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  • Posted January 29, 2017

Where do I Start??!!

The New Year has lost it’s luster, many of us who started with the best of intentions and a resolution of “this year’s gonna be different” are finding ourselves back on the treadmill to nowhere, and may be getting very discouraged. Or maybe you aren’t a resolution person, but you do have something you want to change and aren’t sure where to begin. With so many possibilities how do you know which is right for you?!

I’m a financial planner, so my focus will be on money – but these ideas will apply equally well to most other goals. Specifically, my focus in this article is going to be getting out of debt – because it’s a scenario faced by so many people.

First, begin with the end in mind. Setting the only goal of being “debt free” in “x” years, while admirable and certainly achievable over the long term; may not be the best way to start – especially when you take into account the average household is over $130,000 in debt (NerdWallet). I say this because it’s easy to become discouraged and give up, or put off working towards the goal altogether. Instead, set a monthly goal which will make you uncomfortable; but will also give you a sense of accomplishment when you achieve it.

Let’s use $16,000 in credit card debt, with minimum payments of $250/mth and an 18% interest rate as a hypothetical situation. Paying just the minimum it will take over 19 years to pay this debt off. Horrifying, right? And if you have more than one credit card, your balance owed is higher, or both (or any other combinations of additional debt) it’s easy to understand why people feel stuck.

Adding just an additional $25/mth to your payments will decrease the amount of time to pay that card off from 19 years to 12 years – you drop 7 years of payments (and associated interest). Bumping it up to $50/mth decreases the time it takes to 9 years. My point is this – contrary to what it may feel like, you do NOT need to make a HUGE change to your payments, anything over and above the minimum will help you pay the debt off (as long as you stop adding to it).

If you want to see this for yourself, using real data, here’s how. Open an excel spreadsheet. Enter the following (use a separate cell for each): Interest rate (use percent sign), annual payment (=monthly payment *12, excel will do the math), current balance owed (using a negative sign). Then, click on the “fx” (function) button and look for NPER (number of periods). Select the cell matching what it’s asking for. Excel will then solve for how many years it will take you to pay the debt down.

Rate – interest rate

Pmt – annual payment

PV – current balance

FV – 0

Type – leave blank

Great, right? But what do you do if you have more than one credit card or source of debt? Personally, I’m a fan of attacking whatever has the highest interest rate; but alternatively you could select the one with the lowest balance. The advantage to selecting the lowest balance is it gives you a “win” sooner. After you’ve paid that debt off, take the payment you were making an roll it into the next debt you want gone.

Using my example above, if you are paying $250 on (3) different cards ($750/mth total), and you increase it to $775/mth by adding $25/mth to one of those cards; you would take the $275 and add it to the $250 your paying on the next card – so now you’re paying $525/mth (after the first card is paid off). The last card would have you paying the full $775 towards it, and voila – you’re not only debt free, you’re comfortable not having that $775/mth. So now you can put it to work for you – all from decreasing your monthly spending by $25/mth.

No, this is not going to change your circumstances overnight. I would prefer anybody who chooses to pay down their debt to pay more than an additional $25/mth, but I feel like everybody can find $25 in their budget. My intent is to offer hope, a ray of light to pierce the darkness and despair debt can cause. It doesn’t have to rule your life, but you have to take the first steps of (1) understanding your spending habits and (2) having a willingness to change.