A common question that we hear at LSS is “I’ve got cash temporarily. Should I pay down my credit card debt?” People will come into a sum of money temporarily or maybe get paid more at different times during the year. Think a teacher, construction worker or a seasonal employee.
A friend of mine who works seasonally came to me asking about the benefits of paying down his credit card debt since he had the cash at the moment. Making a big payment now enticed him because this would lower his monthly payments to the credit card company, plus lower the existing interest. But there was a huge catch! He would need the money eventually for basic living expenses this summer (when he isn’t getting paid as much). And if he doesn’t have the money in savings he will most likely have to live off credit again.
Let’s Look at the Big Picture
I told him he hit the nail right on the head. There is no way around it. He will definitely need the cash later. Making a drastic payment will make you feel better now but most likely won’t help you months from now. He needed to look at the big picture. A little breathing room now won’t do you any good if you will just be struggling in the near future.
I asked him the age old simple question, “How much money do you need to live each month?” He looked at me like I was crazy. It is such a simple question but so many people don’t know the answer.
Here was my advice.
First, make a basic budget. Open an excel spreadsheet or go old fashioned and pull out a piece of paper and a pencil. Check out our Expense Tracking Form if you are having trouble. Write down all of your monthly income that you receive right now. Monthly income is your income minus taxes, social security and Medicare. (Remember to include child support, retirement, and social security as income.) Add it up. This total is your current monthly income.
Next, write down all of your expenses. There are two kinds of expenses. Fixed and variable. Fixed expenses don’t fluctuate from month to month. Think, mortgage, rent, auto loans, student loans, etc. Variable expenses are harder to track because they are not consistent. Think groceries, gas, school lunches, household items, etc. Add up all of your expenses for the month and subtract that number from your monthly income. (Net income – expenses = Total monthly net) Is there anything leftover?
Now, play around with what you can afford to pay towards your credit card payments or past due bills by cutting expenses. Making small changes in your budget is not impossible. And remember, in the case of my friend, his monthly income will change in the summer so he needs to take the monthly income fluctuation into account. And in his case, he could NOT afford to make a huge payment to his credit card now. It would cost him too much later. So, he found a reasonable monthly payment that he could afford that fit nicely into his budget.
One last piece of advice…Start building up an emergency savings!
It’s not a matter of “if” but “when” the unplanned emergency is going to strike, and it’s usually at the worst time ever. It could be a furnace, roof, car, medical debt, etc. Try to start building a savings that can help cushion the blow. And try treating it like a payment. Start anywhere…$25.00 or $15.00 a month. Treat it like it is an actual bill and you will be less likely to skip it.
Still confused on how to make a monthly budget? Or maybe the results have been a real eye opener and you want to talk with someone about making small changes now. Our financial counselors specialize in this. They would love to talk with you about moving forward to a debt free life.
Call us at 888-577-2227 to set up an appointment either over the phone or in person. Or start online counseling right now. A Certified Consumer Counselor will get back to you within 2-3 business days.
Author Kate Swenson is a Project Coordinator at LSS Financial Counseling.