Eight Steps For Breaking the Debt Cycle with Kadri & Myriam

Today's episode of Financially Naked: Stories from The Financial Gym, two of our Certified Financial Trainers, Myriam and Kadri, sit down to talk about 8 strategies for paying down debt. Whether it's consumer debt, student loans, medical debt, personal loans, or some combination of these, it can be overwhelming to know where to start. Myriam and Kadri talk about concrete action steps you can take to tackle debt and break the cycle.

Podcast Notes

• STOP USING YOUR CARDS - The most important step of getting out of credit card debt is to stop adding more debt. Kadri often talks to his clients about credit card psychology. Using debit cards while on a debt payoff journey will help you reduce spending. When you spend on a credit card, that balance increases. When numbers go up, we get a good feeling. We only have to pay the bill one time at the end of the month, instead of feeling the money leave with each transaction. It can be a challenge, but here are some tips to make the transition easier:
• • Take them out of your wallet if you can.
  • Forget chasing credit card points - it isn't worth the interest and the larger minimum payment
  • Unlink cards to convenience apps like Uber and DoorDash
  • • Chase Sapphire Preferred gives you DashPass, the membership program to DoorDash. While this may help you reduce fees, remember that if you are ultimately going to pay interest then any deal can't offset that!
  • There are cases where you have to use your credit card. Maybe you don't have an emergency fund and putting something on your cards will be the difference between caring for a sick family member or not.
  • If you truly want to break the cycle, you need to also work towards an emergency fund
• FOCUS ON BUILDING AN EMERGENCY FUND BEFORE AGGRESSIVELY PAYING DOWN DEBT
• • This is the best way to break the debt cycle
  • If you've heard the phrase "pay yourself first," this is an example of that.
  • If you are constantly using your spare cash exclusively towards debt and something major comes up, you'll have to rely on your credit cards
  • This can take time. Saving money is a grind, and that's totally okay!
  • Though you won't earn a ton of interest, it's worth it to build this insurance policy to prevent you from using cards.
  • However, there are still ways to be mindful of the interest you're paying - one is through the debt avalanche approach.
• THE DEBT AVALANCHE APPROACH
• • Tackle the highest interest debt first. If you have an extra $500 to put somewhere (and your emergency fund is fully funded), use that total amount and put it towards one debt, rather than spreading it across a few. This is mathematically the best way to pay down debt if you're going to make additional payments.
  • You may not like math, but you can use it to your advantage by paying down your highest interest rate debt first by putting extra money towards it.
  • You can reduce your debt payments even further with a few tools - one I would consider a little tricky, which is debt settlement, and one I would consider more straightforward, which is balance transfer cards and personal loans.
  • • The Snowball Method is another option for paying down debt. Instead of working on the highest interest debt, extra payments are made to the smallest balance debt. This method works well for a lot of people. It comes down to knowing yourself and using whichever method works for you!
• DEBT SETTLEMENT VS. DEBT MANAGEMENT

Debt Settlement

• The pros: you can potentially reduce the amount of money you need to pay for your debts, and you can use the money you were spending on debt minimums to save for your emergency fund or make ends meet.
• The cons: your creditors may not agree with debt settlement, your credit score will likely tank, and you could be charged more debt and fees.
• This is also tricky because you can get in hot water if you choose to not pay your debt obligations to have more bargaining power in the settlement.
• There are other somewhat shady companies that handle the debt settlement process for you. What they provide is nothing that you can't do yourself. Always be careful and ask a lot of questions when looking into these companies.
• They'll typically ask you to still make monthly payments that they save on your behalf so they can pay the reduced amount for you later.

Debt Management

• In contrast with debt settlement companies and strategies, there are debt management nonprofits that work with your creditors on your behalf to help lower interest rates, lower fees, and sometimes monthly payments.
• They help you keep your credit from suffering if you're struggling with your monthly payments and can work with you to create better cash management habits
• It's important to do your research and ask questions. 'Nonprofit' does not mean they have your best interest in mind. At the end of the day, it is a corporate filing.
• They look at your full debt picture. If you have cards open, they require you to shut down your cards, keeping just one open. They have relationships with lenders and will go to them and negotiate the interest on your behalf. Instead of paying the lenders directly, the minimum payment goes to the nonprofit. Programs like this have advantages, but you can also do this on your own, though it takes some time and you might have to make a few rounds of phone calls.
• If you miss a payment, all bets are off. You cannot miss a payment. There is risk there, but that's pretty much how it goes.
• There are other ways to lower your interest and / or your monthly payments. They are balance transfer cards and personal loans

• BALANCE TRANSFER AND PERSONAL LOANS
• • Balance transfer cards usually offer a 0% or lower APR, and you move the balance from one card onto this new one, giving you more time to pay down the debt.
  • While helpful to reduce interest payments, this can enable you to spend more because you now have more available credit.
  • Before consolidating, make sure to give yourself some time to get used to a new spending plan that is sustainable for your income. Knowing yourself and your habits is important.
  • To find a list of BFF Approved Balance Transfer cards, check out this page!
  • Nerdwallet is also a great resource when looking for cards.
  • If you already have credit cards, there may be balance transfer options available, so make sure to check those out when you do your research.
• INCREASE YOUR INCOME
• • This can come from getting a promotion, switching jobs, getting a second job, or starting a side hustle (with low to no startup costs).
  • Earning more money is something Kadri encourages all of his clients to do. It's easier said than done, but Trainers see it all the time with their clients. They'll get a new job with a 40k salary increase or really advocate for themselves and get a raise in their current roles.
  • Think about all of your talents, expertise, and get creative when thinking about how you can make more money.
  • Once you start making more money, be mindful of lifestyle creep. It's important to know yourself and have a plan in place.
  • Take a look at your expenses and ensure they're helping you reach your debt repayment goals. When it comes to building wealth, look at both sides: increasing income and reducing expenses is the key.
• REDUCE EXPENSES
• • The first step, add up all of your fixed expenses, including debt minimums. How much is left over for your variable expenses, savings, and extra debt repayment?
  • There is a minimum you want to have for your variable expenses, especially in high cost of living areas.
  • When Myriam makes financial plans, she aims to have at least $860 per month or $200 per week for variable expenses. The bare minimum for lower cost of living areas is about $530 per month or $125 per week.
  • It can feel like a lot of sacrifice. You want to check in with yourself and ensure your physical and mental wellness is being taken care of.
  • It's easier said than done. There is only so much that can be cut.
  • Closing the gap between your income and spending is the only way to truly break out of the debt cycle. It is a process and takes time. Be patient and find what works for you.
• DON'T BE AFRAID TO CONSIDER BANKRUPTCY
• • Bankruptcy gets a bad reputation, but it can be an amazing tool, especially if your debt to income ratio is 50% or above.
  • A quick rundown on bankruptcy: it gives you a lot of protection. Your creditors cannot contact you, sue you, put liens on your property or garnish your wages. You can also sometimes be protected from any income tax penalties for the forgiven debt.
  • It is a tremendous tool to give yourself a clean slate. Once you have gone through the process, the debt is gone.
  • It is a long process and can take months. While bankruptcy does not need to be scary, it should be taken seriously. You can only declare bankruptcy every ten years, so having a plan of action for once the debt is clear is incredibly important!

Martinis and Your Money Episodes about bankruptcy

• Declaring Bankruptcy with Colleen
• Life After Bankruptcy with Natalie Jean Baptiste

From The Financially Free Blog:

• How to File For Bankruptcy

THE BIG TAKEAWAY:

• Stop using your credit cards (if you can, and there are some situations where you temporarily have to)
• Build your Emergency fund
• Debt avalanche approach
• Debt management vs settlement
• Debt consolidation using tools like balance transfer cards and personal loans
• Increasing your income
• Reducing your expenses
• Don't be afraid to consider bankruptcy

One of the newest programs at The Financial Gym is our Trainer on Demand, where you can schedule a call every month to chat with a Certified Financial Trainer. If you're looking for someone to help you make a debt management plan and click this link to learn more!

MEET THE TRAINERS

• Level 3 Certified Financial Trainer, Kadri Augustin
• Level 2 Certified Financial Trainer, Myriam Robinson