A Digression on Debt

 If you have any debt, such as Credit cards, Student Loans, Store Cards or other revolving lines of credit, I highly recommend attacking it as strongly as possible.

Debt is borrowing against the future for something you've used yesterday.

Unless it's for something of appreciable value, such as real estate, the value of that expense is almost immediately lost after you've purchased it. Homes can, an usually go up in value. Some cars can appreciate in value, but most drop by thousands immediately after you've driven it off the lot. That fancy dinner, those groceries you bought, or that gas you filled the car with? You can't resell that at all. I understand having to use a credit card in an emergency to buy groceries or gas. But we're going to break out of that hand-to-mouth, paycheck-to-paycheck cycle, so we don't have to use our credit cards any more.

First, we have to get a handle on our debt situation - for a mortgage, I include that in my True Expenses, rather than my Debt, because my Debt is what I'm paying in the short term, whereas my mortgage I'll be paying more long term. If you only have a few credit cards, then just list them out along with your monthly payments.

For myself, the process was much more involved. Several years ago, my wife and I had between 50-60 credit cards and lines of credit. Every few years we'd refinance our house, pay some of the credit off so we could breath again, but then lifestyle creep and poor impulse control would catch up, and we'd find ourselves "robbing from Peter to pay Paul" again, just to be able to tread water. Before our last refi, I went to freecreditreport.com and got a copy of my credit report from all 3 credit bureaus - Trans Union, Equifax, and Experian. I went through each, line by line, and wrote down each creditor, and the balance owed. Not only was this exercise extremely eye-opening, I was also able to find a couple of incorrect entries and get those discrepancies removed.

(As a side note, I recommend doing this annually, or semi annually. In addition, sites like CreditKarma and WalletHub also provide free access to your Credit Report, as well as each of the big 3 Credit Reporting Agencies. But *watch out* - even though memberships are free, they are geared toward aggressively selling you loans and membership upgrades. Just say no, for now.)

We used some of the proceeds from our refi to paying off about half of those credit cards. I don't really recommend this strategy 100% - in this case we just shifted the burden of the debt from credit cards to our house, but at the time it gave me the headspace I needed to be able to get everything else under control - managing 25 cards instead of 50+ was the right decision for me at the time.

Your situation will likely be different. In the last 3 years I've whittled the list of credit cards we owe on down to around 12, and those remaining 12 are on track to be paid off within the next two years. We'll discuss debt paydown strategies in a future post. Right now, let's worry about just keeping up with our credit card payments to avoid any late fees.

In our example, we have 2 credit cards - a Macy's store card, and a Citi Mastercard (referred to here as Citicard) - let's get those into our budget with their minimum monthly payments:

Now then, what's left? We'll cover that in our next post. Fun Money & Etc.

One last thought on credit - until you've paid it all off, I highly recommend freezing your cards - you can do this figuratively - most credit card companies have the option to let you "freeze" your card - making it unavailable to use until you unlock it. This can also prevent it from being used by a credit thief. I've also heard of people literally freezing their cards in blocks of ice so they can't use them. Drastic, but if necessary, do it.

Do whatever you can to prevent you from accruing more debt.  Any debt payments you have to make now, prevent you from using that money later.

In our example budget there's $79 a month going to just paying debt - there's nothing tangible from that expense - we're just paying now for the privilege of having used someone else's money in the past. Get rid of it. That money could be going towards a new stereo, a decent meal out, saving for a vacation. But right now we can't use it for anything but debt.

Now imagine that situation but in more drastic circumstances - some people have hundreds, sometimes thousands going towards debt. That money can be better used once we get it under control. Again, we'll discuss debt paydown strategies in a future post.