Guest Post by Bill Osuch
One of the main goals of this blog is self-reliance, and to me, that doesn’t mean just having a backup supply of food and water and extra batteries. It means “not beholden” to anyone, as my grandmother would have said, and these days the places many Americans are beholden to is the credit card companies. There are some forms of debt that are a necessary evil for most (home mortgage and car), but in my opinion, credit card debt is something to be avoided at all costs and all debts should be paid down as fast as possible! Getting out of debt is the number one thing you can do to live a more self-reliant prepared lifestyle! Here are the reasons why:
1. Protection: If there is an economic rescission, depression or collapse, owing money or not owing money could be the difference between being able to feed your family or not. You are less vulnerable to lenders if you do not owe them money.
2. Setting An Example: As preppers we think the world would be a little better if more people adapted just a little of our lifestyle. Not everyone has what it takes to go live on a remote piece of property, grow their own food and live off grid. However, getting out of debt is something most people can do if they put their mind to it, especially if they see you doing it. What a great example to set for your own kids and people new to the prepping lifestyle! I know the world would be a better place if more people saw this as an important goal.
3. Being Self-Reliant: Prepping means being ready for anything without significant reliance on other people; to me that means being as self reliant as possible. If you owe money you live a life of dependency, it’s as simple as that.
4. It Takes Money To Prep: It takes money to buy extra food, gear and often it takes money to learn a new skill. The reason for learning and buying these things is to be less dependent. You can not be independent and self-sufficient if you owe money to other people. So buying the stuff that makes you a prepper while not paying down your debt is counterproductive.
How To Get Out of Debt: The Snowball Method
The average American household has about $15,000 of credit card debt, and unfortunately a few years back we were well above average! Like most families, we thought everything was fine as long as we were making the minimum monthly payments, until we sat down one day with a calculator and our bills. That was a wake-up call!
The math is going to work out differently for everyone, depending on your balance, interest rate and minimum payment amount, but here’s a rough example of the big problem with carrying a balance every month. Let’s say you have $20,000 on one or more credit cards, with an interest rate of 15.99%. A typical minimum payment is the interest plus 1% of the balance, so you’d be paying about $467 the first month, with that amount dropping slightly every month. The fact that your payment is going down is good, right? Well, not exactly… since your minimum payment is going down every month, you wind up stretching the length of your payments and paying more and more interest. In this example, it would take 406 months (or 34 years) to pay your balance down to $0, and you would have paid over $26,000 in interest – more than you originally borrowed!
So what’s the answer? Paying off the debt as soon as possible, of course. But how do you do that? One of the easiest is a method that’s been around for a while – the Debt Snowball.
Have you ever seen a cartoon where a small snowball starts rolling down the a mountain, picking up more snow as it goes down, until it’s gigantic when it reaches the bottom? That’s the same concept here – you keep building and building your payments until you’re able to wipe out anything in your path.
The basic steps to use this technique are:
- List all your debts in order from the smallest balance to largest. If you have two debts that have a similar amount due, put the one with the highest interest rate first.
- Total up the current minimum payment over all the debts. Be sure to write it down – you will be paying at least this amount every month (and hopefully more), even after the minimum payments amounts on your monthly bills have started to drop. Make sure every month you pay at least this amount, don’t let it slip!
- Figure out if you can add any extra every month to this amount. Now, this is an entire separate blog post in itself, but try to find at least another $20 per month that you could apply – the more the better!
- Pay the minimum amount on all debts except the top one on the list, and pay every extra cent (plus the minimum of course) on that one.
- Once the top debt is paid in full, cross it off, take the amount you were paying towards it (plus the extra) and apply it all to the second debt on the list.
- The easiest way to figure out how much you should be paying on the #1 debt on your list is to use this simple formula:Total of your initial minimum payments (from step 2)
+ Extra amount you can add each month
– Current minimum payments of all debts on your list
= The amount to put towards the #1 debt
- Keep repeating this process until all the debts are paid in full. In theory, once you’ve paid off the smaller debts and are working on the larger ones, the extra amount that you’re paying will begin to grow very quickly. Remember that little snowball rolling down the hill?
This technique is pretty simple, but it works because of basic human psychology – as you completely eliminate some of your bills, you begin to see a light at the end of the tunnel, and this gives you the motivation to keep it up.
You typically will not include a mortgage or car payment in this plan. Once all your other debt is gone you can focus on paying off the mortgage, but for now you’ve probably got a lower interest rate, and the interest is tax-deductible. You need to concentrate on those ugly interest rates first! Most car loans are simple (rather than compound) interest – you pay a set amount on the toal you borrowed, regardless of how long it takes to pay of. So you’ll wind up paying the same whether you pay monthly for the next 3 years, or you pay it all off tomorrow.
Now, if you actually sat down and did all the math, you’d find that you’re better off paying off the debts with the highest interest rates first. After all, if you have a credit card with a $10,000 balance and 16% interest, that’s $1,600 in interest being added every year! (Well, not exactly, since you’re making some minimum payments, but it’s close enough for this example). If you have the discipline, then you’re better off ordering your debts by interest rate. For us, though, the method above worked best – we needed the morale boost that came every time we got a debt down to $0.
Once all these debt are paid off, what’s next? Don’t spend more!!! Do whatever it takes to accomplish this – if you’re disciplined enough, just stash your credit cards way back in a drawer somewhere. If you think you might be tempted again, then cut them up completely! Should you cancel the account? In most cases I would say no – cancelling a credit card account can actually hurt your credit score, and you may find you need it in an emergency sometime. But again, if you think you might slip up, it might be best to go ahead and cancel them.
You may think from this post that I’m totally against any kind of credit card use, but I’m not – if you’re disciplined enough, you may actually be able to save (or even make) money by properly using them. That’s a subject for a future post, so stay tuned!