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Welcome to the newest installment of “Getting Out Of Debt,” a new series where I realize just how horrible my financial situation is and figure out how in the world I’m going to rectify it. If you missed the last column, read Getting Out Of Debt: Compound Interest.
Well, it finally happened. I woke up bright and early at 6:30 this morning like a little kid on Christmas morning. Instead of running down to look for presents under the tree, I logged onto my mobile banking app, and there it was. My first full paycheck. I sat there and reveled in the beauty of a bank account that hasn’t been this flush since I enrolled in graduate school two years ago, and my first immediate thought was, “I’m super fucking rich.”
With a salary bump of over two grand a month from my postgrad internship, I was absolutely loaded. I could finally buy anything I wanted. New clothes? Check. New couch? Hello, Wayfair. No longer was I worried about going into Target for paper towels and overdrafting my bank account. BOGO shoes were piling up in my imaginary shopping cart and I didn’t even care. Thinking about what I was going to do with all of that extra money before I remembered I was trying to get out of debt was the best three minutes of my life.
Oh yeah. Since I’ve told my significant other and literally everyone on the Internet that I was going to be responsible with my money now, I guess that’s something I should actually be doing. For the first time in having money, I’m actually going to handle it like a grown-up and not blow it all at Ulta (unfortunately). I came up with a pretty good process for payday, and as long as I can stick with this for the foreseeable future, I think I may be able to dig myself out of this hole.
I opened up my newly-created budget and my bank account and went to work. Since my 401(k) contributions getting that employer match were auto-deducted, I didn’t have to worry about those and moved on directly to my bills. I get paid monthly, so the first thing I did was pay all of my bills for the month, including all of the minimums on my credit cards. There’s no use in making a ton of money if I accidentally spend all of it before rent’s due and end up with a giant overdraft fee on my account. Besides, this way it takes the money out of my checking account immediately so I don’t make the mistake of looking at my mobile banking app and thinking I have more money than I really do just because my car insurance hasn’t been deducted yet.
After bills were met, I still had a pretty sizable amount left over, which was a huge change from my grad school days. Unfortunately for the couch in my online shopping cart, the new, responsible Steph W. knew this couldn’t only be used to fuel spending desires. Instead, this money was getting broken up into three main categories – saving, spending, and debt reduction.
In personal finance, there’s a concept called “paying yourself first,” which basically means that you’re setting aside your money for saving and debt reduction goals away immediately instead of deciding to do it with “leftover” money at the end of the month, because let’s be honest – you’re going to spend it all. Although paying off debt is my biggest priority, there were a couple of things I needed to account for. First, since I had no savings whatsoever, I put a bit of the cash away to begin my emergency fund. In case I get a flat tire or a dead engine, I know I’ll be able to handle that expense without putting it on a credit card and paying for an emergency plus the interest from the credit card over the next couple of years. It’ll take me a couple of months to really build out this fund, but for now, I’m just going to hope that the universe only throws me tiny, manageable emergencies for the time being.
This leaves the rest of my money to split between spending and debt reduction, which is where things started to get reaaaaalllly tricky. I’d already paid my credit card minimums, and the temptation to keep the rest of it for myself was strong. So what if I have to make over $700 a month in payments? I could still buy a couch. Unfortunately for the part of me that wants to have nice things, logic (and the fear of being broke again when student loans kick in) won out and I knew that if I actually got these debts taken care of, I could buy myself a couch every month for the rest of my life with the savings, so I might as well get started on tackling this debt now.
To make sure that I don’t actually go insane, I left myself some spending money for the month. Using my Excel sheet, I calculated out how much I’ll need to leave myself for the essentials such as gas and groceries, as well as a few other spending “necessities” – dinner with an out-of town friend, a date night, a few new professional clothing items for work, and money to attend a wedding were non-negotiable for me, so I estimated my costs and planned ahead for them. With a sad sign-on to one of my credit card accounts, I watched the rest of my hard-earned money disappear into the oblivion with the click of a mouse.
So it turns out that I’m not nearly as rich as I thought I was, and that’s super unfortunate – especially because I’ve been spending a couple of years thinking I had a pretty sizable amount of spending money when in fact I probably should have been selling my organs on the black market to stay alive.
The good news here is that I can set up my personal finances in a way that protects me from myself and still lets me spend money without feeling horrible guilt. Of course, the money I have to spend isn’t the huge wad of cash I looked at this morning, but it’s still enough that I can spend some money on the most important things to me, which – at least in theory – should keep me sane enough to continue to give thousands of dollars back to the credit card companies I owe. With an hour a month on payday, I can plan for the month to set myself up for success without leaving a ton of leftover discretionary spending funds that I could blow on wine instead of accomplishing my financial goals. Besides, I can factor my wine purchases for the month into my budget and still use the rest of my paycheck to get out of debt, so we’re going to call that a win. .
Respond
Steph W.
Steph W. is a new Master's degree graduate with an intern's salary and six-figure taste. She realizes her expectations far exceed reality, so she spends her days pinning away Loubs she pretends are in her physical closet instead of her virtual one. Her hobbies include attempting to trapping her boyfriend into marriage before he finds out how insane she is and pretending that Black Box wine tastes as good as the kind she could afford when she was gainfully employed. Send her tips for getting out of student debt at recruitchairtsm@gmail.com
@therecruitchair
The thought of not paying off the full balance on a credit card gives me anxiety.
This whole series gives me anxiety. The little amount of Debt I have freaks me out, I can’t what I would feel like in this situation.
i thought i was the only one! the only debt i have are my grad school student loans and my mortgage (neither of which are “bad” debts) and it still causes me stress lol
Highly recommend you read Robert Kiyosaki. He would argue that both of those are bad debts. Good debt- someone else pays off, bad debt- you have to pay off yourself
haha that’s why i put it in quotes. of course no debt that you have to pay back yourself is good debt. but i’d rather have debt in a mortgage than debt in credit cards.
Robert Kyosaki is the “Rich Dad, Poor Dad” author, right? I need to get myself a copy of that book before I graduate.
It’s pretty good. Used copies on Amazon for less than $5.
Me too! A general civics and economics course should be mandatory in all high schools. Thankfully I had parents who educated me about saving and spending money. Also, I’ve worked since I was in junior high (cutting grass, clearing snow…don’t laugh, if you live in the snow belt you can make thousands of dollars a year. Not kidding.), so definitely know what it is like to have to work for money, so I don’t like parting with it unless I need to.
Priorities. Do you want all new clothes and a new sofa in your 20s or do you want to retire in your 50s with a big bank account and maybe a vacation home?
Awesome progress! One thing that I’d recommend though (as I always do in your articles) is in this case NOT to set aside funds for an emergency.
The opportunity cost of those funds being set aside is the interest incurred on the credit card debt that you could’ve paid off…which can get substantial over time. Emergency situations is exactly what the cards are for and as long as you don’t have one for some amount of time (crossing fingers for good luck), it’ll be good to use those funds for the interest payments.
Oh sure, have an emergency and go right back into debt. Verses setting aside $1000.00 for the exact same emergency situation and not go further into debt.
The idea of an emergency fund isn’t to make money. The idea of an emergency fund is to not get back into debt. When you’re broke you get desperate, and when you’re desperate you do stupid things.
Did you miss the fact that she’s $100,000+ in debt? Normal financial advice doesn’t always apply here. She literally has to bet on the fact that there won’t be an emergency in order to pay that debt down.
If she does NOT save that $1,000 and instead pays down her debt, only to encounter an emergency down the line, she pays that $1,000 on her credit card and is back at square one. However, if she does not encounter an emergency, then her debt stays down and her she loses less and less to interest paid each month.
I have to agree with Bill on this one. Even if she’s only paying the average rate of credit card interest (15.07%), saving $1,000 instead of paying off that debt is going to cost her $162/year in interest. It’s very possible she’s paying even more than that.
The best course of action if she has $1,000 to work with is to pay her card down, and if she has an emergency she has an extra $1,000 in CC availability to use.
The opportunity cost and time value of money all point toward paying off the debt first. Obviously you don’t want to ride your bank account down to $5, but as long as you keep enough of a cushion to stay off of the overdrafts, you’re better off paying off debt rather than holding onto your cash.
You’re not exempt from bad things happening to you regardless of whether you’re $1,000.00 in debt, $$30,000.00 in debt like myself, or $100,000.00 in debt. If anything the need for an emergency fund is even greater for this girl.
Tell me how many people do you think will pay down that $1,000.00 before the statement period is up. Then you’ve got interest on top of that, a drunken night in a bar after that, another emergency comes up, all of a sudden the hole is deeper.
Cut the cards up, close the account, and save $1000.00 for emergencies. It will not hurt you, life will go on and you will survive without a credit card. I have been doing so for 3 months and I am perfectly fine. I’ve got my $1000.00 emergency fund (Did I mention I was diagnosed with stage II lymphoma during all of this too?), and killing my debt and I don’t feel like I’m missing out because I have $1000.00 sitting in a money market earning 1%. I am still crushing my debt, and getting treated for cancer all at once. The world will continue to spin without a credit card.
Ok, you guys win. Save up that $1,000 and then put the rest all toward the card.
And good luck fighting that cancer. Kick its ass.
Bill Nye is right, assuming the debt can be put towards credit. Regardless of whether she has an emergency or not, having $1,000 sitting in a savings account costs her interest every month.
However, not necessarily the greatest assumption that an emergency will be able to be covered with credit.
Im with paycheck on this one. Dave Ramsey suggests building up a 6 month emergency fund, after that she can start using all of the left over cash flow to pay down the debts. There is a lot that can happen in life: car accident, loss of job, medical emergency. Having an emergency fund that will cover these events is much better than having to use a credit card and get in more debt.
Also, the peace of mind that having an emergency fund brings is worth it to not always have to worry about what if.
He actually suggests a $1000.00 emergency fund while paying off debt and then after you’re done with the debt you save 3-6 months. But you were headed in the right direction and so I will still award you an up-vote.
Does Dave Ramsey assume that the person is 6 digits in debt? Like I said, some advice isn’t the norm because when you’re that much in debt, your typical financial advice goes out the window for lots of situations.
Dave was actually a couple million in debt when he developed these principles, so I say “Good day, sir.”
Oh, and his networth is about $55 million nowadays and he didn’t use debt to build it. Just fyi
It’s tough to decide. If you have a 0% APR credit card for the next year and a decent limit, you’re better off falling back on that card in an emergency and maxing out debt payment. If you have a shit credit card with a low limit or can’t get an introductory deal/balance transfer deal easily, it’s probably a good idea to save some cash despite interest working against you at the moment.
Automate everything, it makes it so much easier. There is a difference between simple and easy, and if you set up automatic payments you will never have to worry about having the willpower to overcome impulse purchases.
You’re getting an employer match before 365 days?
you’re not?
Most are at least a 60-90 waiting period.
Yeah I got mine right away
I have to wait a year
Mine was just till the next pay period after your start date. It varies a lot.
Give Dave Ramsey a listen y’all, that rational thinking, smooth talking, southern money man will change your life. His lessons on debt and the basic steps to take towards getting out of debt offer a good deal of relief and are crazy simple.
This was a good read and much better than the fall “outfits” drivel that Duda published this week.
I get that personal finance is exactly that: Personal. Watching how she goes about this, though, causes my heart to hurt a little bit more with each article.
Invest in a company that desalinates sea water to then provide drinking water to people in areas where it is scarce…given the climate change we are experiencing, fresh drinkable water reserves are depleting while simultaneously, sea levels are rising due to the ice caps melting. This provides more water for this company to desalinate to then provide more drinking water to people. Yes, with such drastic changes in climate, population densities will thin out in certain regions but the ones that remain will be a harbor for people and people need drinking water. The rise in stock value of this company has increased parallel to the rise in natural disasters with a 5 year look back window. Things are only going to get worse 5 years from now so why not recoup some cash from the problem we all have a hand in creating together!
Future water scarcity is always in the back of my mind. To compact a day long rant into a few sentences: People don’t realize how wasteful we are with the current resources we have. Folks screaming out against GMO’s, but don’t realize we need those drought/disease resistant crops (importance will only increase in the future). The Colorado River doesn’t even reach the ocean anymore. Too much pumping of ground water, it’s not limitless. Stop reproducing so much!!!
Orrrrr you could not listen to me and just do what some assholes are doing: saving little bits of money to maybe acquire 1 share of Amazon stock @ ~ $1,000 just so they can go to their idiot friends who buy new clothes every weekend because they thought they found a “deal” but actually subconsciously do it because they have a deep void to fill within themselves that they are “getting into” investing