Okay, so we’ve talked about what a budget is, the basics of budgeting and how to start saving. So what’s next? Today we’re gonna talk about something that's a big problem for a lot of people: debt.
The Big Debt Hole
In many respects, I am an anomaly among my friends and colleagues. So are my parents. They’ve never been in debt (other than the mortgage on their house) and neither have I. Unfortunately, for most people that isn’t the case.
According to The Huffington Post, the average American household has $97,000 in debt. That’s a lot of money. Like…two or three (or four) years of many people’s annual salary. In fact, according to the U.S. Census Bureau, the average household income from 2006-2010 was $51,914, which comes out to $4326 a month, before you take out taxes. So if you have as much debt as the average American family (again, $97k) and you make what the average American family makes (we’ll round up to $52k), that means that it would take you 22.38 months (so just under 2 years) to pay off all your debt if you didn’t have to pay taxes or anything else.
Add to that the fact that 34% of families paying for college took out student loans, and the average student loan debt for borrowers under the age of 30 is $21,000, according to The Huffington Post.
Simply put, a lot of people have a lot of debt, and it’s hard enough to save money when you’re just trying to pay the bills and sort of have a social life, much less pay bills, have a social life and pay off debt.
So how do you pay off debt, pay your bills, have a social life, and still save?
Well, there’s a couple different schools of thought when it comes to paying off your debt — we’ll call them gradual and snowball.
The gradual method is pretty standard for a lot of people. You pay the minimum payments (or more, if you’re able) on every piece of debt you have until it’s all paid off. For some people this works really well because they continually see the debt they have dropping and that’s good motivation for them.
Another method, introduced to many people by Dave Ramsey, is the snowball method. Instead of paying off minimum payments on all of your debts, you focus on one, starting with the smallest debt and go from there, so that your debt payments “snowball” until you only have one left.
So, let's say you had five debts consisting of $100, $250, $500, $750, and $1000. Each month, you have $300 to pay off your debts. You’d start by paying off that $100 debt right away, as well as $200 on the $250 debt. The next month, instead of paying a little bit on each debt, your $100 debt is gone, and you only have $50 left on your $250 debt. This means you then have $250 to pay on your $500, which means you're already halfway done paying it.
For those people who like “little victories” this method can work well, because instead of constantly seeing things drop little by little, you can celebrate mini victories here and there as you pay off one debt after another.
In the end, it’s really a matter of personal preference, but the important thing is to remember to make sure that your essentials are taken care of first, because I can pretty much guarantee you’ll be a lot more stressed about paying off your debt if you’re also stressed about making the rent bill and the electricity bill and buying food.
So, no matter how you pay down your debt, make sure your necessities are paid first. And then worry about the debt.
Next time, we'll begin talking about how this budgeting thing actually works in real time and get into some of the nitty gritty about budgeting style, personal preferences, and more.
Got a money question you'd like me to answer? Send an email to shadesofshayes[at]gmail[dot]com with "Financial Fridays" in the subject line.
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The post Financial Fridays: Dealing with Debt appeared first on Shades of Shayes.