Beyond Credit Card Debt
I made my last credit card payment this week! That final payment ends more than ten years and $20,000 of credit card debt.
Getting out of credit card debt is a familiar story to readers of Get Rich Slowly. You wake up to the fact that your finances are a sinking ship, so you learn to track your spending, and that helps you figure out where your money goes. From there, you scale back your expenses and spending. You look for ways to boost your income. You start a debt snowball. Pretty soon, you're paying off debt like it's going out of style.
And then one day you make the last payment. What next?
Beyond credit card debt
For me — and probably for a lot of people — that answer is simple: keep that debt snowball rolling. Many perpetual debtors have managed to pick up loans as well as credit cards. I've paid off my credit cards, but I still have a car loan, student loans and a family loan to repay.
Even though I'm still in debt, this is a milestone for me. It represents a huge emotional step, and freedom from high, variable interest rates. I'm delighted. Paying off that last credit card has loosened a lot of emotional energy. I'm making progress in areas of my life where I'd been stalled. I'm going running almost daily, cleaning my house and tending my garden. Kissing that credit card balance goodbye didn't free up any time or money, but the weight it lifted has energized me.
“Keep the debt snowball going” seems so straightforward I almost expected this moment to pass by unnoticed, with simply a change of address to where I was sending my money each month.
In fact, it needed a little more deliberation. Which debt do I pay off now? How quickly? The standard approach is pay off the debt with the highest interest first, or the debt with the smallest balance. In my case, I put the student loans last because the interest on those is tax deductible.
Using the debt snowball spreadsheet available through this site, I've ordered my remaining debts in a custom priority that works for me. Applying the money I was using to pay off credit cards to extra payments on my loans will get me clear of debt in another two years. I have a confidence I never had before that I will do this. I'll be facing a debt-free life.
Then what? This is the real “beyond debt” question. The answer is as simple and complicated as my questions about what to do next with my debt payments.
A debt-free future
Roughly, following Dave Ramsey‘s roadmap for financial success, my debt-free future looks like this:
Build up an Emergency Fund
You should have the beginnings of an emergency fund already, wherever you are in your financial journey. Emergencies will always happen, and having a cushion to help you deal with them can get you off the hamster wheel of debt. Once those debts are paid, it's time to bulk up the emergency fund. I have my starter emergency fund sitting in an ING account, but almost any high interest savings account will do. Ramsey suggests saving $1,000 before mercilessly attacking your debts. I've put by about $5,000 because I'm freelancing for most of my income these days. I want a bigger cushion since I have less job security. Ultimately, every household should have three to six months of living expenses in savings, available to help you weather any financial storm.
Save for Retirement
We all need retirement savings, and the sooner we begin saving for our retirements, the harder those dollars saved can work at building wealth for us. Depending on how long it's taken you to get to this stage, you may have some catching up to do. Figuring out what to save for retirement is complex. There are plenty of good retirement calculators that will tell you how much to save given the particulars of your situation. It's an important and confusing enough issue, though, that it's probably also worth seeking the advice of a seasoned professional financial advisor.
Save for College
If you have kids, your next priority will be their education. Saving for college is like saving for retirement: the sooner you do it, the more bang you'll get from your saved bucks. Most parents won't be able to save all the money they'll need for their kid's tuition. Try to save a third of the cost before they start, expect to pay a third out of pocket while they're in school, and let your children pick up a third of the tab through their own work, scholarships or loans.
Save for Fun
Now comes the fun part. You're an expert saver, and you're financially secure. Save for that vacation you've always wanted to take. Save for the custom-built road bike of your dreams. Save for a vacation home. This might be a long way off for those of us, like me, still swimming upstream against debt, but it's the light at the end of the tunnel. On days when living on a tight budget feels like a burden, it's nice to remember that way off on the horizon is not only freedom, but a whole lot of fun.
I'm speaking here of things I've read about but never lived. I'd love to hear from readers on this topic, since a lot of you are doing these steps, or have done them already. How has moving beyond debt changed your life? What do you do with the money that used to go to interest payments?
J.D.'s note: I gave up my coveted Monday spot in order to publish Sierra's article today instead. Why? Because I think today's discussion will be a natural lead-in to the post I was going to share. Tomorrow, I'll reveal my answer to Sierra's questions. I'll share what I call “the rewards of frugality and thrift”, the reasons I've been scrimping and saving. I'll show what I've been doing with my money since I became debt-free.