Credit cards. We all hate them, but we all depend on them. If you’re like me, you probably exercised your new found freedom as an 18 year old with a brand new credit card. Lured by the temptation of a free t-shirt and ability to “buy now and pay later”.
Last week I my car broke down and I was hit with a hefty repair bill. Struggling to find money to pay for it, I realized that there’s got to be a better way to deal with this problem then immediately running up my credit card debt.
I’ve gotten to a point where I realized that credit cards are not the answer. There’s got a better way. We all have to the ability to extend credit to ourselves…its called savings! And for the next year, I’ll be wiping away those credit card blues and replacing them with some sweet, sweet savings.
Hypothesis: I’ve come to realize that credit problems are a direct result of not building up your savings. Why would anyone carry credit card debt if they had enough money to spend? And I’ve held on to the belief that you should pay down debt before you save. But the problem with credit card debt is it continues to build unless you stop using it. So for the next year, I’ll pay off my credit cards and building my savings at the same time.
Here’s one way to go about it. Chop those bad boys up…That’s what I did last week. It felt good. Even liberating. I’ve read about some people who put their cards in the freezer or gave them to friends to hold on to and make them pay $100 to get it back. Whatever you do, I’d say put them in a place where it’s really hard to use them.
If I wanted to use them now, I would need to reorder a new card. Wait for it in the mail…with my luck on a ship would take about 3-4 weeks, then finally try to use them. With all the effort I put myself through, why would I want to do that?
Lower Your Rates With The Sailor & Soldiers Civil Relief Act
In 2003, President Bush instituted the Sailors And Soldiers Civil Relief Act which provides legal protection to active US military personnel. Section 206 of the Act, says that, “No obligation or liability bearing interest at a rate in excess of 6 percent per year incurred by a person in military service before that person’s entry into that service shall, during any part of the period of military service, bear interest at a rate in excess of 6 percent per year”.
What that means for active military is you can notify your credit card company and request 6% interest change on all outstanding loans and debts you incurred prior to enlisting. But there’s a catch. It may not apply to you if a creditor can show that the ability your debt is not affected by your military service.
What this means if you now make more money now as a result of joining the military (like someone fresh out of high school) then this provision make not help you. But if you’re like me and you were recently laid off from a higher paying civilian job, then enlisted to a lower paying military position, then it’s definitely worth your wild to look into. My credit cards have all been reduced to 6% for the term of my enlistment.
Automate Your Payments
Most banks have automated Bill Pay that you can set-up. I use ING Electric Orange account. I set-up automated payments to go from my checking to two credit cards every two weeks for the next year. To figure in interest and figure out how much I needed to pay each month, I did this equation…
Total Debt X 6% = Yearly Goal / 12 = Monthly Payment / 2 = Paycheck Payment
So now I have a bi-monthly payment that automatically comes out of each of my paychecks each month. You can do this with any other bill you have for the month. Take what you owe, divide it by two. I did this will all my other bills.
Automate Your Savings
If you ever used ING Direct, you’ll understand the value of having a checking and saving system like this. It’s online-only bank that allows you to open as many savings accounts as you’d like. So what I did was opened a checking account then opened several savings accounts attached to it. For every major financial goal I have, there’s an account attached to it. There’s one for travel, an emergency fund (my replacement for credit) and car maintenance.
So, for every paycheck, all my bills are automatically deducted. What’s left over is automatically transferred to a saving account. This allows me to think long term about my finances. Instead of a knee-jerk reaction to finances, I can think more long term about my spending. If there’s something I want, I can save for it, rather than buying it now and paying later.
Whenever I need to buy something, say a plane ticket home or a oil change for my car, I just transfer money from that savings account to my checking. I think dividing your money into accounts is more psychological than anything else. You’re telling yourself, I have X dollars for this purpose. My budgeting method before was to go online see how much money I had in my account. Now, every dollar spent has a purpose.
Only Use Cash For The Rest
Once my bills have been paid and my savings deducted, I have money left in my account. From there I can withdraw the rest in cash. A lot of people use the “Envelope System” where you withdraw cash and separate expenses into envelopes. Since I’m single with no children, don’t have an apartment or groceries (I live on a Navy ship), then budgeting fairly simple.
My cash withdraw is basically for entertainment expenses such dining out, going to the bar, movies and gas. What’s awesome is it’s guilt free money. Money that I’ve set aside for spending on whatever I want and when it’s gone, it’s gone. If I have a new financial goal I want to save for, then I can cut back in this area, open another saving account and automatically start saving money for that.
Read about the conclusion here to learn how I was able to completely eliminate my credit card debit and build a savings account.
Photo Credits: Wynlok