Mary Hunt is an author, speaker, and columnist that helps readers get out of debt and stay our of debt. Now in its 20th year her website, Debt Proof Living, is dedicated to its mission to provide hope, help and realistic solutions for individuals who are committed to financially responsible and debt-free living. She graciously agreed to answer a few questions for readers. You can read my Q&A with her below.
Q: What’s the #1 thing someone in debt should do?
A: The answer may seem unreasonably simplistic: Stop using your cards. Put them far away and out of reach.
Imagine that you’ve left the bathtub running and it is now overflowing and flooding the house. You frantically attempt to mop it up to stop the damage but of course that is completely useless until you do the only thing that will work to reverse the problem: Turn off the tap! Now your efforts to clean up will be successful.
When you stop using your cards, you’ll quickly learn that you are living beyond your means. You’ve become used to spending more than you earn, thus the revolving credit card balance(s). That leads to the next thing you should do: Reduce your spending so it fits within your income.
Q: If you’re already out of debt what’s your best advice for staying out of debt?
A: Build a sizable emergency fund. Keep it in a place that is safe and accessible. You are not going to earn a lot of interest, but that would be a secondary criteria in my opinion. I suggest keeping it in a credit union or bank savings account.
Plan your spending, then rigidly stick to it. That’s called a budget. Don’t assume anything. Write down all of your spending so you can keep track of where you are at any given time. You want to avoid financial surprises as much as possible, so anticipate your irregular and even unexpected expenses. Set aside money for things like Christmas and vacations, clothing and gifts. Be prepared for these things you know will be coming in the next 12 months. Stay ahead of your spending rather than coming up short and feeling compelled to run up debt.
Q: How big of an emergency fund do you recommend?
A: You should have enough money set aside to pay all of your bills and keep food on the table for six months without any paychecks. That amount will vary greatly from one household to the next. It might not be half of your annual income, however.
If you lose your income, you may be eligible for unemployment compensation, which means you will need replace less from your emergency fund. Your expenses are going to change, big time, too. If you are not working, you’ll be spending for child care, for example.
It is reasonable to think that during this time you will drive less, eat out less, become more frugal with the food spending, curb the routine shopping trips and so forth. The amount you need to keep things together for six months may be $10,000 or if you have a lot of debt and other financial obligations, more like $40,000. And remember we’re talking about after tax dollars now. You are replacing take-home pay.
Regardless, 5-figure numbers are hard to swallow, especially for those who have nothing saved for emergencies. So rather than look at an impossibly large sum that can be so discouraging, start small. Set a goal to save up $1,000. Just focus on that with all your might and do it. Then push to $1,500. Then $2,500 … and on and on. Once you’re on your way, you can more easily set a bigger goal like $10,000 without getting totally bummed out and frustrated to the point of giving up.
Q: Do you have any tips or tricks for getting the most out of your credit cards?
A: A credit card can be a fabulous financial tool, when used wisely. When you pay your balance in full each billing cycle, you get something called a grace period. That means that when you use the card to make a purchase, you are using the bank’s money—not your own money—for up to 45 days in some cases, depending on which day in your billing cycle that you make the purchase. That means interest-free loans are available to you in exchange for your financial maturity and personal discipline.
Using a credit card can be very convenient and safe—especially when you are traveling or shopping online. When you use a credit card to purchase the goods and services you need, you can more easily track your spending throughout the year because it’s all recorded on your statements. And all that convenience and service is free, provided you are diligent to pay your balance in full during the grace period and assuming your card does not require an annual fee.
Many issuers now offer rewards in the form of cash back, air miles, prizes and gift cards. It’s like playing a game and if you play well, you can reap significant benefits.
Another trick is to transfer a high interest rate balance to a balance transfer card. You have to be careful here, but if you are diligent you can find a card like Chase Slate that offers $0 fees and 0% for 15 months. This is a tip that a wise person can use to at the least put a huge dent in his or her debt, and at the most, pay it down to $0.
Some issuers are beginning to offer repayment help for customers who are carrying revolving balances like counseling or individualized repayment plans like Chase Blueprint that lets you create a unique repayment plan that will help you repay your balance even faster.
Mary is working with Chase Slate to share tips to help you tackle your debt and stay debt free. You can read her tips on the cleverly titled Do Something about Debt.
Kelly
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