Episode 5 – How to reduce your debt
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. This week we’re talking about debt reduction and kind of methods for being able to tackle debt. Obviously, a lot of Americans have debt. And so, it’s really… the first step is looking at what you owe. So, you can have all kinds of debt, whether it’s credit cards, car loans, student loans, a personal loan, mortgage debt or even gambling losses.
So it’s really important to know, just obviously, what you owe for each credit card.
Seth
Does debt scare you as a subject? Like, is it something that… keeps you up at night? Or has it kept you up? That might be too personal of a question.
Jenny
Yeah. Has it kept me up at night? Yeah, a little bit. I think it’s that fear of going into debt. So some people will avoid credit cards altogether and only go with just a debit card or just straight cash. They avoid credit. But of course, we know that it’s somewhat important in society to have some credit cards because it helps you build that credit score.
Seth
That was sort of my experience. After college, I had grown up in a family. That debt was not something that we talked about or took on. And I didn’t have a credit card at all through college, I avoided all of the people handing out… you know, when you’re when you’re new to school or when you’re 18, people are just giving you more credit than you probably deserve.
Jenny
Yeah, any department store, they’re like, “Hey, you can save 20% today by signing up for this department credit card.”
Seth
Yeah, that was one of my first experiences with a credit card and then forgetting to pay it off the first time. And then, like: “oh, shoot. Not realizing, like, how this works.” Or you’re in the process of moving and you forget to update things and it can feel a little bit, I think, overwhelming at times when folks are dealing with debt. I used to work with a person who was in that same vein of not going to have any credit cards, only going to use a debit card.
And it worked super great for her. Like it was a system that was in place. And I think once again, kind of as a theme of our podcast is that personal finance is personal and you can’t really judge what one person is doing or one person’s experience up to this point. But I think not just putting your head in the sand about debt is really important as well.
Seth
I think that’s how a lot of folks can get themselves in trouble is you wake up one day and realize you have $10,000 that you need to pay off or 20,000 or $100,000 or whatever the amount is.
Jenny
Yeah. And I think that’s kind of the main message today in this episode is that we want people to be able to take those actionable steps to tackle their debt. And it’s important, not just to ignore it and hope that it goes away, but to take those really small steps. So, it’s kind of… about looking at what you owe and then also the interest rate.
Jenny
Do you want to talk a little bit about that?
Seth
Yeah. How much you’re paying and I think, at least in my experience with credit cards, it’s not always obvious. It says, you know how much you have to pay, right? Each month, your minimum payments or whatnot. But how they calculate that number, how much I’m going to have to pay next month if I don’t pay it off isn’t necessarily super clear.
Seth
And so, yeah, knowing what your credit limit is and how much you can pay on a card is something also to pay attention to. But I think that APR – and you had to educate me on what that even stands for because I see this number when I look at credit card offers or if I’m looking at my own…credit cards, APR, the annual percentage rate.
Seth
So, what is it going to cost me if I have this outstanding debt over the next year? How much of my going to get charged? And one of the ways I often think about this and maybe it’s because my mind is always more on the investing side of personal finance, but it’s like it’s compound interest in reverse.
Seth
Like, you’re paying this amount instead of having it paid to you. And so that’s another way to think about that. And I think when you have multiple debts, thinking about how much do I owe on each of those debts and how much is the rate of each of those? Because that can make a really big difference on what debt you want to tackle first.
Seth
And if you’re really wanting to buckle down and pay off debt, there are all sorts of different strategies out there on how to do that. And I don’t think anything is necessarily right or wrong, but it’s coming up with a plan and figuring out, I know I’m glad you brought your laptop for this one because we want to talk about some examples of how to just figure out how long could it take to pay something off.
Seth
And you’ve got a website pulled up that might be helpful.
Jenny
Yeah. So Credit.com has tons of tools, but the one we particularly love is this for this topic is the credit card payoff calculator. So you can go in here and put in your credit card balance. So if I have a credit card balance of $10,000 and then I’m going to put in my interest rate or my APR percentage rates.
Jenny
So let’s say it’s 15% and it says that the minimum monthly payment on that would be $225. So with those statistics, it says you will be debt free if I start paying you know today…you will be debt free by April of 2028. So it’s about five years, but I would end up paying about $14,000 total and that’s on a $10,000 credit card balance.
Jenny
That’s if I’m not putting anything more onto that credit card.
Seth
That’s a really good point.
Jenny
You just shut down the credit card. You do not use it at all. But I think what we really want to stress, again, it’s like kind of taking those small steps. So credit cards have this monthly minimum payment. But I think if you can just pay just like a little bit more than the monthly payment is a good way to start tackling that credit card debt.
Jenny
So, in this example, I’ve got a $10,000 credit card balance my APR is 15%. So if my monthly payment is $225. But let’s see if I increase that to say, $400 a month, then it says I would be debt free in about two years and only end up paying about $12,000 total.
Seth
So, you cut the amount of time in more than half, right. And the amount. So, I mean, you didn’t even double the minimum payment and that’s in that scenario, right?
Jenny
I guess I did. Yeah, it was 225 and I increased it to 400.
Seth
So not even quite double, but then you then you’re cutting the time in half and more. You’re reducing the total amount you have to pay significantly. And I think one of the things when we talk about debt, we often times are focused on credit cards because it’s just an easy example. People have lots of credit cards throughout their life.
Seth
And, you know, we were talking about you might start when you’re 18. But the same sort of thing applies for a car loan or for a mortgage where you can you can do these sorts of projections of, yeah, you’re paying the minimum amount, but what would the difference be if you paid a little bit more, if that would make you a little bit less scared or make you able to sleep at night a little bit easier?
Seth
Yeah. To look at your total debt picture and that’s where that APR can become really important to know for all your different loans or debt amounts. I think sometimes we describe things differently, like a debt seems scary and a loan seems more normal. And I don’t know if that’s marketing or psychology, but I think I think oftentimes when we think about loans, it’s like you’re using it as a tool.
Seth
You’re getting something out of it where debt feels like maybe it’s something that was extravagant or maybe something I didn’t necessarily need. But yeah, I don’t necessarily think we should think about them differently. It’s just money that you owe and how you pay that off. There’s any number of different ways, whether you pay it off right away and you just take it as a quick cash advance, sort of using a credit card, like a short-term interest free loan if you’re paying it off in advance or if you’re going to pay it off over a number of years or, you know, in the case of
Seth
…homes and mortgages, decades.
Jenny
Yeah, definitely. So, I think it’s really just for…It’s about kind of obviously knowing how much you owe and, you know, even if it’s just writing down on a piece of paper, “okay, I have three credit cards with this much debt. Here’s the percentage rate and here’s kind of my goal of taking steps towards paying it off”, whether it’s more than the minimum balance.
Jenny
And one of those things we were talking about is looking at the interest rate or the APR rate of each credit card. And I did this a couple of years ago too. So, a couple years ago, my husband and I were both out of a job for some time and we’d racked up some credit card debt and we decided to kind of focus most of our funding towards the card that had the highest interest rate.
Jenny
I think I had two cards that were under 10% and the other one was a 15 or 20% interest rate because it was an airline’s credit card.
Seth
They were encouraging you to spend. Yeah, yeah, sure.
Jenny
That’s the other important part to mention, too, is that these credit cards that have all these great offers, like airline companies, they can have really great rewards. But you also have to really pay close attention to that to that percentage rate. So. So anyway, that’s what we did was kind of look at the card that had the highest interest rate and put most of our extra funds that we had towards that card first.
Jenny
And then I physically took the credit card out of my wallet and put it in my closet so I wouldn’t be tempted to use it. And then also went online and sort of looked at some of those auto payments that were coming through, whether it was, you know, Netflix or the car insurance to basically make sure that at least for the highest interest rate credit card, that I wasn’t using that one at all.
Jenny
If I had to put something on a credit card, maybe it could go on to the credit cards that had the lower interest rate. So, I think that’s it’s a good strategy. And it still took us a little bit of time, you know, six months to a year to be able to kind of like find new jobs, pay off our credit card debt, kind of get back to ground zero, if you will.
Seth
I’ve got lots of questions for you… How did you decide on that strategy as well? I mean, it sounds to me like what you did was probably the most mathematically optimal, but it might have also been intimidating to pick that card…or you could have suffered from just decision paralysis and not chosen any.
Seth
Well, like trying to figure out what was absolutely right. Why did you go in that direction?
Jenny
That was probably the one that had the biggest balance because it was an airline credit card. So, on a regular basis, I liked using that credit card to put all my bills onto that credit card because then I get all these points. For the airline miles. But then all of a sudden when we weren’t able to make the full payments or the, I mean, at least the minimum payment, but not the full payment.
Jenny
Then I was getting these huge charges every month on “here’s how much, you know, interest that we’re charging you.” I guess it was because that one had the largest balance and it also had the largest interest rate.
Seth
Yeah. So, it was really costing you the most. In interest. So, it was the way to sort of kind of back to your earlier conversations about just looking at your overall budget. If folks are in debt and especially in credit card debt, that’s sort of a line item on your budget, you might not necessarily think about it that way, but the amount you’re paying in interest.
Seth
Is something like you’re paying for food or paying for your utilities.
Jenny
Yeah, yeah, yeah.
Seth
Interest payment. I think that what you said makes a lot of sense to me. I know when I’ve talked to people about debt or kind of read things about people’s different strategies. Well, what you’re describing to me sounds like the debt avalanche method, where you grab the thing that is costing you the most, the highest interest rate… to pay that off first and get it out of the way.
Seth
And I’ve seen a lot of people be successful in that way because then frees up money more quickly. You get that paid down. But I’ve also seen other folks do what’s referred to as the debt snowball method, where they start with the smallest payment because it’s more, I think, psychological. It’s like, “oh, I’ve got $1,000, $5,000 and $10,000.”
Seth
“I’m going to pay off that thousand dollars because then it’s done” and like you said, you could hide the credit card. You could also cut the credit card up. Or, I remember… I don’t know if this was something that was done in my childhood for real. But I remember hearing these stories of people, putting their credit cards in blocks of ice.
Seth
Yes. I’ve heard that too!!
Jenny
I mean, I guess if you’re really tempted to use that credit card…I think nowadays with people doing more online spending. It’s almost harder because, you know, my computer has all of my credit card information saved my Amazon account has my credit card information saved. So if I want to physically stop myself from using that credit card, then I have to go into my Amazon account.
Jenny
You know, I can’t just cut up my credit card and stop using it. Yeah, I have to go into my Amazon account and say: “remove this credit card.”
Seth
I have done that. And in trying to make things a little bit more challenging or trying to be a little bit more intentional in spending, but it is… you’re right. It’s hard. I had forgotten about this until we were talking. I’ve known a couple of people in my life who had their credit card numbers memorized.
Jenny
Oh, sure.
Seth
Which. Which makes sense if you’re using it frequently. But yeah, like that then like how do you get that out of your head?
Jenny
Just have to be very intentional and say: “okay, I know the number. But, I’m not going to use this credit card because I’m trying to pay it off.”
Seth
Yeah. You need like the Men in Black light in front of you, zaps your brain. Just selective memory reduction or something. But yeah, I think that is something to think about is: when you’re tackling debt, what are those strategies that you need to put in place to help prevent from ending back up in the same place?
Seth
Yeah, like you were describing. I think that’s a great example of like the challenges of life going up and down. And I think for a lot of folks who would kind of be in our normal audience, we tend…most folks in government settings tend to have more of a stable income, but not everybody you know, there’s lots of folks who work in parks or seasonal sort of work and that sort of up and down can make it much easier to…or maybe not easier, but more necessary to rely on credit cards to get you through leaner times and then having a strategy to get those paid off after the fact,
Seth
I think is really important. And that’s one of things I really just wanted to stress as we talked about this. Is that credit isn’t necessarily good or bad, kind of in the same way we talked a little bit about loans and kind of the perception that comes with whatever word you choose to use with debt or credit.
Seth
But it can be a tool for folks. And, you know, we talked a little bit about rewards and other things that you can take advantage of. But you also need to use those tools responsibly.
Jenny
Yeah.
Seth
Do you have any other examples or anything else that you wanted to make sure we hit on? I feel like we hit most of the main subjects, but I know we had a few closing items that we wanted to make sure we reinforced.
Jenny
Yeah, I think like we said, it’s just really about taking those small steps and knowing what you owe, whether it’s using something online to hold all of your accounts together and being able to see that either on paper or in the digital world.
Seth
You know, I think the one things that maybe we didn’t touch on that I just wanted to make sure to mention is – one of the reasons we’re talking about this and we’re Department of Retirement Systems and people say: “well, why is debt associated with retirement?” But oftentimes I’ve seen and read that when people pay off debt, they don’t know what to do next.
Seth
Like, you’ve got this savings. I built these habits up. I freed up that money I was spending on interest.
Jenny
Yeah. Monthly payments. Yeah.
Seth
Yeah. And now what should I do with that? And from a, you know, a retirement perspective, that’s when you think about, “well, could I start an emergency fund? Could I start a college savings account? Could I put a little bit more money into my DCP or my retirement savings?”
Jenny
Definitely.
Seth
And so I think it is really related. I think especially we’ve heard a lot lately from folks who they’re not ready to start saving for retirement because they’re still paying off student loans. They have other debt that is important for them to like once again, make it less scary, so you can sleep at night, get rid of that debt.
Seth
And that’s…I think one of the reasons I shy away from debt in general is because “what if I want to quit my job? What if I lose my job? What if, I want to have that flexibility?” And I think that’s another piece of thinking about debt reduction is kind of: What sort of freedom do you have?
Seth
What sort of weight do you have off your shoulders?
Jenny
Yeah, definitely. I love that. And that gives you one more reason to tackle your debt. Yeah, it could even be as simple as writing down: “I want to pay off my credit cards so I can do X, Y and Z so I can, save more money for retirement or go on a nice vacation.”
Jenny
And I think that’s important for people to keep in mind because sometimes it’s too easy just to ignore the credit card debt and be like, “oh, I’ll take care of that later or maybe someday when I win the lottery” or something like that. And it’s yeah, I think it’s really just about looking at the whole picture of your finances.
Jenny
I always loved the phrase: “the best way to eat an elephant is one bite at a time.” And that’s sort of how I approached various things in my life, which is kind of being able to look at what’s the next…
Seth
Yeah.
Jenny
…best step that I can take to tackle this.
Seth
That totally makes sense. Well, thanks. Thanks for the conversation. Yeah.
Jenny
Thank you.
[music outro]
Disclaimer
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