Am I That Dumb About Money? Part 4: Debt Management

If you have read my previous blogs, you’re familiar with the explanation of the title of the series. If you have not, what’s stopping you?

Let’s start with the BIG difference between debit cards and credit cards.

Debit cards use money that you ALREADY have in your checking account. Credit cards use the money borrowed from an institution. If you do not pay them back within one month, they will charge you for the use of their money in the form of interest. There are obviously other differences, but that is the most simplistic way to break it down.

PUT THE CREDIT CARD DOWN – there, I said it. I personally put every discretionary item I can on my credit card. I bet I just confused the heck out of you. If you are overspending (negative net cash flow from my last blog), you must put the credit card down and re-evaluate your budget.

People talk about the key to financial security is saving a bunch of money. I think the first step is NOT putting purchases on credit cards that you cannot pay off each month (said differently, overspending). I see it all the time: people barely keep their heads above water because of massive credit card balances. It’s very important to look deep inside yourself and determine your needs and wants.

If you know me, you have probably heard my porkchop story. When my husband and I first started out, we were broke; I mean broookkke. We went to a popular big box retailer that sells bulk items and bought pork chops on sale (because they were cheaper than chicken at the time). We ate pork chops for what felt like a month straight because that’s what we had to do. Was it fun? No. Did we overspend on our credit cards that month buying food out? NO! It’s funny because I was talking with someone that has budgeting and debt management troubles. I told them that story, and their response was they didn’t think they were in “that bad shape” when they were (in my opinion). They just weren’t willing to sacrifice immediate satisfaction for the long-term satisfaction of not being in credit card debt.

If you are not paying off your credit card balances monthly, put the credit cards in a safe (do not cancel them – more on this when we talk about credit health) and give yourself a certain amount of cash, as defined by the beautiful budget you created following my last blog; when you are out of money, no more spending for you.

Another key to debt management is paying at least the minimum payment for all your credit cards. In order to pay your debt down you may have to make choices that make your life a little bit uncomfortable (hello, pork chops for a month straight). When you get to the point where you have paid off all of your credit card debt, please do not ever let yourself get back to that position again.

Let’s talk about my statement that I put all discretionary purchases on credit cards… Credit cards are not all doom and gloom. If you pick the right card for you and use it properly, they are a great tool to not only establish your credit history/worthiness (more on credit health in a later blog) but also to get rewards that fit your lifestyle.

I use my credit cards for travel rewards and I put everything I can on credit cards. I know I can pay the card off monthly (and if all else fails, I will go back to my porkchop budget) so overspending is not an issue. Caution! There are no credit card reward programs out there (that I know of) that provide a points benefit that is greater than the interest charged on a card with a rolling balance.

Tips and Tricks: Now that your cards are hiding in a safe, what do you do with your current credit card balances? Consider paying more towards your credit cards with the highest interest rates while still paying at least the minimum on your remaining cards. When you finish paying off the first card with the highest interest rate, put those payments towards the credit card with the second highest interest rate…. repeat!

Teach your children about credit card interest rates (generally much higher than interest on your savings account or car loans) and show them what happens with the account balance if you only pay the minimum due each month (there are calculators online that will give you this illustration). The compounded balance is astonishing.

Encourage your children not to overspend. The second they step onto campus during their freshmen year, they will be inundated by credit card companies. They will offer cool things like wireless chargers if you sign up for this card. Be sure to have the discussion with your children before this happens. It should be a rule, not an option, that they pay off the full balance of that card monthly.

As always, if you have any questions, please feel free to reach out!

In Part 5 of this series, we will discuss “Investing.” If you think I’m going to reveal top secrets about getting rich fast, you are mistaken but it’s still a worthwhile read. Stay tuned!