The Plan: Debt Reduction

The Problem

I have always been a math and science person. In elementary school, I participated in a special program for math and science that exposed us to lessons two to three grade levels beyond our class. In high school, I participated in every extra-curricular activity geared towards math and science, including robotics competitions, math clubs, engineering clubs -- ok, I was a geek. My degree is in Biomedical Engineering with a concentration in mechanics and a minor in Psychology, with a huge number of complicated sounding math and science courses under my belt.

With all of that math and science background, and what tends to be a very analytical mind, why, then, would I dig myself in to debt like I did, knowing fully the extent of the debt versus my income and the effects of compounding interest?

I started with my first credit card my freshman year of college. I did well with the card for the first year or so, before I carried my first balance. It got worse from there, and through the next three years or so I consistently carried a balance. Some time later, I got serious about the debt and paid it down. Then I ran it up again. Then I paid it down. Then up. Then I opened a second credit card account, and ran that up too. Eventually, I ran the debt up to where I felt uncomfortable, so I took out a personal line of credit to consolidate both cards under a more structured payment plan. Then I ran the credit cards up again.

Hindsight being what it is, I think I had a problem with impuse buying. Two or three years ago, I realized that I was stuck in a cycle that I had to break before I dug myself deeper. I can attribute most of that epiphany to meeting my wife, growing up a little, and looking forward in my life's timeline at the bleak picture of my financial future that I was painting.

The Solution

Spend Less Than We Earn

The first step in the resolution of my credit card problem is to stop making more debt. I mentioned in a previous post that we have been doing much better for the last year - our overall income exceeds our overall expenses and we've made some progress towards the debt. Even so, there were many times where we underestimate our expenses between paychecks and had to resort to the plastic to hold us over. We've been good about using the credit cards only for "needs," but typically the only reason we had to resort to the card was because we spent too much on "wants. I still consider it an unnecesary use of the credit card.

Avoid Temptation

To counter the temptation to break out the plastic in the face of every "irrestible" deal, special, sale, or bargain, I destroyed my two high-balance cards and froze my low-balance card in the freezer. My wife still has her card in her wallet, but I'm trying to convince her to freeze hers too. For those unfamiliar with the strategy of freezing the card in a block of ice, I still have access to the card in case of an emergency, but in order to use it I have to anticipate it, take it out of the freezer, and set it out to thaw. If I am about to make an impulse purchase, the hope is that by the time the card thaws, the impulse will have passed.

Reduce The Debt

Putting the breaks on adding to the debt is half the battle to reducing it. The second weapon in the war on debt is to make payments. There are many schools of thought on how to pay off credit card debt. Mathematically, to spend the least on interest while reducing the balance the fastest, the best strategy is to pay the minimum payment on all debts and maximize the payment on the highest interest card first. Psychologically, making the same payment to the card with the smallest balance is more noticable and satisfying. I decided on a plan somewhere in the middle.

The Plan

I think I have a touch of OCD when it comes to the card payments, and I like to make payments that leave the balance as a nice round number. For example, if the balance is $10,502.03, and the minimum payment is $180, I will pay $202.03. That being said, the plan is to pay higher interest rates any excess funds, and pay the "minimum" payment as described above. I won't be able to work out how much I will be paying every month, though, until I figure out what impact the 401(k) contributions, automatic savings, and changing health insurance will have on my take-home pay.

So, once I work it out, I'll post more details of the plan.
Until then,
Jonathan