If you’re like the average American family, you’re $90,000 in debt and have no idea how you got there. That figure is really lower than it should be because it includes those happy families that are currently debt free. If you only look at the people who actually, you know, have debt, the true figure is more like $130,000. If your family owes less than that, you might feel a little better knowing you’re not quite at rock bottom yet. Knowing other people have it worse doesn’t shake off that next student loan payment or help you pay down your credit cards. What you need is a plan to get out of debt and, hopefully, retire before you’re too old to remember why you were saving in the first place.
Here’s your plan:
Turn Bad Debt into Good Debt, and Then Kill It Off
Not all debt is created equal, and some types are stone killers. As a starting point, sit down and figure out how much you owe, on what terms and for what. Separate your debts between “good” and “bad.” Good debts are the ones that save you money, such as the 4 percent mortgage you’re paying instead of monthly rent or the 6.5 percent car payment that keeps you off the bus with all the perverts.
Bad debts are almost literally everything else: your student loan, which stopped doing good things for you the moment you graduated with that humanities degree, the $30 pizza you bought on your 28.99% credit card that has already cost you more than $100, and the emergency payday loan you took out — at 259 percent APR — to cover the credit card when it was late.
If there’s any way at all to expand your good debt, such as taking out a home equity line of credit (HELOC) at 4 percent to pay off your credit cards and some of your student loan, do it immediately. At 29 percent APR, $30,000 on a credit card can be paid off in just five years . . . if you have $125,707 to cover the interest. The same amount applied to your 4 percent mortgage is $36,500. There is no downside to doing this. Do it with as much debt as you can, starting with the highest-interest crap you’re paying every month and moving down the list for as long as you have the equity to do it.
Live Beneath Your Means
Famous physicist Neil DeGrasse Tyson once quipped that if a physicist ever wrote a diet book, it would be one sentence long and say, in its entirety: “Take in less energy as food than you burn as exercise.” The same principle works for your budget: Take in more money as income than you spend as expenses. Even if you’re not making that sweet Hayden Planetarium money like Dr. Tyson, this will eventually show some results for you.
Comb through your budget. After you’ve moved those high-interest debts around and pledged to stop putting pizza on your credit card, compare your income with your outflow. If you’re even a penny in the red, you’re losing ground; a penny in the black, and you’re making progress, albeit crappy and slow progress. There’s no such thing as too small an expense to trim if your budget isn’t balanced.
Found a new route to work that saves a gallon a week? That’s $3 a week, $12 a month, $144 a year. When deposited in a mutual fund that compounds quarterly at 5 percent, $12 a month becomes $10,629.66 in 30 years, which will probably buy you a lot of pizza when you’re 65.
Do this with every expense, prioritize what you need versus credit-card pizzas, and never pay a nickel over 10 percent for a debt unless you’re paying for your own heart transplant, and after just a few decades of soul-crushing hard work, you’ll finally be able to throw down that barista’s apron, tell your 19-year-old boss to screw off, and enjoy the (statistically) last decade of your life in the lap of luxury.