Apr 10 2012

Part 4: How Dorothy can save $1k and pay off $5,600 in credit cards in a year


[This post is a follow-up to yesterday’s post, and is a part of Dorothy’s series]

Alrighty, Dorothy. Let’s do this.

If you want to build up $1k in savings and pay off $5,600 in credit card debt by March 1, 2013, it is going to take discipline. It’s going to take sacrifice. What are you willing to do to meet these goals? Are you willing to sell things you don’t want? Cut expenses for awhile? Take on some side projects (freelance writing or editing, perhaps?) to boost your income? Limit spending money when going out with friends? Go cash-only for non-bills?

The reality is, to meet these goals in this time frame, you’re going to have to be really serious about it. Each purchase will need to be deliberate.

And if you’re not willing to make certain changes, I invite you to explore why not.

Your goals are doable. Here’s how to make it work:

  • You get paid at the end of the month. Pay all of your upcoming bills at that time, or as soon as you get the bill. Also, make your debt payments at this time, and be certain that your extra payments are going to credit card principal instead of being counted as a future payment.
  • Call Chase and ask for a lower rate. They’re making less money if they agree to this, so they’ll probably play hardball.
  • Go cash-only for your day-to-day spending: Groceries, gas, restaurants/entertainment and miscellaneous shopping. At payday, go to the ATM and withdraw your spending money for the month. Once it’s gone, it’s gone. YES it sucks to do it this way. But, you can’t blow your budget. Try it for a few months and be amazed at your progress.
  • Sell whatever you can. Old iPods, pretty dresses, books, household items — anything you don’t really need, sell it and put the money in your emergency fund.
  • $80/month is expensive for a gym membership when you have this much debt. If you’re not in a contract, can you go a la carte for the days you do go to the gym? Can you find a cheaper gym that will get the job done until you can afford a fancier gym? Or do some lower-cost exercise altogether? If cutting the gym expense is not possible, be it by contract or choice, then you’ll have to find other areas of spending to cut.
  • I do hope you get a raise in a few months, but please put that money toward savings or credit cards.

I’m assuming you’re still at $300 in the bank. So, for the next 7 months on payday, put $100 in your savings account. Automate it and forget it. Target $1k-in-bank date: end of October 2012 at the latest. At that time, put that $100/month into your debt snowball.

Pay the minimum on your car and student loans. The credit cards are at a much higher interest rate and your debt pay-off efforts will be more effective if you concentrate your extra payments on one debt.

Pay the minimum on your 0% credit card. When it resets to 16% in March, you won’t have much of a balance remaining (it should be just a few hundred dollars, if it’s even still around). If the terms state that you’ll have to pay 16% on the entire $2989 starting balance compounded monthly, then whoa that would be a problem.

For your Chase card, ignore whatever the “minimum monthly payment” is. Consider it a $400/month minimum (or more) until it’s gone. At that pace, it’ll take you until November to pay off.

Fast-forward to November. You now have a paid-off Chase card and $1k in the bank. You’ve paid the minimum on your Citi (roughly $50/month) and the November balance is something like $2,500. Your debt snowball is now $500 ($100 from what you were putting in savings, $400 from Chase) plus $50 for Citi, so roughly $550/month now available to throw at Citi.

The Citi card should be paid off by March, or get you within spitting distance, if my assumptions are correct.

You’ll have a little more than $200/month to do what you want with (this is not counting gas or groceries), and I’m assuming $200/month utilities. Hopefully utilities will be less since you’re sharing them with a roommate. Check my math here, because you might find you’ll have $3-400+ available.

Combine that spending money with gift cards earned via Swagbucks and Mypoints, using Groupon or just finding cheaper ways to go out with friends and you’ll still get to meet your goals and spend at least $50/week on fun stuff.

Put these credit cards in a safe place in your home. Do not take them with you when you’re out shopping.

If having a credit card with you is important (what if you get a flat tire and need a tow? Then yeah, justifiable credit card use there), then I suggest making your card really difficult to access. Get a few envelopes. Put the card in an envelope. Seal it. Tape around it. Write some phrases or something motivational on each envelope so you’ll see it as you peel back each layer. Put that bundle in another one and repeat a few times. The card can stay in your purse, but you’ll have to do some work to unwrap the card to use it — it won’t be available for impulse purchases.

The next year or so will be living semi-lean perhaps, but perhaps not. Some people are living so tight, they only get $20/month of fun money. Or nothing at all. It’s all relative.

The truth is, since you have credit card debt, you were living beyond your means for a time. Not a value judgement there — just basic math. To undo that, you’ll have to live far below your means.

In a year’s time, if you follow these ideas, you’ll have no more credit card debt. You’ll then have an extra $550/month that you weren’t using in your monthly spending, and you can boost your savings account even more. You can apply that money to your student loans or car. Since you were paying the minimums on those fixed-term loans all this time, those balances will go down considerably anyway in the next year.

Lastly — automate all of these payments to protect yourself from yourself.

What do you think, Dorothy? Doable? Do you wanna do it? And readers, do you have any additional thoughts for her?

Posted under Reader series | 4 Comments »

4 Responses to “Part 4: How Dorothy can save $1k and pay off $5,600 in credit cards in a year”

  1. These are great tips from Kacie! I agree that $80 for a gym membership is steep considering your goals to get out of debt. What type of exercise do you do at the gym? If you’re on a treadmill, could you maybe check into joining a running club or something? That way you’d have safety in numbers with lots of people, and I’m sure it wouldn’t carry the same price tag as the gym. Just a though.

    I also agree with Kacie’s idea to stop using credit cards and automate your payments. If your “minimum” becomes $400 a month, you’ll pay it off much faster than your previous method of paying a huge sum, and then charging some more.

    I will also say, I have done a “cash only” budget, and it REALLY does work. I recommend paying all of your monthly bills on payday, and withdrawing whatever amount you’ve decided you can afford to spend at the start of each week. When the money’s gone, it’s gone. You’ll learn to budget it better throughout the week, and you won’t have that sick feeling in your stomach every time you open your bank account to check the balance, because you’ll know EXACTLY what you’re spending.

    I know it’s tough to buckle down and cut way back, but tell yourself it’s only a year. ONE YEAR and things will be so much better. I know you can do this. Your credit card debt is not so bad, but if you don’t break this cycle, you’ll be stuck in a paycheck-to-paycheck cycle forever.

  2. Is the car really necessary? Since the price of gas and the price of public transport basically net out for her commute, why does she need the car? It’s a depreciating asset that she still owes a lot on. I would at least consider getting rid of the car – Zipcar is available for when you really need a vehicle. But this should only be done if she’s planning to stay in Chicago or another city with good public transportation for at least a few years.

  3. Kacie, all your suggestions were great! I would say the biggest challenge for Dorothy might be lifestyle. Whether we want to admit it or not, we all do want to keep up with the Jones’-especially if they are our friends! I would suggest she find a friend to team up with (her roommate?) To do fun, cheap things, cook at home, and keep each other in check. Their goals don’t have to be exactly the same, but we all spend needlessly and having someone to be accountable to really helps!

  4. Dorothy can certainly do it if she makes the right choices. It doesn’t appear that she is very motivated to change based on what you have said. If she really wanted out of debt she wouldn’t be looking to reward her raise by buying something but see that as an opportunity to get ahead. I hope she pays attention to your advice it is very good, while not being over the top frugal.

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Hey! I'm Kacie, wife and mother of 3. I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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