Debt is arguably the scariest financial term out there. It is burdensome, tough to navigate, and can hinder even the most well laid out financial plans. But enough fear-inducing backstory, we're here to help.

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Let's first talk about types of debt:

1. Loans -> house, car, student, personal loans, business loans, etc.

   • These are typically larger amounts that are paid over a number of years

   • There is normally (if not always) a payment schedule with two components

     • Principal -> the total amount you owe

     • Interest Rate -> the amount you are charged to take on the loan

   • Large loans like this usually have an amortization schedule; What does this mean?

     • In the beginning, the interest you are paying is a large portion of the payment​

     • This is because the interest rate is calculated off of the remaining balance owed

     • Therefore, in the beginning, the balance is the largest, so the interest amount is highest

     • As you pay down the loan, the amount of interest you are paying decreases and the amount of principal you are paying increase (this is good!)

     • TIP! -> You are usually (not always) allowed to make additional payments towards your loan, which go straight to reducing the principal. With this tactic, your principal starts to decrease a bit more rapidly and you are able to pay off the loan faster (we'll show you an example)

   • These larger loans should not scare you, mainly because they are a normal part of like

   • The key is understand what you can afford and making sure you don't over-burden yourself

   • So, what can I afford? We suggest you read through (if not already) the Budgeting section to understand your income, expenses, and what you are able to afford

2. Credit Card debt

   • By far the easiest type of debt you can accumulate and the worst kind of debt you can have​

   • Don't worry, we've all been there (ask Tony)

   • There are typically high interest rates associated with credit cards (except for promotions)

   • Payments are based off the total credit card balance, but credit card companies are smart and somewhat devious

   • If you are not aware already, payments are usually set at the "minimum payment due"

   • It is exceptionally hard to pay off credit card debt by just paying the minimum, mainly because interest is accrued monthly off of the balance owed and usually not much less than the minimum payment due

   • The best way to pay off credit cards is to pay MORE than the minimum payment due

 

So let's talk strategies for paying off credit card debt

1. Consolidate into a personal loan​

   • Personal loans are lump sums of cash that are given by a financial institution

   • This lump sum of cash is used to pay off outstanding credit card debt in one shot

   • The advantage to this is that there is that:

     • There is one monthly payment

     • The interest rate is typically lower

     • Your debt is now consolidated into one place and has a lower interest rate, so it should relieve some of the stress of paying off each individual credit card

     • You can also used the additional principal payment strategy to pay off this loan faster

     • TIP! -> DO NOT USE YOUR CREDIT CARDS AGAIN UNTIL THIS LOAN IS PAID OFF

     • We do not want to accrue another credit card balance while we already have a loan

   • Unfortunately, not everyone will be approved for a personal loan, but do not be discouraged, we have another plan listed below

2. If you can't (or simply don't want to) get a personal loan, you can always pay off credit card debt the traditional way.

   • We suggest (if possible) to save at least 1-2 months of expenses in cash before trying to pay off credit credits.

   • Why? Because when you try to pay down your credit card balance first, you usually dwindle your cash to a point where you feel you need to re-use the credit card.

   • Then, this becomes a vicious cycle of paying down your credit cards, not having enough cash for your other expenses, and then ultimately re-using your credit cards to afford your lifestyle, then paying, then re-using, until you realize you haven't made much progress.

   • Instead, pay the minimum on the credit card while saving enough cash to support your monthly expenses.

   • Now you should be able to use the saved up cash for what you NEED to spend your money on, and the extra cash saved can go towards your credit card. Here is an example:

     • Let's say you have $2,000 in credit card debt​

     • You also have $3,000 in income and $2,000 in monthly expenses

     • Instead of paying off your credit card balance with whatever cash you have, put $500 in the bank and $500 toward your credit card balance for 2 months

     • In this scenario, your credit card balance will gain interest, let's say $250

     • After 2 months, you will have put $1,000 toward the credit card balance and gained $500 in interest.

     • But, you also put $1,000 in the bank and did not use your credit card in this time.

     • So take the $1,000 you saved and put it right to the credit card.

     • Now in 3 months, you put $1,500 towards your credit card balance

     • This helps in scenarios where "random" expenses seem to just appear -> now you have the cash to pay for this "random" expense and you did not dive back into the credit card you just paid off

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It is essential to pay off credit card debt

• We must learn to use credit cards effectively

  • Use your credit card toward monthly expenses that you would have paid for anyway​

  • Depending on the credit card, you can earn points/rewards or even cash back (free money!)

  • Pay off this off EVERY month and DO NOT EXCEED YOUR MONTHLY INCOME

  • Example:

    • Let's say you have an Amazon credit card

    • Every time you use your Amazon credit card, you earn points

    • Use this card to pay your phone bill, utilities, subscriptions (etc.) and pay it off every month

    • In this scenario, let's say you buy certain products that you need (or even want) from Amazon -> your accrued points can be put towards this purchases so less money is actually coming out of your pocket because you are only using your credit card for expenses you have to pay for already.

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Amortization Schedule Examples

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