Episode 97 - Paying Off Debt: Where Do I Start?

Overwhelmed by debt and don’t know where to start? In this episode, I’ll break down simple first steps and show you how to choose the best strategy—so you can finally move toward freedom.

Transcript

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Paul, Welcome to Catholic money talk, where we talk about all things money and finance, and we try to do it through a lens of being Catholic, where our ultimate goal is to one day be in Heaven with the Lord. I am your host. Paul Scarfone, thank you for being here today. Welcome to Catholic money talk. You know, if you've ever opened your credit card statement and maybe felt your stomach drop, you're not alone. Debt is one of the biggest financial burdens Americans face, and today we're going to talk about paying off debt. Where do I start? But before we do that, let's say a prayer in the name of the Father and of the Son and of the Holy Spirit. Amen, Heavenly Father. We thank you for this day. We thank you for all the ways you love and bless us. Lord. We know that you have an awesome plan for us and that you love us so much allow us to yield to your Holy Spirit. Come Holy Spirit. Just reveal your will to us so that we can pursue you in everything we do. We ask this all in Jesus name, amen, in the name of the Father and of the Son and of the Holy Spirit. Amen. All right, so my opening line, if you've ever opened your credit card statement and felt your stomach drop. You're not alone. You aren't my first experience with debt like this was so I was 21 I was in college. I was getting serious with my girlfriend, Taryn, who I wanted to find a way to ask her to marry me, and I had been running a bit of up a bit of a credit card balance, and the I forgot to pay it, and I actually I remember where I was. I'm driving, and my cell phone rings, and I pull over, and I flip open my phone, and I answer it, and it's the credit card company, and they said, Hey, you didn't pay your bill. We're charging you. It was $35 or $50 late fee. And that sent a panic through me. I had a I might have had $1,000 balance and I didn't have any money. And I said, Well, what do I need to do? They said, Well, you have to give us your account number and routing number so that we don't have to wait on you to pay your bill. You have to, like, we'll just take the money and and I freak I'm like, I don't have $1,000 you can't take the money. They said, No, we're just going to take the amount of the payment that's due, the minimum payment. And he said, If you want to pay anything extra, you'll have to do that, write a check and mail it in, but this way you'll avoid having late payment fees. And I thought that's probably a smart thing to do, so I did that, and I just didn't even think about anymore. And stupid me, I kept using my credit card, and I'm gonna mail the check in, you know, 100 bucks here and there, but I never opened the statement. I was scared to and I I got to the point where I was going to get engaged, and it was about that time where I said I got to look at this credit card statement. I opened the credit card statement, and my stomach dropped because I had owed 1000 and now it was about four or 5000 it was significant, and I looked at the minimum payment they were taking. It started at maybe $100 a month, but now it was like $200 a month, and it wasn't paying anything off. It wasn't even paying all the interest. So it was like, I remember looking at this, it was$250 of interest, or something like that, and my payment was, like $198 and my stomach was so upset, and I start looking at this and doing some quick math, and I'm thinking, oh my goodness, half of this might be interest. And I called them up, and I was freaking out, and they said you just got to start paying more. Like this is the deal that you signed up for when you got the credit card. We're not changing the deal. And I think I was crying at this point. Maybe I'm 22 years old and I'm crying. I was freaking out. So if you've ever opened your credit card statement and felt your stomach drop, you're your stomach drop, you're not alone. I did that. I did that a long time ago, half my life ago. Oh, my goodness, half my life ago. So that's the that's the starting point for this. So then, so where do you start? If you're in this spot today, where do you start? Well, here's. The deal, the first step. Step number one, you have to know what you owe, right? If you plug a destination into your GPS, into your phone, Google Maps, or Waze, or whatever you're doing, if you plug a location and then you're like, Hey, what are the directions? The next thing it asks, it's like, well, that's fine. You want to get there, but where are you? Like, we can't give you directions if we don't know where you're starting from. And so we might want to pay off our debt. Right? That stomach drives we want that credit card to go away. But if we don't know where we are, we we don't know where to go, like, we don't have a starting point, so we need to figure out our starting point, and that is, know what you owe. So if this is you the first step, you're going to gather every, every bit of debt. You're going to get your credit cards, your credit card statements, your student loan statements, your car loans, medical bills, mortgage, home equity, personal loan, payday loan, like whatever it is, the sofa, the fridge, the appliance, the car, whatever, and you're going to write everything down, or you can use a spreadsheet like a Google sheet, but you're going to write down the balance, you're going to write down the interest rate. You can write down the minimum payment, okay? And if it's a loan that has a term, write that down too, right? So a credit card doesn't have a term, but something like a car loan. If it's like 60 months, that's a term. So you'd write down the term, or at least the term that's remaining. And so why? And I'll tell you, this could be scary. This could be scary. So I just told my story 22 years ago. Well, go 10 years into it right now. We were married. We're still using a credit card. Had more credit card debt. We had student loans, two car loans, lots of that. I've explained this in the on the podcast before, but what got me started on this, like I need to learn how to better handle money, was when I got the letter from the federal loan, you know, federal student loan department from my master's degree, and I opened it up, and it was set and it said, Hey, you owe $40,000 you're going to start paying next month, 600 bucks. I was like, There's no way I can pay that. Like, we don't have any money. And I remember calling them, being like, I need to figure and I was panicking at this point, Taryn and I weren't working together, so this was, this was my problem. I called up and I said, Hey, I can't pay 600 a month. I don't make that much. We have young kids. They said, Well, you can fill out the form and send us a copy of your last year's tax returns, and we can come up with a Income Based Repayment strategy, because I had also explained my situation. Said you don't qualify for deferment or hardship, but, but we can try income based so I send the income based in I get a email that says, All right, you're gonna start next month, and your monthly payment is $770 I was like, that's insane. And I called them up, and they're like, oh, yeah, no, based on the income analysis, you can actually pay more than the 600 I'm like, No, I can't. And that's because the student loan department doesn't take into how many kids you have if you're sending your kids to Catholic school, what your grocery bill is, or if you're tithing or anything like that. It was tough, so I got them to accept the 600 but there I was freaking out, and I had to tell Tara, and that's when we were like, we can't breathe. We need to figure out a new way to do it. And we did, but that fear, I'll tell you after I we laid everything out, as scary as it was, once we saw it and knew we were creating a plan for it, we started to have more calm and more peace, and that increased as we made headway, right? But, but clarity that reduces fear and what feels like a monster, it's so much more manageable once it's on paper and you can look at it. So step one, know what you owe. Step two, so as you're going to work through paying this off, let's say credit cards for Tara and I. Credit cards were where we went if there was an emergency, well, it was that or a stupid 401, k loan. We're not even going to get into that today, but that's where we went. We didn't have cash. We didn't have money available in a bank account that was just earmarked for emergencies. We would go into debt if there was an emergency. So as you start this, if you're if you were like that, if you would go to debt in emergencies, one of the first things you need to do is scrape together a small emergency fund, you know. And depending on your your state and life, if you're a single person, if you're married, you got kids, one income, two incomes in the house, like, maybe it's, maybe you can get buying $500 emergency fund, right? Like fixing a flat tire type of thing, or repairing a refrigerator. But depending on what it is, if you've if you've got larger family, maybe you know potential medical bill or something, you might have to have closer to $2,000 but pick a number that you can scrape together quickly, and you earmark it, you stick in a separate account. You just like, that's just for an emergency, right? Break glass if there's an emergency, because you don't want to slip into debt. Debt again and use a credit card, right? The best way to stay out of debt is to never borrow. So you don't want to give yourself permission to ever borrow again. One of the ways to do that is to create a plan for if there's an emergency, right, have some money, because if you don't have a plan, you're not going to have success, right? If an emergency, you're trying to pay off debt, an emergency comes, you don't have a plan to tackle an emergency, you're not going to be successful. So the plan to tackle an emergency is set some money aside, right? So it might be 500 might be all the way up to two grand, depending on your state, but you don't want it like $10,000 that would take a long time to get that together before you tackle the debt. So you want something you can pull together, probably within that first month, right? And a quick win, right? If you're trying to figure out how to get the money, try, try for a quick win, you could Facebook marketplace something, maybe cancel some subscriptions. Well, sometimes when I'm working with couples, I'll challenge them. Have a have a no spend week, like, other than putting gas in the car, but just raid the fridge, pantry, freezer, whatever for food this week, and don't buy anything and see what you can pile up. Maybe, maybe do a no spend every other week for the first month. Like, you find different ways. Cut subscriptions, sell some stuff. Maybe you can even go, you know, show you know, if it's the winter and snowing, shovel someone you know falls coming up, maybe go blow some leaves. Rake some leaves for someone. Maybe scrape a couple 100 bucks together real quick. So step one, know what you owe. Write it all down so you can see it. Step two, get that little starter emergency fund. You got to build that. That is your defense from going back into debt. Step three, you're going to choose your repayment strategy. So there's two popular ones out there, if I'm sure, if you Googled, you could find more, but there's two that you can quickly identify. There's the Debt Snowball, and that's the process where you list all your debts, smallest, first to biggest, last, last, and you just start working on on the smallest one first and like so each month you'll pay the minimum payments, or the required payments on each one, but any extra money every month goes towards the smallest debt first, and knock that off. And then, you know, so let's say you had 10 debts, right? Let's say, you know, if you were Taryn and I, when we started, we had, let's see, I'm going to do this real quick. We had two car loans, we had a home equity loan, we had a credit card, we had, like, five student loans, and then we had a a personal loan, which had been a 401 k loan. Like a long story there. So, so that's 10. So if this was you, if you have 10 loans, you got them all lined up, smallest balance to biggest balance. You're making payments every month in each one any extra money every month, and you're cutting things out of your budget to create more, to create some excess. It all goes at the first debt. So let's say that's gone after month two. Now you only have nine debts left. See, I'm saying maybe three or four months in now, you only have eight debts left, right, and then a few more months and maybe there's just seven debts left. So that's the idea. You just you tackle them. It's like a snowball, because all the money then just rolls over to the next debt, and you tackle it. So Debt Snowball is a very popular one Dave Ramsey, that's the one that he talks about. That's the one that Taryn and I that we used, we used the Debt Snowball. The other one that people talk about, and this is more probably, if you're a nerd, you like numbers, is the Debt Avalanche. The way that works is you list all your debts, but the highest interest rate to the lowest interest rate. So let's say you have some type of maybe it's a family loan and it's 0% yo, your dad 20 grand or something in a Debt Avalanche, that might be your last one you're paying off because it's 0% your first one you're paying off might be your 25% interest rate credit card balance, right? And it works the same way as a debt snowball, where every month you're paying all the monthly payments, but everything extra you throw at the one with the highest interest rate, right? And technically, if you do the math on it, the Debt Avalanche will save you money, because you're getting rid of the largest interest rates first, however, and this is what we experienced doing, the Debt Snowball Method, going smallest to largest debts, regardless of interest rate, you your brain feels like you're more successful because you're having wins more quickly, right? Because you're getting rid of those smaller ones, and you feel like you're making headway more than you might if it was the Avalanche method. So, but which one's the best method? Obviously, it's the one. If you're married, it's the one you and your spouse agree to. That's top but it's the one that you're actually going to stick to. Right? When people ask me, Hey, what's the best budgeting software out there? It all depends which one you're going to use and stick with. That's the best one. For you, so you have your choice. There might be more than this, but these are the two most popular Debt Snowball or Debt Avalanche. So step one was know how much you owe. Step two, build a small starter emergency fund. Step three, choose your payment strategy. Now here is step four. But step four is not so much a step as much so it's not so much a step as much as it's a kind of a mindset, and that is, you want to avoid the common pitfalls. So what are the common pitfalls? One common pitfall is people making only minimum payments, right? If all you do, if you if you lay out your debt snowball, Your Debt Avalanche, you just line out all those minimum debt payments, and you don't get aggressive, you don't trim the budget, you don't sell some stuff, you don't generate excess to throw extra money at the principal of these loans. If all you do is just pay the minimum payments, I promise you, you will be in debt forever. You will because, and you might think, Well, no, it's a six year car loan. Once six years is up, like, I won't have that payment anymore, yeah, but all your money will have gone to loans. And then when you do need to buy a new car, what are you going to do? Are you going to get another car loan? Right? The idea is to go after this stuff as fast as possible, so we can start saving money and building up money to make future purchases and to pay for things, whether it be, you know, things that we've talked about in here, retirement, kids, college, a new car, a new home, an addition, a renovation, a repair, A you know, replacing a roof, replacing a vehicle, any of those things that you'd want money for, any of those things that you look at those debts you had, and you said, Oh, what have we borrowed for before? It's like, oh, future me isn't going to do that anymore. I'm going to get rid of all this debt as fast as I can. I'm going to be aggressive with it so I can start to save money in a pile so that I can pay for these things in the future and off to borrow again, right? So common pitfall, number one, making only minimum payments. Don't do it, generate some extra money, sell some stuff. The other, another pitfall, consolidation loans or balance transfers. So I regularly get calls from friends, from people that know me, know what I do. Maybe it's current clients, past clients. Sometimes it's my future clients will call me with a question, and they'll say, Hey, should I do this consolidation loan I just got to, you know, I'm trying to pay off this credit card, and this other credit card just sent me a balance transfer deal, like, Should I do that? And my answer to them is it's usually, well, well, what's your plan for tackling it right now? Like, where, how did you create the debt? And what's your plan for paying it down and not borrowing again if you didn't change your behaviors, if you didn't change your habits, then just moving your debt, whether it's a consolidation loan or a balance transfer, isn't going to help you at all. Honestly, it will not help you at all if you don't address the problem, which is you and your money behaviors, right? Or your you and your spouse and how you handle money that was tearing in my challenge, right until we address the habits and how we handled money and work together, we weren't able to get rid of the debt, so consolidation loans and balance transfers from a number standpoint, yeah, it might save you some interest over time, but this isn't a math problem. Paying off debt isn't a math problem. It's a behavioral problem, and you need to generate new behaviors and stop the old behaviors if you want to see change in your life. So don't, don't fall for the ease of a consolidation loan or balance transfer, thinking you somehow magically fix something. You didn't address the habits. All right, so don't do just minimum payments. Make sure addressing your habits. Another common pitfall is continuing use credit cards while trying to pay them off. Like, that's, that's the word, like, how are you going to get out of a hole if you keep digging down right if you're paying off credit cards? Because you've run into problems with credit cards in the in the past, cut them up and don't use them, and as you pay them off, close them. Taryn and I don't use credit cards. When we were trying to figure out how to get out of debt, and we realized that we need to change. We need to drastically change the way we look at and handle money. We said, Let's like we would use credit cards for everything we we got pots and pans. We got all these wonderful things from credit cards, right from the points, from all these cool things. But studies prove that people who use credit cards just spend more money. So you can argue with me all you want. Start Googling all the studies, you'll see that I'm. Right? But for us, just stopping you like one of the first steps is we're just never gonna use a credit card again. And we haven't, right? We decided that in 2013 and so this is 12 years later, we don't use credit cards anymore, and life's been great. I was just talking to someone about this today. Earlier, credit card bills when we're using them when we're using credit cards every month. Credit card bill was our biggest bill. Now that's gone, right? We stopped using them. That's gone on my podcast I mentioned a few months ago. We paid off our house. That was the second biggest bill every month. Now that's gone like this is pretty cool, right? We're moving in the right direction. So another pitfall people who continue to use credit cards while trying to pay them off, stop, get rid of credit rid of credit cards. You don't need them. And then the final pitfall to avoid, a common one, there's there's several others, but these are the most common, is not adjusting your lifestyle, right? That goes back to the behaviors, like thinking that nothing needs to change. Oh, we just got all this debt. We'll just pay it off, and then we'll be good. Know what? What created that debt, right? Maybe it was your plan. If there's an emergency, we're just going to borrow. Well, you need to create a new plan so that when you have an emergency, you're not borrowing. You already have money set aside for emergencies. And maybe you've been going on, you know, vacations every year, or maybe you've been going on expensive vacations every year. Do it less. Do everything down a notch. Maybe you never had a budget for Christmas. You're always spending $5,000 on Christmas. Maybe spend $1,000 on Christmas, right? Like, cut back different areas in your life, whether it be and it doesn't need to be, the needs. Like, typically, it's not like having to sell our house and downsize. No, just stop eating out, cut back, maybe eliminate most or all your subscriptions and stop the impulse buys, right? And another great behavior is create a budget and stick to it right. So those are the common pitfalls, making only minimum payments. Thinking consolidation loans or balance transfers are helping in some way, continuing to use credit cards while trying to pay them off or not adjusting your lifestyle All right. Now, step five, and this is probably the biggest piece, right? So you lay out this plan, everything I just talked about, you sit down. Let's say you could do all of those things tonight, right? You could sit at a table and figure all this out tonight and figure out a plan for, hey, when will I have my 500 or 1000 or $2,000 emergency fund set up and maybe go to execute it this month and feel like, oh yeah, this is great. But here's the problem, if you're like me and Taryn, when we first started doing and trying to pay off our debt, we first sat down that first night, looked at everything it was gonna take seven years. And I remember looking at my children and thinking about our marriage and our family and thinking like, what, what will it look like in seven years? Like I had no idea, right? We had, at that point, we had four kids, and Taryn was a stay at home mom. I was working at the bank like crazy hours or No, I might have just changed jobs. I went to the business banking but, but I was like, it scared me seven years. It's gonna take a long time. And so what I want to encourage you with is it might look like it's going to take a long time, and so this is step five. You need to find a way to build accountability, support and encouragement for yourself, right? It's unlike anything else, right? If I'm trying to lose weight right now, I've got an app I'm using. I talked to my wife about it, and I've mentioned it to few other people. If I'm trying to lose weight and exercise regularly, I like to tell people about that so that they can help hold me accountable, right? So same thing, we're trying to pay off debt. Tell the people in your life that you care about especially if they're people that maybe might influence you, like, hey dude, we're all going out to lunch. Like you want to lunch. Just tell them, Look No. When I was at the bank, we used to love to go out to lunch. Go out to lunch with a bunch of buddies that I worked worked with, and I remember a couple times guys like, Hey, we're gonna go lunch. I'm like, I can't, like, or just trying to pay off debt, I can't spend the money. And sometimes they'd be like, Dude, come on. Like, I really want to go to this place. You know what? I'll pay for you. I was like, Fine, I will take charity, right? I will totally take charity. They I'm not. I'm worried about my financial situation, not yours. So you can buy me lunch if you really want to sit at a restaurant with me, but, but you want to encourage that. You want to tell the people around you what you're doing so they can be encourage you, and not like a detriment or an obstacle for you. So, you know, 78% of people in the US are living paycheck to paycheck, right? That means most of them have debt. Okay? So you're in the majority. If you say I'm trying to pay off my debt, most people that hear that are going to go, wow, I should probably really do. That, right? So don't you know you're swimming upstream, right? You're going against the flow, like, if anything, you're probably going to be a motivation other people. They're not going to think like less of you. They might think you're a little weird, but weird to school this kind of weird. That's cool, all right. So share your plan with others, and you're going to do this with your spouse. If you're married, you're doing this with your spouse, so that accountability is built in. But also tell, tell a trusted friend, if you're not married, tell a trusted friend, not your shopping partner, not your shopping buddy, but someone who can really help and mentor you through this. Get some great tool. There's great tools out there. There's budget apps, there's different visual tractors. You can make a whiteboard, something that can help you mark your progress. And, you know, just like when your church is fundraising and they got the thermometer and they're coloring it in, right, it's fun to see that thing growing week after week, right? Create those types of things for yourself when you're paying off the debt. For us, when it first started, we had our debt snowball, and I made just a Google Sheet, and every month, Tara and I would update it, and we would try to guess where we'll be on certain things, you know, six months from now, 12 months from now, like, create mile markers for ourselves to see as as we were doing that and our kids were getting a little bit older, we actually made a grid for the fridge. And it was a very simple, you know, like, you know, squares across, I don't know, I forget how many were on there, but maybe it was like five rows of eight squares or something, maybe 40 grand. And when we started, it was 80, but by the time we put the chart on the fridge, maybe was 40, and each square was $1,000 so every month we'd color in however many we paid off. And I remember we were letting the kids color it in. I remember my oldest, Josh. He's probably like, I don't know, at that time, 10 or 11, and I remember him coloring in a square one month. And he goes, Dad, why? Because we'd use a different color each month. He was like, Dad, why am I only coloring one square? Last month, we colored in three squares. And that was like a good challenge and motivation to me to be like, yeah. Like, I want to keep trying to do better every month, not taking steps back, right? It was just, it just added fuel to the fire. That's a way your kids can can get involved, too. When we bought the house we're in now, and I've mentioned this before, we bought this house, the plan when we bought it was to pay it off as quickly as possible. And you know, instead of getting a 30 year mortgage, we got a shorter mortgage, and we hope to pay it off in at least 15 years. But as we paid more and more and more, we actually were able to pay it off in less than seven years, right? And here's the cool thing, too. I mentioned, when we were first trying to get pay off our consumer debt, our mortgage wasn't involved in that, right? All of this, I would say, trying to get a debt, put your mortgage to the side for now, right? Look at all the everything but the mortgage, right? Everything but the mortgage. So that's student loans, car loans, personal loans, 401 K loans, credit cards, all that, right, but not the mortgage. Leave that to the side. That's a whole nother ball game. But when we're first trying to pay off our our non mortgage debt, that first time in 2013 we first sat down to do all this, it was like $82,000 and it was gonna take seven years, but we got motivated and we went after it, and we were able to pay it off in four. Like, that's pretty cool, right? So that's it was like four and a half years. So that's we saved two and a half years of interest, basically, which is a lot. That was a lot. So So create a way to build accountability, support and motivation, all right? And when we think about, like, why are we trying to pay off debt? Oh, my goodness, just look at Proverbs, 22 verse seven, it's so true, the borrower is slave to the lender. Paying off debt is about reclaiming freedom so that you can serve God and you can serve those around you with your money, right? Why do Why did God create us to know Him, love Him, and serve Him in this life so we could be happy with him forever in the next how do we do that with our money? We don't do it through loan payments. We don't we do it through putting all of our money, everything we have right, our will, our possessions, everything we have, our time at the service of God. And we say, Lord, what do you want us to do today? So, so that's it. This is my starting point for paying off debt. Right? Want to pay off debt. Where do I start? First thing, know what you owe, right? Step one, know what you owe. Step two, build a small emergency fund, right? 500 to$2,000 depending on your life situation. Step three, choose your payment strategy. It's most likely going to be a Debt Snowball or Debt Avalanche. We use the debt snowball and loved it. I think you get the most emotional and mental wins by using the Debt Snowball that the wins Come quick. Lee, step four, avoid the common pitfalls, right? And what were those pitfalls, making minimum payments, making only minimum payments, relying on consolidation loans or balance transfers instead of addressing the spending habits, continuing use credit cards. What's wrong? To pay them off. And then the last common pitfall, just not adjusting your lifestyle. Cut things out of your budget. Make a change. Step five, build accountability and support. Find people, surround yourself with people. Talk to your wife, your spouse, your husband, to get encouragement. So that's it. Debt Free. Living is possible. Taryn and I, we are finally there, and it is awesome, but takes one step at a time. So if you're ready to take that first step today, grab a notebook. Sit down, look up, write down everything you owe. That's your starting line. That's where this thing starts. And just pray. Say, Lord, give me the strength to do this. I promise you, once your all your debts paid off, you're not going to miss it. You won't regret it. So I'll be praying for you. I encourage you. Hopefully you can come back here for more encouragement as you go. Thank you for joining me today. God bless Thank you for listening to Catholic money talk. I hope you join us again next time, please click Subscribe on your podcast app to get notified of new episodes. God bless you and have a great day. You. You.