By Erik Carter, JD, CFP® is a resident financial planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
Are you struggling with credit card debt? If so, you’re not alone. Paying off credit cards and other higher interest debt is one of the most common goals that people try to save for. Unfortunately, having to pay off a large amount of debt with ridiculously high interest rates can make you feel hopeless, especially if your budget is already stretched. But it turns out that you don’t necessarily need to make huge sacrifices to become debt free much sooner than you may have thought was possible.
Let’s take a look at an example. Suppose you have 4 credit cards. One has a balance of $1,800 at 19.8%. The second has a balance of 1,500 at 16.99%. The third has a $1,100 balance at 16.7%. The last has a balance of $1,000 at 5.9%. If you just make the minimum payments, it would take over 30 years to pay all that off! Sounds pretty discouraging for someone on a tight budget, huh?
Here’s the interesting thing though. The 4th credit card with the $1k balance will be paid off within 7 years. What do you think will happen to the $15 minimum payment then? If you’re like most people, you’d probably spend it without even thinking about it. After all, it’s only $15 right? What if you just put that same $15 you were spending on that card towards the credit card with the highest interest debt (in this case 19.8%)? It turns out that if you did that as each card is paid off, you would be debt free in less than 10 years! This would save you over $4k in interest payments and that’s without changing any of your current spending habits.
But what if you were able to pay a little more than the minimum balance? For example, if you could save just $40 a month by eating out one less meal per week and put those extra dollars towards the highest interest credit card, you could be debt free in just 5 years and save over $7k in interest! Here are some other relatively painless things I’ve done myself to save money each month: (amounts are monthly)
Average cost of credit monitoring service = $13
Savings = $13
Average landline bill = $20
Average cell phone bill = $70
Virgin Mobile prepaid cell phone with 900 minutes = $40 (save $5 by signing up for automatic payments)
Savings = $50
Work out at home and cancel, gym membership, and work out at home
Average gym membership = $55
Savings = $55
Average cable bill = $86
Netflix streaming = $8
Hulu Plus = $8
Savings = $70
Want to know how quickly these tips can make you debt free? You can use this DebtBlaster calculator to see how these seemingly small savings can really add up to big interest savings over time.
For more resources on debt and saving, check out these other resources: