How I Got Out Of $14.5k in Credit Card Debt

On one end, credit can serve as a helpful tool to generate wealth. On the flip slide, it can become an overbearing obstacle requiring endless amounts of energy to correct. If I learned anything from swimming in the depressive waters of credit debt, it’s that there is no step-by-step process available to protect you from becoming indebted. The trick is to outgrow the idea of spending money you don’t have. That paycheck comes in 3 days. Taxes are around the corner. Your friend is repaying you next week. We’re confident that bag is coming so we confidently spend it in advance.

Before we dive into my terrible decision-making, let’s discuss my relationship with money. My childhood household had a combined income of around $30k annually. For context, the federal poverty line floats around $25k. This inevitably taught me how to get crafty. My high school savings account was comprised of money saved from skipping the train and whatever I could flip on eBay. For the most part, I’ve been solely responsible for myself financially since high school. This lifestyle taught me the value of a dollar, entrepreneurship and discipline. As my mom called it, I was “cheap as fuck.” You’d think that someone who knew the value of a dollar would never find themselves thousands deep in credit debt. Wrong! Financial literacy isn’t learned by surviving without money. It’s learned through maintaining it once you have it.

**Whenever I read articles like this I skim in search of numbers to confirm my suspicions that the author(s) had financial support. What am I supposed to learn from someone who got a hand out from their parents, you know? If you’re deep in credit debt making significantly less, of course this article won’t directly apply but trust me, recovering from credit debt has a lot more to do with your spending psychology than it does your income.**

Fast forward a few years, my poverty stricken life has expired. My senior year I secure an $85k salary with a $10k signing bonus. After checking the paycheck calculator, I expected $12.7k as my first paycheck out of college. This prompted a spree of erratic spending. I associated the word “bonus” with “free” and my relationship with money changed overnight. Although it wasn’t in my pocket, them papers said otherwise!

As the days went by, I began treating myself to more and more. “I’ll take a drink with that order” turned into $250 shoes, a 5 year car note, limitless spending during a Thailand trip..the list goes on. I’d never had this opportunity so, in my mind, it was time I freed myself from the shackles of destitution. After a few months, I relocated to New York for work. I fell even further into my bag. A $700 mattress? Swipe. $650 on Ikea furniture? Easy. The drinks for our party of 5? On me! Whatever I desired, I purchased because in a few months I expected a paycheck with more zeroes than I’d ever seen in my life.

Coincidentally, my first paycheck came with a huge error! It was short a few thousand so I contacted the HR department. I learned that there was no error. Taxes unfortunately apply to both paychecks and bonuses thus reducing my bonus from $10k to about ~$4k. So much for understanding the value of the dollar! What would have been a $12.7k paycheck shrunk to ~$6.5k. After paying move-in costs and other miscellaneous personal debts, I found myself in $14.5k in debt across five credit cards. None of which had 0% APR.

There may not be a step-by-step guide to protect you from falling into debt but there are some steps to help reverse the damage. Here’s how I dug myself out of this deep, deep hole:

Step 1: Make A Decision

After eight months, I decided to leave my employer. I expected my departure to offer me the creative freedom I’d been seeking at the expense of a $30k pay cut. This leave would require rationality which, unfortunately, doesn’t equate to spending hundreds of dollars in monthly credit card bills. Eliminating credit debt was now my only option.

Step 2: Spending Audit

A common budgeting tactic is to budget monthly, confirming which dollars belong where. I prefer bi-weekly budgets because they allow budgeting per paycheck which, in my opinion, is easier and more logical. To create my bi-weekly budget I first audited my spending. Every purchase I made was categorized by transaction type (clothing, food, partying, personal wants, etc.) down to the cent in my notes app. I did this for two months, or four paychecks, to account for as many transactions as possible. Holidays, graduations, birthdays, travel, etc. The longer you audit the more random spending habits you discover. This audit revealed that I spent hundreds on groceries to then spend hundreds on outside food. I spent hundreds on Ubers although I had a very convenient train pass in one of the world’s most publicly accessible cities. I was paying car insurance, tickets and a car note for a vehicle I only used on weekends. My money was everywhere it didn’t belong. This birds eye view of my spending habits showed me exactly what I needed to stop doing. I felt broke while making more money than I’d ever imagined.

Step 3: 60 / 20 / 20 Rule

I’m a strong advocate of sharing goals with those around you. Not only will you have accountability partners, but, if communicated to the right people, you may uncover helpful tips. The most helpful financial advice I’ve received was from my friend Jasmin and I still thank her to this day. Her advice was to follow the 60 / 20 / 20 rule, coined by Elizabeth Warren. The rule states:

· No more than 60% of your income should go to hard expenses

· 20% of your income is for financial objectives

· The final 20% is for discretionary spending

Hard expenses are comprised of expenses you must pay. This includes rent, light bills, cell phone bills, car notes, student loans, etc. If these expenses aren’t accounted for you’ll likely find yourself in trouble or without something you need on a daily basis. We all need electricity!

Financial objectives are straightforward. Where would you like to see your money in six months? What about 2 years? This bucket of your income is dedicated to stashing cash away for a short or long term goal. Once most people save 3–6 months of their spending (emergency savings) they pivot and begin saving for investment purposes or debt reduction.

Discretionary spending is what we all look forward to. This bucket is dedicated to shopping, paint-balling, travel, and any other frivolous activity you desire to partake in. Beware, if managed incorrectly, this “fun” bucket of money can quickly lead you into credit debt.

Before implementing this strategy my 60 / 20 /20 was more like 65 / 5 / 30. There wasn’t a dollar that I second guessed. 8 years of good grades with no priors?! I deserved it, right? The truth is, once you learn basic financial principles like these, you’re simply starting in a position many others were already born into.

Step 4: Execute

Once you allocate your money, you must execute. Of all the avenues I exhausted trying to shrink my credit card debt, I recommend a custom excel sheet, 0% APR balance transfer credit cards (put your balances on as many of these as possible to eliminate interest charges) and a halt on credit card use altogether. My excel sheet (pictured below) housed important financial information but the most important piece is at the bottom. I wrote down the current balances across my now eight credit cards. My objective was to ensure that the total of all my cards decreased every two weeks. If the total increased past last week’s threshold, I’d highlight the text red and reduce my spending for the following pay period freeing up extra funds for debt payments. Once I got in the swing of limiting my spending, I reduced my salary to 60k, reallocating the remaining 25k (annually) towards credit debt. I believe I was paying $700 a paycheck towards credit debt at one point. I did this until I quit my job, and even repeated this same process with the pay cut. Credit payments became ten times harder with reduced pay (~$200 per paycheck) but after switching careers and changing jobs twice with months of unemployment between each, I was credit debt free at the 2.5 year mark. Now, all of my spending goes on my Chase Freedom credit card and I clear the balance everyone month, pocketing the cash back points for excess $$$.

Although I truly disliked my job, I can’t ignore how beneficial that financially sound environment was. An environment where people openly discussed salaries, bonuses, stock portfolios, rent payments, interest rates and investment strategies opened my eyes to good uses of money. Hearing a friend subtly mention $50k in their savings account or how they profited $10k off of random voice over work will surely shift your thinking for the better. Do better and spend better my people!

Additional Resources:

Cash Back Credit Cards: these cards payout ~$250 for spending up to $500 max. If you become savvy enough to manage your spending this is technically a free $$$. Just don’t fall for the trap and carry a balance long enough for interest to hit! Chase Freedom Unlimited and Capital One Quicksilver are my favorites.

Digit: a savings app that tracks spending and reallocates small amounts from your checking account into savings “buckets” of your choice. This app will surely help you stash away an extra $100 per month.

Ally Savings Account: a high yield online savings account that I highly recommend. B.C. (before Corona), interest rates floated around 1.75%!