Eliminate Credit Card Debt

It’s important to eliminate (or at least minimize) credit card debt. But, at the same time, use your credit cards to establish good credit!

Ideally, credit cards should just be a source of liquidity for you to make purchases between your paychecks. Successful investors will not continuously maintain a credit card balance.

Look at the annual rate you are paying on your balances: 12.9 … 15.9 … 20.9%!? You will be hard-pressed to find a better investment opportunity available to you than discontinuing these interest costs by paying off your credit cards. Don’t let these balances continue to linger around due to high-interest rates … pay them off ASAP!

In some cases, you will need to run a credit card balance for a few months so you can buy a new computer or appliance that you can’t pay off in one month, but track it in your budget that you want to pay it off within 3-4 months.

Holiday Debt

Getting out of debt after a holiday season is never easy, so the best way to solve the problem going forward is to resolve to not get into debt next year. Set a holiday budget for 2020 in January to include all gifts and expected travel expenses, and open a separate savings account used exclusively for the holiday season, and fund the full year budget in advance with monthly deposits. This way next year you have no credit card debt incurring interest expenses that you are paying off looking backwards, and you can resume saving for the subsequent year all over again, but this time starting off debt-free.

Those that repeatedly incur debt during the holidays may need to make the difficult decision to significantly downsize their holiday budgets so that they can prioritize their own longer term finances. Financial Advisors unfortunately sometimes need to assume the role of the Christmas Grinch, where we need to counsel clients that their spending goals are beyond their means and are detrimental to their longer term retirement goals.

Also, consider the value of the gift you are giving to your child. In 15 years, will your 5 year old remember the $500 in presents given to them? Or at age 20 would they better appreciate most of that gift budget having been contributed to a 529 college savings account each year to grow tax-free for their college expenses?

To solve the current year’s debt burden consider implementing a “travel and restaurant ban” where you don’t take any trips or eat out until the credit card balance is paid off in full. Any leisure spending while you still have credit card balances could have been used to pay down your credit card bill that is accruing 15-20%+ in annual interest charges, so all discretionary spending done in the interim essentially comes with that added cost.

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