We’ve been working aggressively to pay off our cards over the last year or so. Running the numbers on our situation has led to some surprising insights about the potential of a debt-free existence.
Let’s say you’re carrying the American average of $10,000 debt on your credit cards, but, rather than pay the insane 29% interest on most consumer cards, you were smart about it and moved the money to a 0% card. And let’s say you’re paying that money off at $400/month. That leaves you 25 months to pay the sucker off. Should you try to pay it off sooner?
Well, let’s take a look a what life would be like without the $400/mo payment. 400 times 12 months equals $4,800/year — not an insubstantial chunk of money. And, you’re paying taxes on that money for the privledge of sending it to the credit card companies every month. Assuming that’s around 30%, you have to earn $6,854 per year just to give it away to Uncle Sam and the bank.
Let’s say you make $65K per year: paying off the card completely would be like giving yourself a 10.5% raise! But let’s take that a step further: what if you paid off the card and invested half the monthly payment into a retirement account like a 401(k). You get to pocket $200 every month ($2,400 a year), but because a 401(k) is a pre-tax investment, you’re investing $285/mo in your future.
Knowing that many companies match retirement contributions — some match a dollar for every dollar you contribute — that means you could be saving as much as $570 a month, or $6,840 a year!
Now you’ve given yourself a 14% raise ($2,400 pocket money + $6,840 in savings), all by just paying off your credit cards as quickly as possible. And, note, that’s assuming that you’re not paying any interest on that debt — that adds a whole new level of urgency to paying off your cards ASAP.
A “friend of mine”:http://sapridyne.com calls the difference between his expendable income and his credit card debt his “shovel to hole ratio” — in other words, his ability to dig himself out of debt. Paying off your cards and saving the money for the future takes this analogy to a new level. Once you’ve got the hole filled, now you can start stacking bricks on it and really build something.
It’s a wonder more people aren’t doing this.
“It’s a wonder more people aren’t doing this.”
You have to have money to get out of debt. A lot of people, at least around here, get into debt because they don’t make enough money to make ends meet.
I went from having $800 a month of disposable income 2 or 3 years ago to about $100 – $150. During that time my salary has increased 19%, and i’ve taking on NO additional bills or payments, just a result of higher food, energy and fuel bills.
All i’m saying is that it may not be that people haven’t thought about it. It may be that we, as a country, are in such a miserable place right now that getting out of debt is beyond many peoples economic means at the moment.
so you’re saying that cost of living for you has gone up 20%? If so, with all due respect, I suggest you move.
Very insightful!
Mike, I’d have to agree with Brandon: your drop in expendable cash is over 530%! Is that really just the result of food, energy and gas?
We haven’t seen that result ourselves — at least, not between two years ago and last. I don’t have hard numbers, but I can tell you that we’d definitely feel a drop that steep. We don’t drive much and we’re only heating a 2 BR apartment rather than a house, but that sounds really high.
As to the issue of debt in American culture at large: well, I’d be willing to bet that most of the debt-holders are typically middle or upper-middle class consumer culture. A lot of the terrifying average of around $10k per household is a lifestyle decision to NOT live within our means.
I’d argue that our debt-obsessed society is much of the reason why we “are in such a miserable place right now.” The average American earns about $45k per year (1), but carries at least $8k in debt (2). Sure, a lot of that could be due to making ends meet, but Apple sure didn’t seem to have any problem moving iPods last Christmas (3).
1. http://en.wikipedia.org/wiki/Household_income_in_the_United_States
2. http://moneycentral.msn.com/content/SavingandDebt/P70581.asp
3. http://daringfireball.net/linked/2007/january#wed-17-apple_q1_2007
I feel fortunate enough to be able to pay my two credit cards off in full every month. I don’t really charge much to begin with, because I don’t want to live beyond my means and get into debt in the first place. But I also have disadvantages – I don’t own a car, a house, have school debt to pay off. But even without those things, I feel I can live comfortably, and I have a good job even without the education.
@Mike: You need to move. Definitely. Anywhere that goes up that much is only going to keep going up.
Dude… credit cards suck. Beck and I are not crazy with them, but we definitely fell into Mike’s “Need to use them” category. Without it, we would have had no heat this year.
Though, this is why I needed to change jobs.
We used to be able to keep on top of the card issue, but we bought a house… and a house, is probably the largest contributer to debt, and mostly because upkeep on a house is ongoing and expensive.
Oh, and kids aren’t cheap either :-P.
But both of those things, house and kids, are worth what you invest into them, because they have great returns in the end.
Unrelated note… I think I’m blogging again…
When are we hanging out again? I miss you guys, and gotta see that Dahlia character again. She’s pretty cute!