When I held debt, debt actually held me. It held me pretty tight actually. Each month I had my living expenses and right next to that was my debt repayment. Perhaps it should have been called debt burden. That’s how it felt like to me.
As I mentioned before in My Biggest Budgeting Mistake, I was in my early twenties when I hit my credit card a little too hard. I was fortunate enough to be young, free and single, and so it was a matter of six months or so of watching what I spent and not using that bit of plastic until I had got myself back to a zero balance.
But today I know my ability to pay off any debt has changed. I have children and they are not cheap. Getting out of debt now is so much harder than it was then. Budget cuts are harder to find; it’s not a case of a few less nights out, especially as like many parents we don’t get that many nights out anyway. In simple terms, £100 per month spent on credit card interest (or other debt interest) is £100 that I would not be able to spend on securing our families’ future.
I would rather that £100 be used by me than given to a bank. Of course I’m not saying banks are bad. Without banks we wouldn’t have got a mortgage to buy the home in which we live. But I’m not keen on giving banks interest payments for anything but a mortgage. Dead money spent on interest payments harms my long term financial security
In Why Compound Interest Is Sexy I talked about the positive benefits of rolling over interest on the interest on the interest. That is, we get extra money on your interest, and then we get even more extra money on the interest each year. The same also works in reverse. If I had a credit card debt that I couldn’t pay off each month, the interest on the debt compounds each month, and I keep paying interest on the debt each month over and over again until it is finally paid off. Before I know it, I could be paying anywhere between 18% to 25% on whatever I owe. No wonder financial institutions allow easy access to credit cards, and keep sending me letters in the post wanting to extend my credit limit and offer 0% balance transfers… and I thought it was just me they liked!
But the banks aren’t to blame because I know what’s happening. I know that using a credit card or taking a loan isn’t a good idea. So the obvious answer is for me to not have debt, and to get rid of any I do have to take back control of my financial life and financial future.
There are two ways to approach paying off debts according to the experts. The first is logical. The second, psychological. The logical approach is to pay the minimum balance required on all debts and then put extra money on the debts that charges the most interest. The psychological approach is to pay off smallest debt first (while still paying off the minimum amounts on all the others). The idea is that we get a quicker feeling of success by seeing a debt disappear quite quickly. Personally I prefer the psychological approach as I like to see tangible progress and feel like I’m moving forward.
I genuinely believe that paying off all debt, except for mortgage debt, is the first thing I need to do to secure my and, more importantly, my daughter’s financial future. There are other family benefits too. The money I would have spent on interest payments can be spent the things that the whole family enjoys.
Next week, in part five of this mini-series, I share some ideas on how to save for the medium term to enable the longer plans become a reality.
I would love to hear your views on debt – I’m sure I’m not the only one that’s been there. Please do this on our Facebook page. Journey Skills is a resource hub where we love to start conversations and learn from each other.