I was laid off from my job 18 months ago and just started working again in the last month. During that time I relied on credit cards as well as a home equity line of credit. Now that I'm working again I want to get back into a healthier financial spot. What's the best way to do this?
I have volunteered at my church in the budget counseling area, and there was a recommendation there that on the surface didn’t seem like the best method, but in the long run it did help with successful outcomes more. Logic would tell you to concentrate on the highest interest rate, but what seemed to work best was to pay the minimum amount on all cards except the one with the smallest balance. Take every extra dollar you have and apply it to pay off that card. Well, first things first, this will not help if you are increasing balances elsewhere – become a cash buyer! And then with money’s left over after paying cash for everything and minimum amounts on all cards except all the extra on the smallest card and don’t use that card anymore. Then pay all extra to the next smallest, until you are hopefully down to no balances at all.
There are a couple small items in this recommendation. First off, by paying cash for everything, we get a greater sense of its value. Even say gas in the car for example. When we have to use greenbacks, we might be more conscientious about how we are burning up the gas (visualizing our greenbacks burning up into the atmosphere!). Or on food, when using greenbacks, we tend to shop more wisely or even start using coupons. The second item is the use of paying all extra to the smallest card – it becomes a psychological win with each card we cut down. If we had 10 cards with a balance that is now down to 6 (and we are not using them anymore), we get more a sense of accomplishment than the dollar amount. There is just something magic in that.
Hope this helps…
Congratulations on your new job! That is wonderful news.
I agree with David's suggestion about paying off small credit card balances. I have used this strategy in the past and it works. I also like the idea of freezing credit cards as a deterrent against impulse buys.
To help clients in similar situations find the money for either debt control (or to fund their goals) is to have them look at their spending plan in a different manner. For example, rather than give up all entertainment (movies out, premium channels on cable, etc), decide how often They really watch the premium channels and if they really need to see the lastest week's movie. One client made changes in their entertainment, it didn't limit their choices, and saved over $100 per month.
This may be a good time for an auto/home/renters insurance review. Some people find making small changes in this area could save some serious money. We discuss making sure there is adequate money in their emergency fund if they raise their deductibles.
Sometimes there are "money leaks." This usually happens when identified spending is much lower than what folks are experiencing. When this happens I provide a small note pad to record what they spend over a month's time. The idea behind the log is to provide information to people to give them the opportunity to make the decisions they want to make. As David hinted, we are often disconnected from seeing actual money leaving our physical wallets. The log helps many of us make spending decisions. One couple I work with found they were spending a lot more than they thought on some items. Knowing where their money was going helped them make better decisions (and put $300/mo towards their goals).
Congratulations on the new job and also the foresight to establish a home equity line (HEL) of credit while still employed. I am a fan of getting rid of high-rate debt first. Your mention of the HEL implies you have some flexible, economic considerations. Be aware the minimum payment on high-rate credit cards are still based on high interest rates.