How to Manage Debt as an American

Debt is like trying to lose weight, it's easier to gain than it is to lose. 

Introduction

This post is written for the millions of Americans who are struggling to pay off their credit card debt. Because it has taken so many years to get out of debt (and I'm still not quite there yet) I thought I would share a few tactics I've used to help get my debt under control and systematically pay it off. I hope this post can help a few folks out there.

How Not To Get Into Debt / How I Got Into Debt

I'm sharing my personal story because some people may find it interesting as well as relatable.

There's a common hero narrative of the Entrepreneur who risked everything to start their company. Then after several years of struggle, they made it big.

I once saw myself as that heroic entrepreneur. But in reality, I think only a very small percentage of people who take these bets make it big or even break even.

I will not go into details on my life story and how I accumulated debt, but the short of it was that I wanted to start a company while living abroad. But to be able to finance various trips and startup costs, like paying contractors, I put myself into debt of about $12,000 in credit card bills. This credit card debt was in addition to my typical-sized student loan debt which I used to finance half of my graduate school ~$50,000. The other half I was fortunate to be able to finance through a scholarship.

I also had accumulated debt from back taxes to the IRS. The reason for this is that if you are self-employed, no matter how much income you make, you still owe 20% to the government. So as a broke entrepreneur living in Chile, Kenya, and eventually India, owing money to the IRS felt like a sham of the American dream. Not only did I not live in the United States, but I also had to pay taxes on what little income I made. What kind of country that supports entrepreneurs would maintain a system like this?

I remember when I was living in Kenya that I only made about $10,000 that year, and despite this, I owed $2,000 in taxes. To me this was insane because as it was, I was living a hand-to-mouth lifestyle; living on a diet I called the "apple and banana diet"; I wanted to fly home once a year for Christmas which costs $1,000 for the flight (still missed a few), and I had day-to-day startup expenses that in the beginning I would bear out of pocket. To me paying 20% on so little money felt like a failure of the US government to support entrepreneurs. When all was said and done, after 2-3 years of back taxes, I ended up owing $3,500 to the IRS.

As a side note, I highly do not recommend owing money to the IRS and making monthly installments because the documentation, payment process, and monthly overhead to do this is exhausting. It's a time and mental sink I wish no-one to endure.

So how to manage debt...

Debt Arbitrage

"Credit Surfing"

I first learned this word from an American Express agent over the phone when I was applying for a 0% interest credit card.

Credit surfing is the concept where people who have accumulated debt apply for new a 0% interest "Balance Transfer" credit card, and move their existing credit card balance from their old card(s) to their new 0% interest card. And if you're a real pro, you constantly move one 0% debt from an old credit card to a new 0% credit card. I've done this multiple times and it works exceedingly well.

As an example - say I have taken a promotional Barclays Card to pay for an $800 iPhone, with an introductory rate of 0% for the first 18 months*. And let's say I have been servicing this $800 principal balance over the last 16 months with $25 monthly payments, so I've paid down about $400 of that debt. Now that the end of the 18 month promo period is approaching, I will suddenly be hit with the true interest rate of the Barclays Card, which would be something like 25%. So to avoid paying any interest on this debt, what I can do is apply for a new 0% interest credit card and transfer the balance to it.

I had done this recently with the American Express card and it is completely legal. And according, to the American Express agent on the phone, "credit surfing" is extremely common.

Though you will continue to defer your debt, the benefit of credit surfing is simply that you are not paying interest on it.

To find a list of 0% Balance Transfer cards, check out NerdWallet.

[*side note: this is an awesome offer, and logically speaking everyone regardless of finances should take it because according to finance logic, it's better to build cash reserves and pay for things over time than to pay for something in one shot. The reason for this is that capital today is more expensive/valuable than capital in the future. The principle behind is the expectation that, as economic agents, people will generate income in the future than they will today (because of increased skills, experience, etc.). So the principle suggests that it is better to lower your costs today and bear the higher costs tomorrow because you will be in a better financial position to make payments in the future. This is a bit of financial philosophy, which is obviously very personal; but to summarize my perspective, it's better to spread small payments over time than to make one large payment in one shot]

Tally App (or better a personal loan)

If you are an American, before you use Tally (which I'll explain in a moment) I would urge you to take out a personal loan. The reason I personally could not take a loan was that I was employed abroad so I did not have payslips from a US company that the banks required. So I was left searching for an alternative debt instrument.

I was fortunate to find Tally. The way I would summarize Tally is that it is a 15% interest loan plus app, that is used to consolidate credit card debt, so users make only one payment to Tally, and Tally automatically and intelligently distributes that loan and payment to the users' credit cards.

Here are the three reasons why I Tally is useful to anyone managing debt:

1. Tally gives you a loan, typically around 15%, which is used to pay off your credit cards. Most credit cards cost anywhere between 18 to 25%, so it's a no brainer to get access to Tally debt to pay off your credit cards.
2. Tally consolidates all of your credit cards into a single view where you see your outstanding debt, interest rates, credit promotion expiry dates (like 0% for the first 12 months), and due dates of your payments.
3. Tally automatically pays your credit cards for you. The two key benefits here are:

• You will never miss a payment. What I've come to learn is that the reason many people miss credit payments is not that they do not care or do not have the funds to pay, but because it is so challenging making payments to different credit cards on different payment dates. It is easy to slip up and miss a single credit card's payment due date. So Tally streamlines the payment process by becoming the payer of credit cards for you. This frees up a lot of mental time and bandwidth for users.
• Tally intelligently optimizes the payments to each credit card so it minimizes your overall interest payments - it does this by taking into consideration each cards' total outstanding debt and interest rate. I used to do this manually and setting-up this optimization was not an easy task on a spreadsheet. Furthermore, it is a monthly recurring overhead calculation that most people would rather not do. So why not take the benefit of an algorithm to do it for you?

Culture of Financial Responsibility

Budgeting

This may sound obvious, but its important to highlight, many people who are under financial stress do not keep a budget. I didn't keep a budget for the first couple of years of managing debt. Instead I would live with the whimsical hope that next month would bring more money than I would spend, which would invariably never happen. Also in some ways, and this is going to be true for a lot of people, I intentionally did not keep a budget because it meant bending to the constraints of my situation. Philosophically I was opposed to constraints because as an "entrepreneur" I was by existence up against the odds.

In any event, no matter your situation you should keep a basic budget.

For me, I like to break down a budget into 4 buckets:

1. Recurring expenses + daily budget
2. One-time expenses for the month
3. Credit card debt
4. Free cash + rainy day cash + investments

(my budget is a little more complicated because I work in India and have to move money to the US every month to service my debt)

Savings

Even if you're struggling with debt it's still a good practice to build a culture of savings. Yes, financially speaking, if have a debt of $100 at 20% interest it is irrational to take $100 in cash and put it into a savings account at 4%. But that's not the point here - because the goal here is to build a culture of savings, even if you don't have much to save!

In the previous section, my savings bucket was broken up into 3 different pools: free cash, rainy day cash, and investments. I was recommended this approach by a friend to build a culture of savings which applies equal importance to each allocation of cash. So if I carve out $300 from my expected expenses for the month, then I will allocate $100 to free cash, $100 toward rainy day cash, and $100 toward investments. The principle behind this is that I should always have a little bit of liquidity for all 3 of my "futures": the short-term; medium-term; and long-term.

This is how I distribute funds among my "futures":

• Short-term capital is for unexpected expenses, like an impromptu trip or an unexpected medical expense. This money I put in a regular day-to-day bank account. I use and like Chase bank, because of its intuitive web and mobile apps.
• Medium-term capital is for larger unexpected expenses like an apartment deposit, or money to use if I'm taking a break between jobs. I put this money into a Charles Schwab high yield checking account. I like that it takes Schwab 4 days to transfer the funds, because adding this friction makes it feel like this money is more difficult to get out.
• Medium-Long-term is also used for large unexpected expenses. I put this money into a savings account through an app called Acorns, where I part of my "Short-term" money gets auto-debited each month.
• Long-term capital is intended to be money I never touch. I put money into the stock market using an app called M1.

Acorns for Medium-Long Term Savings

Acorns is a web and mobile app that enables users to save through a feature called "Round Up". It works by rounding-up every expense users make to the nearest dollar, and investing the rounded-up portion into a savings account. As an example, say you spend $3.69 for a cup of coffee. Acorns will round up the expense to $4.00, and apply that balance of $.31 to a savings account.

This is a brilliant tactic to saving that was originally introduced by the design agency IDEO in partnership with Bank of America in 2004. The psychology principle behind this is that it is easier (i.e. less painful) for people to save money at the contemporaneous moment of spending it, versus saving money in any planned manner.

I highly recommend using Acorns because, after a short period of a few months, users end up with a few hundred dollars in their bank account that they wouldn't have otherwise saved.

(credit: Acorns Advisers LLC)

M1 Finance for Long Term Savings

I use M1 Finance for investing, but it really doesn't matter which app you use. The principle behind using stocks as 1/3 of my savings is that, if I lose my money, I don't go broke, but I have the upside of making more than I would have to put those savings into a low yielding bank account.

As a disclaimer, I know very little about stocks, and I honestly don't have much interest in it. My behavior is that I pick investment themes that I believe will be the future (like e-commerce), and I put money into it and I walk away. Though I'm being a little savvy, by at least picking stocks, for most people who care even less than I do, you should just put your money into an Index fund like Vanguard. That's what Warren Buffet advises, and for good reason - the stock market (and Index funds that follow the market) has historically grown at an average of 7%, which is a higher rate than not only savings accounts, but also the average hedge funds.

M1 is a nice investing app because you can build high-level portfolios based on themes, like "Ecommerce". And then you can build baskets of stocks within that theme. Here are two screenshots to give you an idea:

Outro

Being in debt sucks. And being in debt for a long time really sucks. The time and emotional energy to manage debt is a terrible thing. So hopefully for anybody who reads this article, you can at least get a little inspiration to take a short cut to reduce the amount of time you'll have to manage your debt.

I can't give any recommendations on how to not get into debt, because it's obviously very personal, but I will at a later point share a blog post about why young people should avoid starting-up companies right out of college. One reason is because of how easy it is to get sucked into debt at that age because of the mindset of "all or nothing". For most people who take that approach, like me, that choice of risk leads to a long period of debt management.