ABC Good Money Paying Down Debt Main Segment

Welcome to Good Money, your trusted source for personal finance advice. I'm Tonya Rivero in New York. Ever wonder if you'll ever see the light at the end of the debt tunnel? You try to pay down those mounting credit card bills, sometimes even more than the minimum balance. But between high interest rates and the need to spend, you may feel like you're running on a hamster wheel with no relief in sight. So what's the best way to manage your debt in order to reach your goal of financial freedom? For that, I'm joined by Ramit Sethi, ABC's personal finance contributor and author of I will teach you to be rich. Ramit joins me with an action plan to help pay off debt as quickly as possible. Hi there, Ramit. Great to see you again.

Nice to be here.

So do you feel that this day and age you see a lot more people who are complaining about being in debt? Because we certainly get questions about debt every day.

Well, I think we've always been in debt, but nowadays, particularly with the bad job situation, it's particularly bad. And people are talking about it, they're more open about it. So I'm not surprised to hear that you're getting more and more questions about.

So the stigma is no longer there.

That's right.

All right, so let's talk about what we need to pay off to really start to see some progress. You say even just paying an extra $50 a month can have some significant changes for us.

Yeah, even 50 or 100 bucks a month, it's astonishing. So take my friend, for example. He's got $20,000 in student loan debt. If he paid that off over 10 years, it would cost him about $230 a month. Right. It would take him 10 years. But if he added just $100 a month to that, it would cut it down from 10 years to six years. Cut off 40% of that just with an extra hundred bucks a month so you can make some big changes yet.

Where is this extra money supposed to come from, though? That's sort of like the million dollar question, right?

Well, you know, a lot of people talk about these sexy things. You can take home equity, line of credit, you can do a balance transfer. For most people, the truth is that you just need to prioritize putting an extra 50 or $100 a month towards your debt and automating that. If you can do that, if you can find that 50 or $100, you can make a big dent. And if you can't, you can use the CEO strategy, cut costs Earn more or negotiate some of the fees you're already paying and optimize your spending. That's CEO.

All right. And so you have multiple debt, though, and different cards, different loans. How do you prioritize?

So this is the magic question. There's two ways to do it. The first way is the mathematical way. That is, you want to pay off the debt with the highest interest rate. But I think that debt is more psychological than mathematical. So I would recommend something called the snowball technique. And in this way, you take all your debt, you pay the minimums on everything except for the smallest balance. And what this lets you do is it lets you make incremental progress and you're just knocking down debt after debt after debt.

And so you feel good too.

Feel great. You see it and you say, I'm making progress.

Absolutely. But now, what about those of us out there, though, who are in the very difficult situation of having just been laid off?

Yeah. Well, these companies know that times are tough and they'll actually work with you. Believe it or not, as much as they want to screw us, they also want to help us. So you can call them up and say, look, you know, times are tough, I just lost my job. What can you do for student loans? They'll often give you a hardship deferment. They'll do that. They have that built in for credit cards. They know that they'd rather get something than nothing. So they'll also work with you in that situation.

So you just have to call up and keep asking for the supervisor.

Yep. You keep calling. If they say no, you document it and you call again in a couple weeks.

All right. Now some of us, though, can just get so overwhelmed that they just don't know where to start. Do you have some help for folks like that?

Yeah. It's not surprising. The number one barrier with people is in debt is actually figuring out how much they owe. It's pretty overwhelming to sit down and write all this stuff down and figure out this massive number. So the first thing you want to do is just get all your paperwork in order, meaning just get your credit cards. And if you have any student loans, call them up and ask them to fill out some information for you. Tell them you want to know, how much do I owe, what's my interest rate and what's my monthly minimum payment. And that's just step one to get started.

Right. And you, of course, have this fantastic three step action plan, which I think is great, that anyone can follow. It'll help anyone. The first thing you say is to list all your debts. Right? Then you have to decide which to pay off first.

Yes. Okay, so this can get very confusing. What most people do, they just pay randomly here and there and then they never see any progress. I'm actually going to recommend a great service. It's my favorite calculator online. Go to whatsthecost.com and click on their snowball calculator. What you can do is you can plug in all the numbers you just collected and it will spit out exactly what you should be paying off first. And then it will tell you, this is the best part. What's the light at the end of the tunnel? On which date am I going to be debt free?

Oh, lovely.

Feels great.

Put that date up on your fridge and look at it every day.

Exactly every day.

So they do the hard work for you, the hard work of figuring it out. All right, now your third tip is to start those automatic payments. Make it mindless.

That's right. You don't want to have to depend on yourself or your own discipline. Just automate it. And this is very easy to do. Call up the lenders or use their website. You can do it in less than half an hour. Or automate your money so that you never miss a payment. By the way, this will raise your credit score. And don't worry about losing control. You're still going to know when the payments are going out, but by default, everything is just going to work.

Right now you have to have a budget though in place to make this all work. Because if you're having this money automatically taken out of your account, you got to make sure you have enough to.

Cover the rent you do. And like I said, you'll get notified before any money is taken out. But if you just set up some simple numbers to say I'm going to spend 100, 200, $300 and put it towards this debt every month, you're going to be golden in getting towards your debt free goals.

And what if though you feel like it'll take 10, 20, 30 years to pay off your debt and you are not putting enough aside for retirement?

It's a great question. There are really three things you need to do. Cut your costs. Whatever you're spending, you can look at that. We know that. Earn more. Most people never talk about this. How do I take my skills and turn them into income?

Please do tell.

We'll talk about that too.

A whole new show.

And then optimize your spending. So you know, call up your gym, call up your cable company, call up all the subscriptions you have and say, look, I just can't do this. What can you do? Often, one call will save you 3, 4, $500 that you can then put towards your debt.

And then do you really have to just take a cold, hard look at your lifestyle and maybe just shave off things that you previously thought you couldn't live without?

Yep, that's part of it. Absolutely. Sometimes you have to make tough decisions when you're in debt.

All right, Ramit Sethi, thank you so much for all this great information.

It.