hands on NOW. Don’t wait another day. Everything you can do today will make your future more comfortable and less stressful.

Can Compounding Work Against Me

Compounding can also work AGAINST you. The same power that allows your investments to grow will also cause your debt to march relentlessly upward. Some types of debt like credit card debt are calculated with compounding interest and not simple interest. As your credit card balance grows with purchases, the interest on interest calculation causes the balance to grow even faster.

If you do not pay your credit card bills in full every month, you are paying the bank a huge premium for the privilege of carrying their card. At the time of this writing, interest rates on savings accounts are below 1% per year, whereas credit card rates are anywhere from 16-30%. The first step in boosting your savings rate is to pay off your credit cards!

Credit cards are not the only type of loan that is calculated with compound interest. If you have other types of loans, check to see what kind of interest they carry.

Where Can I Find Compounding?

Compounding happens in several places. The most obvious would be at your bank with a savings account or CD. Usually, the bank guarantees a rate of interest for a period of time. Unfortunately, interest rates are very low right now (March 2021) and have been for a while.

Compounding also happens in the stock market. Investment vehicles such as mutual funds, stocks, bonds, and T-bills are some examples. The compounding happens when interest and dividends are paid and with increases in the share price. (You must remember the stock market will go up and down on any given day, month or year. The point is over time, stocks go up)

The way to ensure you enjoy the effects of compounding is to leave your interest and dividends in the account to compound into the future.

Conclusion

Compounding is a force you want working for you and not against you. This means saving early and often. It also means pay off your credit cards.

Here’s another quote for you. This time from Warren Buffet.

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

Key Takeaway – Harnessing the power of compounding is probably THE most important factor in becoming Financially Independent. Save early and save often.

Assignment 1 – Look at how much you are saving today. Can it be increased?

Assignment 2 – Are you carrying a balance on your credit cards? Look at their current interest rate. Try to reduce the rate or pay it off. (Here is an article about paying your credit cards off)

Coming Soon – How credit card debt can get out of control.

How To Pay Off Credit Card Debt In 6 Steps

At A Glance – Long term credit card debt is the enemy of your financial well-being. It is like a black hole – sucking everything in and leaving you empty-handed. Paying off your credit card debt will break the chains of that bondage.

6 Steps To Pay Off Your Credit Card Debt

1. Have An Emergency Fund

Why am I starting with an Emergency Fund (EF) and not paying your cards? Because the minute you decide to pay off your debt, you will have an emergency! Your car will break down or your water heater will blow up. If you don’t have an EF, you will have to put this crisis on your credit card and the problem will get worse.

If you already have an EF, great! Skip to Step 2. If not, stop what you’re doing right now and work on this. It’s critical! Not only for debt reduction but just for life. An EF puts a cushion between you and life. When you have a flat tire, it’s not a crisis. You buy a new tire, restock your EF and move on.

How much do you need? A fully funded EF is 3-6 months of expenses in cash. If you don’t have any cash saved, then start with $1,000. This is your Baby Emergency Fund. I don’t want you to wait until you save 3-6 months saved before you start working on your debt. After your debt is gone, go back and finish the EF.

How do you get $1,000 quickly? Sell something on Marketplace, have a garage sale, or take a part-time job. Look at where you can cut spending. Do it quickly and do it now. You should be able to come up with $1,000 quickly. Dig all the loose change out of your car seat.

2. Stop Taking On New Debt

To get rid of this debt, you need to commit to no new spending! You can’t make headway with your cards if you keep putting purchases on them. This will be the hardest step for most people. Spending is what got you here. (How’s that working for you, by the way?) New habits and a new mindset will get you out.

If you can’t pay cash for something, you can’t afford it. Reduce your spending (for a season) to necessities only. And no, getting your nails done or a new car magazine is not a necessity! I know this will be painful, but it won’t last forever.

Start using a budget and track your expenses. Budgeting and tracking will show you where you are overspending and getting off track. If you haven’t used one before, here is a link to an article about Budgeting and an article about Tracking Your Spending. They include simple spreadsheets you can use. They are free for you to download, or you can find many others on the web. There are also apps you can load to your phone that make tracking simple. Give yourself some grace with these tools if you’ve never done this before. It usually takes about 3 months to get the hang of budgeting.

After you have put your expenses down on paper (or an app), do you see areas where you can cut? For now, cut your spending to the bone. The more you can cut, the faster you will get out of this pit of debt.

3. Use Cash

As I said above, if you don’t have the cash for a purchase, you can’t afford it. I know using cash these days is archaic, but it works. When I was in the pit of debt and fear, I switched to cash. Using cash for a purchase keeps you from overspending by letting you feel the emotional pain of spending. When you have to hand over a couple of Ben Franklins to buy the groceries, it makes you think about everything you put in your basket!

I literally had cash in envelopes in my purse. I can hear your question now…No, I wasn’t afraid to carry that much cash with me. I didn’t have ALL my envelopes in my purse. Just the ones I needed for the errands that day. And I get it, going to the bank to get cash and doling it out to the envelopes is a pain. That’s the point. You want to get that debt paid off and get out of this mode of operating AS SOON AS POSSIBLE.

I understand we are in the 21st century and…”There’s an app for that”. There are lots of apps you can use to help with your spending. Some of the more widely used budgeting apps are Mint, YNAB and Every Dollar.

4. Reduce the Interest Rate Or Transfer The Balance To A 0% Card

Call your current credit card companies and ask for a reduction in your interest rate. This may be a long shot, but the worst thing that can happen is they say no. This will depend on your payment history and your credit score.

Another way to reduce your interest rate would be to transfer your balance to a card with a 0% offer. (You may not be able to do this if your credit is trashed). Some cards offer a 0% interest rate for a period of time. Say 12-18 months. You can transfer your balance and pay the card down while the interest meter has been turned off. This will give you a bit of breathing room. If you are able to do this, push through the pain and pay everything you can find on the balance before the interest starts running again.

Special Note: There is normally a fee to transfer your balance onto a new card. Do the math and be sure you’re not paying more in fees than you will save in interest.

This tactic is a form of debt consolidation, and I’m not usually a proponent of debt consolidation. Let me say that again. I DON’T like Debt Consolidation. Why? Because it won’t work without a behavior change. You must change your behavior with spending and saving. Otherwise, you will consolidate your debt, clear your credit cards and start filling them up again. Not a good plan.

If you can transfer your balance to a 0% card, you should CLOSE the cards you’ve emptied to eliminate the temptation to spend on them.

5. Start Paying Off Your Credit Card Debt

Here’s the real meat of the article! Let’s get those cards paid off!

There are 3 main ways to pay off your credit card debt. They are the Snowball Method, the Avalanche Method and the Hybrid Method.

I will explain them here. Also, here is a link to an article about paying down any kind of debt and includes further descriptions of these methods. How To Pay Off Debt.

Snowball Method

This method is fairly simple. List your balances starting with the smallest balance down to the largest. Ignore the interest rate, just rank them by balance amount. Make minimum payments on all but the smallest card and throw everything you possibly can at the small one until it is paid off. This means any extra money you can get your hands on goes to this debt. This could be money from a side job, overtime, or by selling something.

After the first card is paid off, take all the money you were paying on it plus the minimum payment you were making on the second card and put it on the second card. You keep doing this for each credit card until all are paid. Each time adding the money from the payments on the previous card. This is the snowball and it gets bigger as it rolls to each card.

The snowball method gives you an emotional boost with a quick win. This Atta-Boy can help you stay focused and keep going. The downside is because it does not take interest rates into account you could pay more in the long run.

Avalanche Method

The Avalanche Method is similar to the Snowball, but it considers the interest rate instead of the card’s balance. In this method, list your balances starting with the highest interest rate down to the lowest. Pay minimum payments on all but the first card on the list. Throw all the money you can at the first card until it is paid. Then, like in the Snowball, you add what you were paying on the first card to the minimum payment of the second and keep going till all credit cards are paid.

The avalanche method can save you some money in the end. If you focus on your highest interest card, you can save some money by eliminating that debt first. The downside of this method is it may take months to slog through the first card’s balance.

Hybrid method

The Hybrid Method combines the pros of the Snowball and the Avalanche. Using this method, pay off one or two small cards first for that quick win to get you motivated. Then, as you feel you have the discipline, start working on the card with the largest interest rate.

Last thought about payment method

Which method should you use? My normal advice about debt repayment is, it’s really up to you. Choose what will work better for your situation and temperament. In the case of paying off credit card debt, I would suggest the Avalanche method if you can bear it. Why? Credit card debt carries such high interest that, if it were me, I’d attack the highest interest card first.

6. Track Your Progress

Make yourself a visual. A chart or graph. Put it on your phone and your computer. Put it on your refrigerator. Make sure you squeeze every bit of feel-good from your progress. Give yourself a pat on the back for every little win.

This whole credit card payoff process won’t be easy. And it won’t be quick. As Dave Ramsey says, “You might have wandered into debt, but you can’t wander out”!

It may help to have an accountability partner along this journey. Find someone who will walk this road with you and say hard things because they love you.

Go to my Started At 50 Facebook group and let us know how you’re doing. We would all love to celebrate your progress!

I’ve Paid Off My Credit Cards, Now What?

First, WOOHOO!! Congrats on making this major milestone in your finances and your life. Doesn’t it feel good?

Now it’s time to put your big-girl pants on. FROM NOW ON AND FOREVERMORE, if you put purchases on a credit card…PAY THEM ON TIME AND IN FULL every single month. This is the only way to use these beasts. Now, you can be in control of your credit rather than being at the mercy of the bank!

I would suggest that you also continue to budget and track your spending. You may not need to do this forever, but it is a good way to put guard rails around your finances.

What Does The Bible Say?

Conclusion

“Why go through all this pain”, you may ask? Carrying continuous, strangling debt is no way to live. It sucks the joy out of life, creates stress and will eventually affect everything.

When you work through the process of paying off your credit card debt, you will have freedom and control. Freedom from fear and anxiety and control of your future. You may have other debt in your life that needs to be addressed. If you do, you have the skills and the mindset necessary to attack the rest of your debt. You are now in a position to create the amazing life you want.

Key Takeaway – Long term credit card debt is the enemy of your financial well-being. Paying it off will break the chains of that bondage.

Assignment 1 – Commit to STOP using your credit cards TODAY!

Assignment 2 – Look at all your credit card statements. Make a list of all the balances and interest rates. Decide which payoff method you will use.

Assignment 3 – Pay them off as aggressively as possible

Coming Soon – The Power of Compound Interest

If you need any help or encouragement in your debt pay-off journey, use the contact form to contact me or go to the Started At 50 Facebook group.

Have you been able to pay off some of your credit card debt? Great! Leave a comment so we can all celebrate with you.

How To Pay Off Debt

At A Glance – Debt is NOT your friend. It robs your future, and more stuff won’t make you happier. Pay off your Debt as quickly as possible. It won’t be easy, but it will be worth it! Then you can start to design the future you’ve always dreamed of.

Accumulating debt has become an American past-time. Everything we want comes with “easy payments”, so why not buy it? Often-times we don’t realize how deep we’re in until we realize we can’t get out. 

How many of us find ourselves thinking things like: 

  • I don’t want to buy some else’s car problems, so I need to buy a new car.
  • My new baby needs the best and safest equipment, so I’ll just put her cute new stuff on my credit card.
  • My boss was really unreasonable today, so I’ll go to that new bar for a happy hour with my friends.
  • I need all this stuff to keep up. I wouldn’t want my friends to think I’m not doing well.

It feels normal because it’s what everyone else is doing. We have become professionals at retail therapy.

We’ve created a lifestyle that’s impossible to maintain. And we fund it all with debt. Take my word for it – this will NOT bring us joy. It only brings us bondage. Debt is a mental, emotional and financial drain that robs your future.

Debt Is A Product

Did you know debt is a product? Just like your favorite candy bar or the shampoo you use, debt is a product we buy. And just like the other products, it is heavily marketed to us.

Debt is sold to us in the form of credit cards, car loans and mortgages.

You Can’t Borrow Your Way Out

The only way to get out of debt is to quit borrowing. Taking out one loan to pay off another is just moving the debt around. 

If you are serious about wanting to get out of debt, you have to stop taking on new debt. You can’t get out of the hole by digging it deeper.

What Does The Bible Say About Debt

The Bible has a lot to say about money. That is one of the things I explore here at Started At 50. If you study God’s word, it doesn’t take long to see that debt is not part of His plan for us. He knows it’s not good for us. Here’s a couple of examples.

Proverbs 22:7 – The rich rule over the poor, and the borrower is slave to the lender.

Romans 13:8(a) – Let no debt remain outstanding, except the continuing debt to love one another.

What Is Debt?

What is considered debt? The definition of debt is simple…Debt is anything you owe to anyone. Having debt means you are funding today’s life with tomorrow’s dollars. When does it end?!!!

It can end here and now. You CAN get out from under the stress and the bondage of debt. It won’t be easy, but it is possible. You can do it with a few simple tools and a plan.

Let’s talk a bit about the different kinds of debt and the effect debt can have on your life and then we’ll dive into the nuts and bolts of Debt Payoff.

Kinds Of Debt

  • Credit Cards
  • Student Loans
  • Car Loans
  • Mortgage
  • Personal Loans
  • Medical Debt
  • Payday Loans
  • HELOC
  • 401k loans
  • Loans from Your Parents
  • “90 Days Same As Cash” Purchases
  • Financing Your Kids Braces

Did you see anything on this list you had not previously considered debt? Many of these types of debt are common in our culture. It’s normal to have a Car Loan or Student Loans. Other types of debt such as Payday Loans are truly insidious, but they are all damaging to our financial well-being.

How Can Debt Affect You Emotionally?

Frustration – It can be frustrating to have an unexpected expense that has to go on the credit card. Just when you thought you were making headway! Frustration can lead to giving up.

Denial – Do you shove unopened bills in the drawer? You just don’t want to know how bad it is! Denial could lead to unhealthy coping habits like drinking in an effort to forget.

Stress – Do you have more month than money? How can you juggle all these bills. Even with making minimum payments, you don’t have enough to go around! Stress could lead to weight gain or relationship problems.

Fear and Panic – Do you let all your calls go to voicemail because you’re afraid it’s a collector. Are you fearful your credit card will be denied while you are at a restaurant with your date? Fear and Panic could lead to feeling anxious all the time and not enjoying life.

Shame – Do you hide your spending or the amount of debt you have from friends, family or co-workers. You don’t want anyone to know how deep in debt you are. I mean, what would they think! Shame can lead to living an inauthentic life.

Anger – Are you having money fights with your spouse? Are you yelling at your kids or your co-workers because you can’t quit thinking about your money problems? Anger can lead to relationship issues.

Depression – You have just shut down. You can’t see a way out and your spouse doesn’t understand the pressure you’re under! You can’t deal with it anymore. Depression can lead to a whole list of mental, emotional or spiritual issues. Deardebt.com is a one of many resources for someone who is struggling with depression and mental health problems due to financial strain.

I experienced a lot of these emotions when Stephen and I were having our money issues. We had dug such a deep hole, I didn’t think we would EVER climb out. We couldn’t talk about money without getting into an argument. I was frightened and he had shut down. We were going nowhere.

The stress was unbearable and I became hopeless. This is no way to live.

You’ve Got This!

I want you to know that no matter where you are starting, YOU CAN DO IT! Your self-worth is not your net worth. Your past mistakes do not define your future. Forgive yourself and let go of the past! If you are starting your Debt reduction journey, let us know in my FB group, Started At 50. We are all there to support and encourage each other. We will not judge!

Getting back to Zero is a great feeling. You will be starting your Financial Freedom clock. This is where I was at 50 years old!

First Things First – Your Emergency Fund

Before you start to pay down your debt, you need to build a baby Emergency Fund. If you already have one, great! If not, you need an EF of $1000 in the bank. Why would I ask you to save $1000 when I’ve just spent pages telling you to pay off your debt? Because you need a safety net. Some cushion between you and life. As soon as you commit to paying off your debt, your car will break down or your refrigerator will go out. You don’t need to go deeper in debt while you are trying to pay it off.

This was one of the big problems I experienced in our dark days. We had no safety net and when life threw us a curveball, it sent us over the cliff financially.

Try to save your $1000 quickly. Have a garage sale, sell stuff on Marketplace, work some overtime or declare a “No Spend Month”. Find any way you can to get this first $1000. Then when you have a flat tire, it’s not a disaster!

How To Pay Off Your Debt

There are 3 commonly accepted methods for paying off debt. The Snowball Method, the Avalanche Method and the Hybrid Method. Let’s look at how they work and the pros and cons of each.

Snowball Method

This method is fairly simple. You list your debts starting with the smallest balance down to the largest balance. Ignore the interest rate, just rank them by balance amount. You make minimum payments on all but the smallest debt and throw everything you possibly can at the small one until it is paid off. This means any extra money you can get your hands on goes to this debt. This could be money from a side job, overtime, or by selling something.

After the first debt is paid off, take all the money you were paying on it plus the minimum payment you were making on the second debt and put it on the second debt. You keep doing this for each debt on the list until all are paid. Each time adding the money from the payments on the previous debt. This is the snowball and it gets bigger as it rolls to each debt.

Snowball Pros and Cons

The advantage (or pro) of the Snowball Method is it gives you a quick psychological boost. Paying off all your debt is not going to be a piece of cake. You didn’t get into debt overnight and you won’t get out overnight. It takes time, discipline and it will probably take some sacrifice. The Snowball Method gives you a quick win and helps you feel like you are making headway. This can give you motivation to stick to it.

The disadvantage is the Snowball Method does not take math into consideration. You may pay your first debt off quickly, but that might be a loan with a small interest rate. Meanwhile, the loan with the large interest rate, say your credit card, is treading water and accumulating interest while it waits for you to get to it.

Avalanche Method

The Avalanche Method is similar to the Snowball, but it considers the interest rate instead of loan balance. In this method, list your debts starting with the largest interest rate down to the smallest. Pay minimum payments on all but the first debt on the list. Throw all the money you can at the first debt until it is paid. Then, like in the Snowball, you add what you were paying on the first debt to the minimum payment of the second and keep going till all debts are paid.

Avalanche Pros and Cons

The pro for the Avalanche is you are considering interest rates. You save money as you pay down the loan with the largest interest rate first. As the loan balance decreases, the amount of interest being charged decreases also.

The con for the Avalanche is emotional. The loan on the top of your list may have a large balance and take months or even years to pay off. This can be discouraging to see all your other debt treading water while you work on the one.

Hybrid Method

The Hybrid Method combines the pros of the Snowball and the Avalanche. Using this method you can pay off one or two small debts first for that quick win to get you motivated. Then as you feel you have the discipline to “Stick To It”, start working on the debt with the largest interest rate. This method is a hybrid of the other two.

One note about credit cards. Your credit card debt may have the largest interest rate of anything on your list. Check into transferring your CC balance to a zero-percent card. If your credit score is high enough, you can open a card with a zero percent interest rate for a period of time (6 or 12 months). This may save you some money as you pay down your debts. WARNING: Don’t do this if you have not changed your spending habits. It will only make your problem bigger!

Choose What Is Right For You

Is there a right or wrong way to pay your debts? Probably not. As with other financial tools like Budgeting or Expense Tracking apps, pick the one that works for you. If sticking to your payoff plan may be hard for you, choose the Snowball. Pick the Avalanche if you think you can stay with it and don’t need the “pat on the back”. Not sure, try the Hybrid.

You can accelerate your journey to being debt free. You can Earn More or Spend Less. Better yet, do both.

One note about interest rates – If you have anything with a greater than 10% interest rate, this is “Hair On Fire”. Address this loan as soon as possible. If you have anything worse, like a payday loan at anywhere from 200 to 2400%, this is “Nuclear Armageddon”! Do Not pass GO, Do Not Collect $200…borrow the money from your brother if you have to. Pay this thing off TODAY!

Conclusion

No matter which method you choose, the much BIGGER point here is to Get Out Of Debt! As I said earlier, these methods are simple. The execution of the plan will take grit. It won’t be easy to turn down that invitation to go out for dinner or forego a vacation. Life may feel very restricted…for a while. Remember, this is a season. It won’t last forever and it will be SO worth it.

Exercise Your Frugal Muscle

One unexpected benefit to the hard work of paying off your debt is you are building your frugal muscle. You will need to really think about every purchase while you pay off your debts. Then when the debts are gone, you will have created your frugal muscle. You will know how to pay attention to your spending. You will be in the perfect position to start saving! And saving money is what sets you up for a great future of financial freedom.

Key Takeaway – Debt is NOT your friend. It robs your future, and more stuff won’t make you happier. Pay off your Debt as quickly as possible. It won’t be easy, but it will be worth it! Then you can start to design the future you’ve always dreamed of.

Assignment 1 – Accumulate your $1000 baby Emergency Fund if you don’t already have one. Do it NOW!

Assignment 2 – Pull out all your debts. I mean ALL of them. Make a list of loan balances, minimum payments and interest rates. Decide which pay off method is right for you. List the debts in the order needed for the pay off method you have chosen. Smallest to largest balance for the Snowball. Largest to smallest interest rate for the Avalanche or your choosing for the Hybrid.

Assignment 3 – DO IT!!! You have a plan, so NOW is the time to get started. If you have trouble starting or you just need help from a real person, email me at becky@startedat50.com. Also, don’t forget the FB group Started At 50. We can crowd-source any question you have.

Coming Soon – Managing those Credit Cards