First off, I’m sorry. Surfing the PF blogs this week, I came across this link to the Motley Fool’s Get Out of Debt seminar. I should have tracked who found it first so that I could give that blog credit, but I forgot. So, if you’re out there, let me know!
I’ve always like the Motley Fool. There’s a nice blend of humor and decent financial advice. This seminar is free, clever, and you can print off their handy workbook after each session. Typically, I’d race through something like this, think “yeah, yeah, yeah,” and go on to the next site. This time, I decided to go slowly. I’ve had lots of revelations about my spending habits over the last few weeks, but reinforcement is good, especially because payday is tomorrow. It’s hard waiting for the fun “pay down the debt” day. I keep finding myself itching to spend money on little treats like a haircut rather than saving the surplus in my budget for the big pay off. So it may only be a day or two away, but it seems like the last little wait is the worst.
Lesson One: Setting the Foundation
Here, the Motley Fool reminds us that little bits add up. They should join the Snowflake Revolution! According to their numbers, just putting an extra $75 a month on your credit cards can add up to $7200 at 18% interest in five years. Now, rather than go over your budget $75, if you were able to stay under $75 a month, you’d have $5100 in the bank if it earned 5%. That’s quite a difference! Rather than trying to come up with an extra $7200 when you’re already overspending, you’d have $5100 in the bank and a great saving habit. Given the rising cost of food and gas lately, going over $75 a month seems pretty easy to do. That doesn’t even count the extra treats I used to love like new books from the bookstore or new yoga pants or kitchen gadgets.
I went into our local bank branch yesterday to deposit some survey and rebate checks. These days, I like seeing what the CD rates are, planning for that bright day after debt reduction when I can seriously start saving. As I stood in line, I didn’t see one flyer or poster advertising a CD, but I counted five posters or flyers for credit cards or consumer loans. No surprise, I guess. Clearly, the bank will be much happier making money off my credit card habits than paying me money for my savings.
The Fool’s workbook starts you off by listing out all your bad debts. I was feeling pretty good about my debt repayment, so I decided to log into all my credit cards to get the exact amounts. Here’s what I found:
- Card #1: $1774.82 @ 23.99% = $425.00 annual interest
- Card #2: $2005.81 @ 19.24% = $385.92 annual interest
- Card #3: $3545.77 @ 17.24% = $611.29 annual interest
- TOTAL: $7326.40 of debt and $1422.21 interest payments
At this point, I still wasn’t feeling too bad. Yes, the cards ticked up a bit this month from work expenses that I’ll get reimbursed for and the wedding invitations, but I’ll still be able to put a nice dent in that debt this weekend. So, yes, it’s ugly. And yes, those interest rates are very, very ugly, but at least I can face the music. A few months ago, I didn’t even want to total everything up.
Bad Debt-to-Income Ratio
Then I turned the page to this step. I skimmed down to the “Danger, Will Robinson!” line: a 21.4% bad debt-to-income ratio. I thought, well, I bet I’m more like 9% or 10%. So, I did the math. I multiplied my take-home pay by 12 and got $33,672. I thought about adding in my 401(k) payments, but those are involuntary, so that money is not available to pay my debt. What was my debt-to-income ratio? “Danger, Will Robinson!” I’m at 21.8%, pretty darn close to the Fool’s bad example. Ideally, of course, I want to get to zero, but they advise you keep the ratio at 15% or less.
It was a good little motivating exercise, because I could easily go out tonight and blow some money. Now, though, I’m more motivated to save my surplus for the debt. I may even throw all of it at the debt rather than putting some in my “fun” account. These days, what’s most fun is seeing those debts shrink!