Marie-Claire AssekoDisclaimer:
The content of the Kaizen Gal website, its podcast and blog posts should not be taken as an investment or financial advice. I am not a financial planner, nor do I pretend or intend to be one. I am solely sharing what works for me, what is specific for me and for the stage of life that I am in.
🡪 Always make sure to do your own research and due diligence before making any investment or financial decision.
The goal of the Rags to Riches series is to share tips and habits I picked up and honed over a seven-year period of time in order to help me manage and automate my personal finances. Financial anxiety is real and scarcity mentality will hinder you from expanding the reach and ROI of your money.
So here is my 5-part story on how I went from being thousands of dollars in debt, expelled from my apartment to buying a 3-bedroom with basement house by myself in 6 years. My rags-to riches story, except I am not that rich…yet ^^
As a believer in Jesus, I am aware that God is the One who makes the impossible possible. My life is a continued demonstration of His undeserved Grace towards me and us all.
This is a summary of the Season 3 – Episode 1 of The Kaizen Gal podcast titled “Paying down or managing debt”, the first installment of my series on Personal Finances.
My story starts in 2015.
I have close to $10K of debt to my name due to unpaid rent (family reasons) while I earn around $35-38K per year.
My first step: pay down and manage debt. Here’s what it meant for me.
Create a Budget And Stick to it!
A strict budget helped me manage my money better: by knowing what was coming in and out, I was able to decrease my expenses and dedicate that delta to paying down debt. It’s all about making a plan and sticking to it- one that will set you up for success in paying off your debt: paying down debt is not easy, but it becomes much more manageable if you’re committed and have the tools to make good money decisions!
It doesn’t take much to get started on the right track:
- Identify what you need most from the income coming in (the essentials and fixed expenses);
- Figure out how much of what comes in goes towards those needs (how much can be allocated towards variable expenses);
- Then, keep track of everything so that you have no surprises at the end of the month.
I personally use the Mint app (update: Intuit announced that they’re shutting down Mint so I moved to) Monarch Money and an Excel sheet (template here!) I built inspired by a combination of the following resources:
- Patricia Bright’s Youtube episode about budget;
- One Big Happy Life’s One Year Spending plan.
It may seem like an overwhelming task at first, but trust me, better yet, trust my journey: getting into the habit of tracking your expenses and sticking to a strict budget will help you save and meet your goals faster than ever before!
Negotiate a Debt Repayment Plan
I did not that it was possible until the coordinator of my account at the debt collection agency told it to me: I could actually negotiate a lower total payment if I formally committed to a repayment plan with a mid-term deadline!
Basically, a debt repayment plan can help you reduce your monthly payment or offer an interest-free period while you continue making payments. For instance, if you have difficulty making debt payments (mortgage, credit cards, credit lines, car, etc.), you could ask to defer payments or restructure the loan. However, this will only partially discharge your debt: the interest rates may be reduced so you have less pressure to pay the debt off in a short time. Before taking any debt relief measures though, I highly recommend that you consult a financial advisor to avoid worsening your situation.
In my case, after careful thinking and planning, and many discussions with the account coordinator, we agreed (in writing!) that if I paid $6K in 35 days, the agency would forgive the remaining $4K.
Don’t ask me what the agency gains from doing that, I was too happy to inquire further!
Key learning: any debt, including a bill, can be negotiated. Don’t be afraid and ask, you’ll lose nothing (but face and pride) but you might gain something out of it (preserve dignity).
Understand The Billing Cycle of Credit Cards
Paying close attention to a credit card’s billing cycle is part of managing your debt better. For the sake of brevity, credit card companies generally charge interest on the balance of an account. The balance is the outstanding balance on a card minus any payments made to date. The more you can pay off each month, the less interest you will pay, and the quicker you will be able to get out of debt.
There is typically a 2-week grace period (the first two weeks of your billing cycle) during which you don’t incur interest on your balance. So I set up alarms to remind myself to pay my balance in full before the end of that grace period. That way, I didn’t pay any interest at the end of the cycle even if I had a balance after that 2-week sweet spot.
Something else to consider: maximize your monthly payments beyond the minimum payment. If you only make the minimum payment each month, it will take you longer to pay down your debt. Which means that you will also pay a lot more interest over time. So, for as long as possible, make your monthly payments as large as you can afford!
Link Debt Payments to Budgeting Tools
Paying down debt is a process that takes time. Tracking how much you are actually paying off is key not only to not fall off track but also to motivate you to keep going. One way is to keep a log of your payments, or categorize them in your budget tool.
Honestly, I do not know where I would be today without the Mint app. Not only does it allow me to (re)categorize expenses and incomes, it also provides insights (average, minimum, maximum, etc) of my personal finances over different periods of time (year-over-year, quarter-over-quarter, month-over-month, week-on-week).
With the app, I had a detailed view of how much I was paying down each month. It made my goal to slowly increase my payments very easy to track. Also, seeing how much interest the bank was getting out of me at the end of each quarter was another incentive to NOT let this interest cost go up.
Set up an Emergency Fund
Something I often see: people focus on paying down their debt and an unexpected event has them dip again in the debt bucket! How unfortunate!
Setting up an emergency fund while you’re paying debt (if you don’t already have one), no matter how small the amount you can contribute is, will allow you to NOT rely on your credit card whenever an emergency occurs. And even if you end up using your credit card because your emergency fund does not have enough money in it, at least you will use a lesser amount of credit. For that reason, an emergency fund is one of the most effective ways to prevent getting into (deeper) debt in my opinion!
The general rule of thumb is to set aside 3 to 6 months’ worth of living expenses.
Typically fixed expenses, but I incorporate some provision for variable expenses and I aim for 6 to 9 months.
Automate Bill Payments
If you can schedule your bills to be paid automatically from your account, please DO it!
Having to remember when each bill is due is a headache that can be avoided. So early on, I chose to set up automated payments and I’ll never go back.
That means my bills are always paid on time, I avoid late fees and penalties and, so I save money over time #GirlMath.
TL;DR – Pay Down or Manage Debt
In this article, I purposefully did not include recommendations on which debt to tackle first. It was not a focus of mine at the time. Just getting started with tracking and understanding my finances was a big step!
- Adopting a strict budget will give you visibility on how your spending impacts your capacity to pay down debt;
- Any debt can negotiated. Be courageous and have the conversation;
- Actually understanding the billing cycle of your credit cards, or any debt you have, will save you high-interest costs;
- Track your debt payments as a way to motivate yourself to maintain your pace, or even increase it;
- Set up an emergency funds to NOT use credit cards whenever there’s an emergency;
- Automate every single bill possible and deactivate any auto-renewal/reload.
No matter how you look at it, having debt can negatively impact our mental and emotional well-being – on top of threatening our financial security.
Whether you are trying to pay off your student loans, get ahead on your mortgage payments, or manage your everyday expenses better, there are many ways to pay down or manage debt. The key is finding the right strategy for you and sticking with it.
Onto the second post of the series!
