1. Your credit card debt holds no value to you and your family.  At least you have a car to back your car loan, and even an education to back your student loan.  No, your memories from your trip to Europe that you put on your credit card hold no value to you and your family.
2. The interest that you are paying on your credit cards is making you poorer and poorer.  Most often, it’s the interest, late payment fees and additional interest that is crippling people, not necessarily the balance. 

If you have a variable interest rate, you should be even more motivated to pay your credit card off completely.  If you are paying 10% today, while the fed rates are at 0-.25% (essentially the rate at which your bank or credit card company can borrow money) do you think your variable interest rate is going to go up or down in the future?  You better pay it off now, because the rate you are paying is as low as it’s ever going to be. 

Can I negotiate my credit card rate?  Should I?

The answer: Yes and it depends.   Negotiating your credit card rate depends on whether or not it is really worth the time and hassle to do it.  Remember, the idea of this step is to pay off credit card debt as soon as possible.  If you are on track to pay off your cards in 3-6 months, it’s not worth your time to transfer your money or to call and get your 10% rate down to an 8% rate.  Your savings don’t outweigh your troubles. 

However, if you have a considerable amount of credit card debt (more than $5,000), your interest rate is over 10%, and it will take over a year to pay off based on your monthly bills and buffer zone, you may want to look at this option.  Here are some basic steps to negotiating with your credit card company.

1. Start collecting other credit card offers in the mail.  Keep track of what rates they are offering.
2. Calculate the difference in the interactive spreadsheet to determine whether the difference is worth your time. 
3. Call the credit card company to negotiate.  If they fail to negotiate, transfer this money to the company that made the better offer.  By the way, don’t ever use that old or new credit card again. 

Here is a more thorough explanation of the Simple Steps program to financial freedom.

Phase 1 – Extreme Intensity

Step 1- Save $1000

Before you start knocking out your debt, you will want to create a small buffer.  This $1,000 creates some padding for the emergencies that life can throw at you.  It also gives a good excuse never to use your credit cards ever again.  Keep this money accessible, but not too accessible where you are tempted to use it on non-emergencies.  I will discuss where to put this $1,000 in a later post. 

Step 2 – Eliminate Credit Card Debt

Once the $1,000 is set, we are going to tackle credit card debt first.  You will arrange your debts from the smallest to largest balance.  Pay the minimum on all monthly payments.  All extra money each month (see your buffer zone/profit margin) is put toward paying extra on your credit cards.  When you are finished paying off a card, you will roll that minimum monthly payment plus your buffer money to the next debt.  You will continue to roll these minimum monthly payments and buffer money until all credit card debt is eliminated. 

Step 3- Eliminate All Consumer Debt

Now that your credit card debt is gone, you will roll all of your previous credit card monthly payments plus your buffer money to your consumer debt.  Just like your credit card debt, write out your debts from smallest to largest balance.  Use the same process that you used with the credit card debt.  Keep going until all consumer debt is eliminated. 

Once your debt is gone, Party!  Celebrate!  Shout it from the rooftop (or at least send an email to me.)  Now you are ready to move on to Phase 2. 

Phase 2- Mid Intensity

Step 1- Emergency Fund (3 months of living expenses)

The same money that you have been pouring into eliminating your debt now goes to some fun stuff.  Your emergency fund stays with you and grows…in your name, not your lenders (albeit, it is not growing very rapidly at this point.)  At the minimum, you should keep 3 months of your total monthly expenses in a savings/Money market fund.  A good rule of thumb is to take your yearly salary (or average salary if you are dual income, married) and divide it by 10,000.  This will give you a more accurate monthly total that you should be saving for.

Example, $40,000 a year / 10,000 = 4 months of expenses suggested emergency fund.

Remember, you have a $1000.00 head start from your first $1000.00 saved via phase 1, step 1. 

Step 2- Retirement (15% gross salary)

Now that your emergency fund is set, roll this money into your retirement account(s).   Some items that we will need to visit at a later time include, but are not limited to:

1. What type of retirement account(s) to invest?
2. When should you invest?
3. What should I invest in?

I get excited about this step.  You should too.  This step truly begins your wealth building process.

Step 3- Personal Saving (10% gross salary)

Once you have 15% automatically going into your retirement account(s), we will come up with another 10% to put towards personal savings.   Your personal savings can be whatever you want it to be.  If you haven’t noticed by now, I like to work in sets of 3.  I typically have 3 savings targets.  Now is the time to save for those things that you love, but have been putting off while eliminating your debt. 

We are currently saving for a car, travel, and personal investing.  You can make these 3 things whatever you want.  What about a down payment for a house or money to start your own business?  This is the step to start doing this. 

Phase 3 – Low Intensity

Step 1- Pay off house early

Phase 3 is all about the really good stuff.  You already have 25% of your income going to savings with no debt.  You are about to become extremely successful. 

If you are paying off a 30 year fixed mortgage, your step 1 is to begin paying off your mortgage as if it’s a 15 year fixed mortgage.  The extra payment will go to your principal balance.  At the bare minimum, you will have your house paid for in 15 years or less.  That means if you are 30, your house is owned free and clear by 45. 

Ideally, you will want to pay off the mortgage in ten years or less. 

Step 2- College Savings

With the money you have from HAVING NO MORTGAGE (I purposely put it in CAPS in case you didn’t realize this) you can put it towards college savings for your children. Some might think that this is too far down the list and your children’s education should be given a higher priority.  I love my son more than anything, but he can work his way through college or get a scholarship.  I can’t take a loan out for my retirement.  You may not realize it, but you are doing your kids more of a favor by putting your retirement first. 

Start by putting $2000.00 per year per child into an Educational Savings Account or a 529 Plan.  More details on this step to follow.

Step 3 – Invest and Give

Have I mentioned that YOU STILL DON’T HAVE A MORTGAGE PAYMENT!  You should be able to breeze through the college savings step and move your money into giving and investing.  Simply allocate a certain amount or percentage to both your giving and investing fund, and use it as you see appropriate.  Investing does not need to be complicated.  In fact, if it becomes complicated, you are likely doing something wrong with your investments.

•  46% of Americans would not be able to come up with $2,000 cash within a month if they had an emergency 
• 25% of those earning $100,000 to $149,000 said they would be unable to raise the $2,000

If the majority is broke, then I definitely want to be different. 

In an effort to get out of debt, the idea of being different should remain in the back of your mind.  Lucky for you, you can follow our Simple Steps to get our of debt.

Simple Step 1: Save $1,000 emergency fund.  This is the beginning to being different.

Emergencies are stressful enough.  A small emergency fund stops emergencies from being catastrophes’.  

What do you do (financially) that’s different?  Come back soon and we’ll give you some tips on how to save that first $1,000 and complete Simple Step 1.