“When you find yourself in a hole, stop digging.” –Will Rogers
We wake up one morning, and face the realization that we’re now 50-something-years-old, and staring right in the face of retirement, specifically debt before retirement.
Several chilling realities set in and there’s nothing to it but to face our situation. If we have a three- to six-months emergency fund built up, a regular deposit into our retirement savings plan, and we haven’t run up unruly credit card debt trying to keep up with the Joneses, we’re probably in good shape. The main caution here is that we avoid going deeper into any other kind of debt.
The category many more of us fall into is much less cut and dried. We may have gone at our retirement savings in a hit or miss way that usually means our savings plan is the last entry in our budget. In other words, we pay into that only when there is a little bit left over after we pay our credit card bills. That, of course, never happens and we’re once again saying, “I’ll start that next month.”
If that’s the case, let’s take a critical look at what we should be doing going forward. Save or Pay is a legitimate question. Simple math might help us determine our best course. We all know that we pay dearly for using our credit. Bank credit cards charge a much higher rate than the interest we get off our savings—no matter how we try to save. If we pay 15% interested on our unpaid balance on credit card debt but our savings account or CD is paying only .01 to 2.2 percent interest, we’re actually losing money, right? It is said that if we have $10,000 or more in credit card debt and only pay the minimum payment each month, it will take us over 40 years to pay off that debt. Get serious! If we are already over age 50, we’d be paying on that until we’re in our 90s.
How do we get into such situations in the first place? Most of it is living in our consumer driven world without exercising necessary restraint, buying things we want instead of limiting our expenditures to things we need. Since we cannot roll back time, how do we get out of this uncomfortable situation? It’s no rose garden. We’ve danced with procrastination too often, so let’s not ignore the fact that we now have to pay the piper. But, believe it or not, the process can actually be exciting and (in an oddball sort of way) almost fun.
The steps we take now make a lot of sense if we look at it as a challenge:
- First step is to do a proper analysis of where we stand. We begin by rationally determining our expendable income. In other words, how much income is available after we pay the mortgage, buy groceries, purchase clothes, and make the car payment. (Remember grocery and clothing budgets can be cut back, if necessary.)
- Second step is to create our budget using the figures we’ve worked out. This time, we’ll put our priorities in a different sequence. First thing is to determine how much over the minimum payment required we can pay on to our consumer debt. Note that at this point we’re not talking about the mortgage which already has a low rate and some of that debt may be depreciated off our income taxes plus carry tax-deductible interest. What we want to pay down first are those department store credit cards which charge the highest rate of interest. Then we’ll tackle those bank credit cards that may have high rates—especially if we’re late with payments. We should also note that the credit card companies, as a rule, will not change the due date on your billing cycle. So, if you get paid on the 15th and the bill is due on the 10th we need to plan spending so that there’s money to pay up by the due date.
- Third step is to determine our net worth. Basically, that is the difference between our available cash and savings minus the sum of our outstanding debts. This can be an eye-opener that helps us decide what to pay first. If our assets minus our liabilities equals zero, that’s our net worth. If we have savings equal to our liabilities which we pay off with our savings, our net worth is still zero but we’ve plugged the hole that’s been draining us in the form of monthly interest.
- Forth step is to plan savings so that we have an emergency fund available should it be needed. Making extra payments on a debt will speed up getting it paid off, but your