I’d like to empower my readers to strive for financial independence. I’ve known since a young age that I needed to be financially independent so I am not dependent on anyone for the sake of money, but I didn’t learn to properly manage my spending until the last year or so.
Financial independence can mean different things to different people. For me, it means to have enough money to be able to support my bills and lifestyle, but also to be credit card debt free. I talk about credit card debt here specifically, because this has been my downfall for years, and it got really bad the last few years.
Last May, I had $10K left in my undergrad student loans, $10K left in the loan I co-signed for my brother, and close to $30K in credit card debt spread across 5 different credit cards. I also didn’t have liquid money in my savings. I have savings in my 401K, but no liquid money that I can use for emergencies.
You might be gasping and wondering how I even got to $30K in credit card debt? There’s many reasons that I can list, such as the fact that I graduated from undergrad with $90K in student loans and made under $40K for the first 8 years I was out of college. Or that I was altruistic and co-signed some of my brother’s loan and am not expecting him to pay me back. Or that I had to buy all new furniture when I moved out on my own a few years ago. I can come up with more excuses to explain to you how I let $30K in credit card debt happen, but at the end of the day, I was trying to live my best life with the bank account of a pauper.
I was spending beyond my means.
I ate out at restaurants four times a week with friends. Each time I go out it was at least $30.00 out of my pocket. I traveled like I would never travel again. In between 2017 and 2020, I went to India, Shanghai, Taiwan (2 times), Portugal, Spain, NYC, Boston, California, and other places I can’t think of right now. I went on late-night, sleepy shopping sprees on Amazon and Instagram, and was surprised when a few days later, 8 packages show up at my doorstep. I bought clothes that I didn’t wear. Shoes that I didn’t wear.
I was making payments toward my loans and each of my cards every month, but the balances were not going down. One, because they have high interests; two, because I was still spending more than I had; and three, I had no idea where my money was going.
Putting aside the shame I’ve felt from having debt, and spending money I don’t have, I am proud to say that I have to say that I have taken control of the issue. I have paid off my undergrad student loan, paid off my brother’s loan that I co-signed, and as of January 15, 2021 (tomorrow), I will be credit card debt free as well.
This would add up to about $50K in debt that I cleaned off in 18 months.
Here’s how I did it.
1. Set a Budget
The word budgeting is not new. I’ve heard it for years, and my friend even recommended the software YNAB. I set it up by linking all my accounts into the software, and set a budget, but I didn’t follow it. I didn’t quite understand the meaning of a budget and how to use it.
Finally last year, when I became serious about clearing my debt, I realized that I needed a way to track my budget that is easy. For me, although YNAB is intuitive and hands-off, I needed something that would make me physically go in to enter my spending and think through my budget. That’s why I chose iSaveMoney. I manually enter my income and expenses, and bucket my spending into different categories. For income, I enter the amount of take-home after my pre-tax deductions and after my automated savings. For the categories, I break them down as shown below.
Fixed Amount for Each Category
- Loans and Debt
- Transportation (Gas or Public Transit)
- Utilities (Gas and Electric)
Flexible Amounts for Each Category
- Experiences (Dining, Shopping, Activities)
- Necessities (such as toilet paper)
For each category, I set a fixed budget each month, while also setting aside $2000 to my loans and debt to cover minimum payments and $1600 specifically for debt reduction. If for one month I spend a little more on Groceries, I can move the budget from the Necessities or Experiences categories over. The goal is to stick to the total amount budgeted each month, with at least $300 leftover in my bank each month.
I track all my spending. If I buy stamps at USPS, I enter it. If I Venmo a friend, I enter it. Everything goes into the the budget tracker.
2. Categorize the Debt
Looking at the big picture, I had three main debts. The credit card debt had the highest interests, then my brother’s loan, then my loan. I break it down this way because I want to figure out where to focus on first.
Typically we focus on the highest balance or highest interest-rate categories first. This is so we can reduce the amount of interest we are paying to the bank.
- Credit card with >15% APR
- My brother’s loan with 11.25% APR
- My loans 7.5% APR
3. Take Advantage of Balance Transfer Offers
Because I had $30K in credit card loans on five different cards, it was impossible for me to pay off the cards with my existing strategy, which was paying a few hundred dollars on each card each month.
I took advantage of balance transfer deals for 3 of my cards that carried a total of around 20K balance to buy myself time. The other cards were already on 0% interest. Balance Transfers are typically offered when you open a new credit card. The new credit card company will allow you to have 0% intro APR for 12–18 months, which means your debt will not grow bigger.
The caveat is that there is usually a fee of around 1.5–3% on your balance for the new credit card company to take over your existing credit card debt. Based on my math, the 3% ($600) would buy me additional time, and during this time, my credit card debt will not be increasing by 15% or more each month.
The other caveat is that whenever you have a hard credit inquiry, it can negatively impact your credit score. I wasn’t planning to buy a house anytime soon, so my credit score wasn’t a big issue for me in the short term. Although the credit score will go down, it will quickly go up as your overall credit usage becomes lower as you reduce your debt. You available credit also increases when you open up new cards, and that can reduce your overall credit usage, and thus increase your credit score as well.
You may have heard of credit card consolidation services that would take over and consolidate all your credit card debt at a lower interest rate. I have looked into this, but the fact that there would still be interest on the credit cards made me hesitant to go that route. As well, those interest rates would have been higher than the one-time 1.5%–3% fee on my credit card debt.
4. Start Utilizing the Budget and Pay Off Debt
From this point on, I stuck to my budget, which tells me how much I am allowed to spend while still putting $1600 toward my debt every month. I also stopped using all but 1 of my credit cards, so I’m not increasing the balance on the other cards.
As mentioned earlier, we typically, we want to get rid of the highest interest debt, or the debt with the largest balance first. Once you figure out the priority order, chip away at the debt you’re focusing on until it’s gone before moving on to the next category. Because my credit cards were all at 0% interest at this point, I focused on my brother’s loan, which had a 11.25% interest on it.
When focusing on my brother’s loan, I put $1600 toward it each month while paying off what I was spending still each month and also paying the minimum payments on my other debt.
Once that was done, I focused on my own student loan, putting $1600 each month toward it.
Then when that was done, I tackled the credit card debt the same way. I paid of one card at a time.
Budgeting helped because I was never spending more than I had. In other words, everything that I spent fit into my budget. When I had extra money, such as from my translation side hustle, I dumped that right into the debt I’m focusing on. When I received my bonus from work, that went straight into my debt. I focused on reducing the debt with laser focus. Nothing would get me to go out of my budget, which also meant a lot of No’s to dinner or hangout invites.
The good thing about focusing on one loan at a time, while paying the minimum payment each month on other areas, is that I could see my debt chip away each month, and there’s an end for each debt. While before, when I was paying a little each month on all my credit cards, I didn’t see the balance budge at all, and it felt like I was getting nowhere.
5. Review, Evaluate, and Pivot as Needed
Each month, I take a look at all of my expenses and set a new budget for the specific month, taking into account specific spends I need to make. When I want to see a clear picture of how my payments are tracking to a credit-card-debt-free life, I use unbury.me.
Unbury.me allows you to enter your debt amount, the interest rate, and your planned monthly payment to help you visually see how many months you have left. You can also use it to play around with your monthly payments to see how that’ll change your payoff timeline. If you’re thinking about refinancing, you can also use it to see how the new rate and fee will impact your monthly payments and timeline.
There it is. This is how I incurred debt and how I chipped away at it by setting a goal, giving myself little milestones to achieve, and chipping away at it little by little with persistency and consistency.
Through this experience, I find that my priorities have shifted and I’ve become more inward looking, I’m also more mindful not just in how I spend my money, but also in how I use my time. Some of the things I learned are:
Know Where Your Money Is Going. I learned how important it is for us to know where our money is going. Even if you make $500K a month and don’t have loans and debt, I think you should still know where your money is going. This will allow you to be more conscious about how you are spending and why you are spending, but also allow you to plan better for the short-and long-term.
Is This a Want or a Need. I read Cait Flander’s The Year of Less: How I Stopped Shopping, Gave Away My Belongings, and Discovered Life Is Worth More Than Anything You Can Buy in a Store, and the book made me think more carefully about my purchases. When I want something, I now ask myself, do I really need it or it’s something I want to fill another void in my life? Is it something I need, or am I getting this for vanity’s sake? If I’m looking at a shirt, I think about whether it is something that is multifunctional? Because I have a limited budget, I’ve become more mindful about how I spend my money. If I’m ordering out, I order out with a friend whose time I value, not simply because have a craving.
Financial Behavior Is Learned. I wish I had been raised with money management skills, but unfortunately, I picked up the behavior I saw from my mom, and emulated her to a tee. I was never taught to budget, and I saw my mom filling out balance transfer forms over the years. You’d think you can move money around and make it disappear, but no. Debt grows, and it grow fast! Luckily, my sibling who grew up in the same household saw my mom’s behavior, and vowed never to have any credit card debt and to save. I’m finally getting closer to my sibling’s level.
Keep a Budget. Keeping a budget is liberating and freeing. It gives me structure and also helps me builds confidence because I know where each cent that I make is going. I recommend it as a way to be in control of your life.
Persistence and consistency is something huge that I learned in 2020. I’m credit card debt free, and I am so proud of myself and excited for that. To me, I can say that I am financially independent now because I can support my bills, my lifestyle, and I don’t have anymore credit card debt!
Next I still have my MBA student loans, but I’m still in school so I’ll get a head start by paying toward that now. I’m also continuing to contribute to my 401k for my future, and also saving each month with a goal to have at least a year’s worth of liquid money. With a will, there’s a way. With a goal, there’s a path.
Thank you for reading!