Why You Need An Emergency Fund And How To Get One

At A Glance – An emergency fund is a financial safety net for future mishaps and/or unexpected expenses.

What Is An Emergency Fund?

An Emergency Fund (EF) could also be called a “Rainy Day Fund”. It is a stash of money, usually cash, that is set aside for an unexpected event, such as a medical emergency, a large car repair or a job loss.

Why Do I Need An Emergency Fund?

Life Happens. Things break, accidents happen, or there is, say, a global pandemic! An EF can keep you from taking on debt while you work through your emergency.

And don’t emergencies seem to happen at the worst times! The water heater breaks right after you had to get a new transmission. With an EF you won’t have to take on more debt to keep life going.

Without having some cash set aside, you might have to put your emergency on a credit card or take out a personal loan. Both of these options come with high interest rates that set you back even more than the emergency did.

One of the main reasons Stephen and I had such financial woes in our earlier life was because we did not have an EF. We had just drifted through life with no safety net, and when the BIG unexpected event happened we fell off the financial cliff! It affected our marriage and our family. Life was very unpleasant. Now we have enough cash to handle almost any emergency.

How Much Do I Need?

If you don’t have any cash on hand right now for emergencies, you need to start with a Baby Emergency Fund of $1,000.

Your Baby Emergency Fund is your first line of defense against a dumpster fire event in your life. It keeps you from getting off track and taking on more debt when you have a small to medium-sized emergency. If you have a flat tire or the washing machine quits, you can handle it.

The typical advice about how much to keep in your fully-funded Emergency Fund is 3-6 months expenses. This will handle larger events like a large medical bill or job lay-off. Your fully-funded emergency fund keeps you going without adding additional debt and stress. Having 3-6 months of expenses saved can give you the peace and confidence to face almost anything life can throw at you.

Here’s another advantage of having a fully-funded EF. If you have a large emergency or a job lay-off, you can temporarily cut back on your spending. Three to six months of savings can be stretched to last even longer as you cut back on discretionary spending. Eating out and vacations can wait.

How Do I Build It?

You can build your Emergency Fund by saving, selling something or a part-time job. If you need to build your Baby EF, the fastest way to accumulate that first $1,000 is to sell something. Have a garage sale or sell some stuff on market place. You probably have enough stuff around your house you could sell to stash away that first $1,000.

The rest of your 3-6 months of EF can come from saving money from your monthly paycheck or by taking on a part-time job or side hustle. It will take some time to accumulate 3-6 months of living expenses, so be patient, but be diligent. The more you are willing to sacrifice, the faster this will go.

If you don’t know how to save any extra money from your paycheck, take a look at your budget and see where you can temporarily cut something. If you aren’t using a budget, this is a good time to start. Here is my article, How To Do A Budget. It explains how to set up and use a budget, and includes a spreadsheet you can download. Or you can use an app like YNAB and Mint.

Where Do I Keep My Emergency Fund?

You want your emergency fund to be accessible, but not TOO accessible. In other words, you don’t want to be tempted to use your EF for that new big screen you’ve been wanting.

Since your EF will probably be cash, you could keep it in a savings account or a money market account. These can be held at your bank or a brokerage firm. You might even want to open a separate account at a different bank. This does two things. You know exactly how much you have, and you can’t do an online transfer into your checking account. This will keep you from being tempted to use it for something else.

As you are deciding where to put your cash, you will probably think, “This is boring. It’s just sitting there. I could do better than this piddly amount of interest it’s earning.” And you’ll be right. It is boring. It’s not making anything. But the point is not for it be a great investment, it’s meant to be a safety net. It’s what lets you sleep at night without worrying about Murphy knocking on your door!

When Should I Use My Emergency Fund?

This is an Emergency Fund…use it for emergencies!

What’s an emergency? Let’s start with what is NOT an emergency. A new couch is not an emergency. A vacation is not an emergency. A nicer car is also not an emergency.

Your EF should be used for things that are truly emergencies. As mentioned above, a large unexpected medical bill or job lay-off are true emergencies. Another example is paying an insurance deductible for something like a hail storm or a car wreck.

Also, keep in mind that not every large expense is an emergency. A new roof or a vehicle will be a large expense, but they are not a surprise. Large purchases or repairs can be planned for. You know they are coming eventually. These large purchases can be handled with a sinking fund. A sinking fund is where you set aside money each month in preparation for a large purchase.

For example, if you need to replace your car in 5 years and you think it will cost about $15,000, set aside $250/month. In 5 years you will have the cash to pay for the car. It won’t be an emergency.

When you need to use your emergency fund, you will need to replace what you spent. Start saving again until your emergency fund is fully funded.

What Does The Bible Say

There is a great example of an EF in the Bible in the book of Genesis. Pharaoh has a dream which Joseph interprets. The dream tells him there will be 7 years of abundance and then 7 years of famine. Pharaoh puts Joseph in charge of building Egypt’s “Emergency Fund” so his people will not starve during the famine. Read about it here.

Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.
Genesis 41:34-36

Conclusion

Having an emergency fund keeps life’s mishaps from turning into stress and drama. After you have lived with one for a while, you will discover that you don’t have as many emergencies. If something unexpected happens, you handle it, replace what you spent out of the fund and move on.

Key Takeaway – An emergency fund is a financial safety net for future mishaps and/or unexpected expenses. Having one will keep you from going into debt to handle an emergency.

Assignment 1 – Build your Baby Emergency Fund of $1,000. Sell something or take on a part-time job.

Assignment 2 – Look at your current budget and make adjustments to temporarily save as much as you can to build your fully-funded Emergency Fund.

Assignment 3 – Decide where to put your Emergency Fund.

Coming Soon – My first real retirement trip!

Have there been times in the past when you could have used an EF? Do you have an example of when having an EF kept you out of the ditch? Share your story in the comments below. I love hearing how our members are navigating our “strange new world”!

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 Balance	Int. Rate	Min Pymt	How Long to Pay Off	Total Paid (Int.+Card Balance)
$500	18%	$25	2 yrs	$599
$2,000	18%	$75	2 yrs, 11 mo.	$2,573
$5,000	18%	$125	5 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 Balance	Int. Rate	Min Pymt	How Long to Pay Off	Total Paid (Int.+Card Balance)
$500	29%	$15	2 yrs, 4 mo.	$691
$2,000	29%	$75	3 yrs, 8 mo.	$3,247
$5,000	29%	$125	11 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	Gain	Total
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 1	0.02
End of Day 2	0.04
End of Day 3	0.08
End of Day 4	0.16
End of Day 5	0.32
End of Day 6	0.64
End of Day 7	1.28
End of Day 8	2.56
End of Day 9	5.12
End of Day 10	10.24
End of Day 11	20.48
End of Day 12	40.96
End of Day 13	81.92
End of Day 14	163.84
End of Day 15	327.68

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

End of Day 16	655.36
End of Day 17	1,310.72
End of Day 18	2,621.44
End of Day 19	5,242.88
End of Day 20	10,485.76
End of Day 21	20,971.52
End of Day 22	41,943.04
End of Day 23	83,886.08
End of Day 24	167,772.16
End of Day 25	335544.32
End of Day 26	671,088.64
End of Day 27	1,342,177.28
End of Day 28	2,684,354.56
End of Day 29	5,368,702.12
End of Day 30	10, 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.

	Earl	Paul
Age 32	$111,837	$0.00
Age 42	358,764	139,796
Age 52	906,902	448,455
Age 62	2,123,675	1,133,627

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