A few weeks ago, I was interviewed for an article on getting out of debt. The interviewer/writer asked me an interesting opening question:
Can I pay off my debt in one year?
Now, this may seem like a pretty cut-and-dried question for an article about getting debt, but there’s a rub: She didn’t tell me how much debt she was in.
The wonderful writer, Kit Warchol, titled her piece I’m 16K in Debt—Here’s What Finance Experts Told Me To Do, though I wasn’t initially provided with the 16K figure. It’s okay! I knew we’d figure it out, but the question’s kinda like someone asking whether they can lose all unwanted fat in 6 months without providing a BMI, current weight, or at the very least a glimpse at what’s percolatin’ beneath the oversized poncho. I wanted to be positive but really, how could I know?
Still, it is an important question and I wanted to provide a good answer. My solution? Use a credit/loan calculator, in a very specific way. Here’s my quote:
“To determine whether you can pay off credit card debt in a particular time frame, use a debt repayment calculator like this one by Credit Karma. You tell the calculator how much you owe, at what interest rate, and the time frame you’d like to pay it off in (one year). It will calculate the monthly payment(s) necessary to achieve this goal (and provides you with some alternate timelines). Do this with each credit card, and add up your monthly totals. Look at this number within your personal budget. Can you pull it off? All timelines are wholly dependent on how much you owe and how much you earn.”
FRIENDS! I DO NOT WANT TO LOSE YOU! PLEASE DO NOT CLICK OUT OF THIS POST because we are talking about a (BORING) financial calculator!! Unlike the graphing calculators of yore, these calculators are our friends. Credit Karma did a great job. They are clean and simple! Just like life before I found alcohol.
And, they are imperative to your success. For credit card debt, use the calculator I referenced above. For student, personal, and auto loans, use Credit Karma’s Simple Loan Calculator.
This is very much a first, exploratory step. It’s as much about facing the issue and accepting the challenge as it is about solving a problem with the available financial tools. This is an exercise in knowing what we are up against! You can’t change what you refuse to confront.
Still, I have this feeling that ordering you to “GO USE THIS ONLINE CALCULATOR!” is going to be about as popular as telling you to “GO PEEL A BAG FULL OF POTATOES!!”
EXAMPLE FRIEND (just like real!!): Her name is Dolly. She has 8K in debt and wants to know if she can pay it off in one year. Here’s the debt that Dolly is currently rockin’ on her balance sheet:
1. $2,000 in credit card debt at a 16% interest rate.
2. $5,000 student loan at a 6% interest rate.
3. $1,000 auto loan at a 5% interest rate.
Aiight. Let’s plug that ish into a calculator!
1. Pay off $2,000 in credit card debt at 16% in one year (use the credit card calculator):
To pay off the $2,000 credit card balance in one year, Dolly’s monthly payment would be $181.
2. Pay off a $5,000 student loan at 6% in one year (use the simple loan calculator):
To pay off the $5,000 student loan balance in one year, Dolly’s monthly payment would be $430.
3. Pay off a $1,000 auto loan at 5% in one year (use the simple loan calculator):
To pay off the $1,000 auto loan balance in one year, Dolly’s monthly payment would be $86.
So, can she do it? Can Dolly pay off all her debt in one year?
$181 + $430 + $86 = $697/month
To do so, Dolly would have to put $697 towards debt each month. Whether or not she can pull this entirely dependent on her personal situation—specifically, how much she earns and how much she spends on non-negotiables, or bills like rent, utilities, transportation, etc.
Now it’s your turn! Get in there and learn about your debt and the monthly commitment paying it off requires.
If your current debt can’t be alleviated quite so simply, it’s time to start making a game plan. You will need to choose which source of debt to pay off first, like all credit cards. For more on this and other considerations, read I’m 16K in Debt—Here’s What Finance Experts Told Me To Do! Kit, the writer, did a great job delineating a plan of attack. She did the grunt work so you don’t have to! As a bonus, it’s easy to read and will make you feel inspired.
For anyone that’s interested in comprehensive help with debt, Dave Ramsey is considered the industry’s leading resource. Here’s his website. You’ll notice the tagline on his “Get Started” page: You can wander into debt, but you can’t wander out. He’s right and he’s a friendly grandpa, so check him out 🙂