Need help with a financial plan of attack
December 28, 2017 1:10 AM   Subscribe

In the spirit of the New Year, I would like to face my financial circumstances, which are quite dire at the moment. Help?

For the decade that I have been a legal adult, I have been moving steadily from working class to middle class, thanks to my late blooming interest in a STEM field that pays well. Unfortunately, I have made some iffy decisions on the way, due to depression and just plain financial illiteracy.

I have about $20,000 in credit card debt. That amount has been shrinking steadily, meaning I no longer use credit cards, but have until now been mostly making minimum payments for years. I relied on a credit card to move cross country for a job making triple the salary I was previously making (from ~$35k to ~$100k). I now live in a much more expensive area, and pay about $1500 a month in rent, plus ~$600 on credit card minimums. My credit is in the mid-600s. I have been working this new job for six months and am finally getting back on my feet to the point that I have amortized the costs of moving, but have no savings. But I am ready to start tackling this mess.

Some more details— I deposit 10% of my pretax income to a 401k with 100% employer matching. It’s possible that next year I could earn a bonus hat would wipe out 50% or more of my credit card debt; however, this is obviously not a certainty. I am still in the probationary period at my job, and everything is going well, though of course I’m terrified of losing it.

Another huge issue is ~$100k in student debt getting my Masters degree that led to the much better paying job. The training was necessary and I wasn’t in a position to get into a PhD or otherwise receive funding. I’m still not sure whether it was the right choice, but what’s done is done.

I’ve done the math and could pay off the cards with all their respective interest rates in 1 year, paying $2000 a month on credit cards. This would require requesting a year of forbearance on my student loans (meaning the interest would pile up while I’m not paying them), but the cards would finally be finished. I would then spend $1500 on rent and have about $900 a month left for other expenses (after taxes and 401k).

I’m honestly not sure if this is a good plan. I wish I had more savings. I’ve read conflicting things about student loan debt, but it’s a low priority for me at the moment, as if I were to lose my job, my IBR payment would shrink considerably, and I could handle it. It’s the revolving debt that really scares me at the moment and feels like the monkey on my back.

I also know that my rent sounds insane, but I actually have roommates and it’s not too far out of the norm here— it would be possible to search for something better, but my moving circumstances were not ideal.

If this were you, how would you approach this? Thanks for all your help.
posted by anonymous to Work & Money (23 answers total) 17 users marked this as a favorite
Presumably the credit card debt is at some relatively usurious interest rate compared to the student loan debt? I would sure pay it off as soon as I could.

If you want to read a lot of people's opinions about this stuff, you might enjoy checking out the personal finance subreddit. They have a wiki page about priorities regarding incoming money.
posted by value of information at 1:59 AM on December 28, 2017 [5 favorites]

First, breathe. I've been in a very similar position to you, with a significant amount of debt over my head, high monthly minimum payments that needed to happen, most of the whole shebang you're going through right now. This problem does NOT have to be solved in one year. It didn't take you one year to get to this point, and while I understand the overwhelming desire to be rid of this problem once and for all, this is a marathon, not a sprint.

First, check out this Reddit thread on personal finance. It sounds like you have parts of this figured out (from what I'm reading, you've created a budget and are maxing out your employer match, so you're well on your way!). I'm a strong advocate of building up some sort of emergency fund before you focus highly on reducing your debt - if you do happen to lose your job, it'll serve as a cushion that will keep you from having to immediately start piling debt back on, though you need to balance that against your credit card debt.

Second, I'd reconsider my budget. Calculate what it would take to live on ramen (or whatever baseline you feel comfortable with), transport costs, utilities, cell service, etc. and add it to your rent and loan // credit repayments. This is your new baseline to evaluate everything else against - your true monthly minimum expense.

Third, I'd continue to pay the minimums on my cards until I had, at minimum, a one-month buffer of all monthly expenses saved up in cash. This will help you feel less worried about the loss of your job (as you won't immediately need to go back into debt) and provide a buffer against any sort of unexpected illness or other problem that would temporarily reduce your income (like when mono put me down for two weeks last year :( )

Fourth, once you have your buffer, subtract your minimums per month from your income per month. This is your 'free' money - money that you can do whatever you want with. Then, personally, I'd cut that 'free' money in half. Half would go towards repaying my credit cards. (I'd pay down my high interest ones first in order to minimize the total amount I'd need to pay, but this is a big debate among people who talk about this sort of thing on the internet. Many advocate completely eliminating the balance on the smallest of your debts first, to get the weight off your shoulders and allow you to free that cash flow towards other cards or other projects. Only you can choose which will make you feel the most comfortable.) The other half is yours to do with whatever the hell you please. Eat better food than ramen, see some movies, do whatever.

Again, PLEASE don't think of this as a problem that has to be solved in one year. It's tempting, especially since you see a way to eliminate this problem in one swoop. But you'll still have your student loans, and... honestly? For me? Man cannot live on bread alone. I personally would be exhausted by devoting the overwhelming majority of my free resources to burn out my debt. A significant portion? Sure, and I've done it before (I got out from under $10k worth of consumer debt in ~3 years after jumping my salary from 40k to 60k per year, specifically by doing something very close to what I've recommended above). But don't commit yourself to a shoestring budget to try to blow this out of the water, unless you won't be able to rest without doing so. You're already doing an AMAZING job by budgeting this out and committing to paying this down. Just don't think you need to undo in one year what it took several to build up.

TL;DR: what I would do:

1) Read that Reddit post - it's got very good basic information about what you should be doing, and you're already doing a lot of it
2) Re-compute your budget. Include an honest estimate of minimum food, transit, cell phone, and other expenses you need to live, and treat those at the same level you treat your credit card minimums.
3) Start by building a 1-month cash buffer of all expenses (minimums for credit cards and student loans, rent, utils, ramen, etc.) to guard against unexpected events.
4) Calculate your 'free' income (anything above your rent + credit cards and loans + the minimums you calculated to need to live) and split it in half. Half goes to you and not eating ramen. Half goes towards repaying your credit cards. I'd recommend attacking the high interest ones first, but completely eliminating balances to reduce minimum payments is viable as well. (Don't cancel the cards once you're done!)

Best of luck! You can do this! Sorry for the wall of text! And congrats on making such an incredible leap in earnings!
posted by isauteikisa at 2:24 AM on December 28, 2017 [12 favorites]

Some financial advice that stuck with me when I read it ages ago: debt isn't just mathematical, it's also emotional. This means that you need to find a strategy that targets both. One I know of is the snowball strategy- this is where you pay the minimum on everything, except for the smallest debt (is it your credit card?) This one, you throw every thing at- you avoid eating out etc etc. Once this is paid off, you then take what you were paying on that debt, and throw it at the next smallest debt and so on, until they are all paid off. This might not pay it off the quickest, but it knocks out debts for good.

Put a little into savings as you go, too. (Treat it as another 'debt' you have a minimum on.)
posted by freethefeet at 3:05 AM on December 28, 2017 [8 favorites]

Here's a snowball calculator you can use to figure out what order to pay things down in.

Agree with above posters saying it's important not to deprive yourself too much. It's okay to budget for treats and fun stuff, and it's that that's finally kept me sticking to a budget after several aborted attempts.

Can you get a cheaper credit card and do a balance transfer of some of the debt at all? A loan? Credit union? Reducing interest rates will really, really help.

Also highly recommend YNAB or similar. Bit of a learning curve but I really like being able to see all my cash there and accounted for and knowing what I can spend on treats each month. Never buying lunch or coffee at work is unrealistic. Budgeting £5 a day or whatever for lunch at work is much better - it keeps the spending under control but doesn't deprive you. If you then make lunch or take in leftovers one day, you get to buy a coffee two days! Rewards are good.

If you budget to pay $2000 a month towards credit cards, bear in mind that's not a fixed thing - if you have a rough month and can only afford to put $1000 on them that month, that's okay. Maybe you could plan to put $1500 on them but leave yourself some wiggle room so if your budget goes well that month, you can put the extra $500 on too. If not, fine.

I'd argue it's not worth putting anything into savings (aside from pension) until the debt is gone - you'll pay more in debt interest than you'll make in savings interest, and in a super emergency you can use the headroom you've made on your credit cards.
posted by corvine at 4:25 AM on December 28, 2017 [6 favorites]

I basically want to echo everything isauteikisa wrote. I once had to dig myself out of a similar situation and had a few lucky strokes, and I'm going to try and address the things you put in your post but it's sort of turned into a wall of text -- hope you can find some useful bits!

It sounds like you have no liquid savings account to fall back on, and your takehome (after rent and debt) is manageable. And you have a great retirement savings regimen! 10% is fantastic, especially with a 100% employer match! Keep that up, and do not sacrifice it unless, like, the world ends. 40 year old-you will be so happy with now-you, and it's honestly very comforting to see retirement building up and know that you have something under control in a positive way.

So, right. First thing is to know where you are at in terms of active spending: make a real budget - look over your online banking and compile all your actual purchases, and don't skip over the "coffee" or "bought a magazine" one-offs too, because you'll notice those if you suddenly declare them all out of bounds. You may find that your budget wipes out, like, $800 of your $900. Or you may discover the sudden will to go cancel a bunch of monthly recurring costs you've been meaning to get around to canceling and find an extra $100 a month. Anyways, my point is that you need to know what your monthly spend is and where it's actually going first. And don't suddenly, brutally slash your entertainment budget to 0 because you can't justify it, it absolutely will aggravate your depression if you can't have so much as a coffee without feeling guilty. There's no point in trying to make yourself happy by getting the credit card monkey off your back if you only add a brand new "either I'm miserable or I'm guilty" monkey. Here, I speak from definite experience.

Next, planning your attack. The first thing I advise is to cover your bills and make only minimum payments so you can save until you have at least $1k in the bank. This is your emergency fund. For me personally, I prefer having at least one month of bills in the bank, which for you sounds like closer to $3k, but $1k is enough to start. It's your insurance against any single unexpected event throwing you out of whack, and it gives you a little psychological breathing space. That is the most important thing I learned from my experience, and having that buffer saved my sanity at least once. (If you have to dip into the savings, go back to step 1 and start paying minimums until you rebuild the savings.)

And you need to make a choice, above and beyond choosing which card to pay off first based on APR/balance: either you don't touch the cards from here out, or you choose one to pay off first so you can use it for ordinary purchases again if necessary. Check the terms for the cards and see if new purchases on a card with an existing balance start being charged balance immediately or if they have a grace period despite a balance. If you have to use the card for something, whether it's something small like you forgot your debit card but have to pay for your lunch or you have to purchase emergency plane tickets, know what it means to you and your plan, and be comfortable that you've already planned for this and you made the right decision in the moment.

Once you've got savings and new revolving debt taken care of, as to forbearance on the student loans to pay credit cards: it depends on your interest rates and your comfort level. My bestie here is Excel. I run spreadsheets of multiple scenarios and play with the numbers until I find what makes me, personally, feel comfortable and satisfied that it's a good decision. I don't necessarily choose the scenario that books tell me to do, nor the scenario that gets all debts paid as soon as humanly possible even if it means I eat beans for two years, just a scenario I could live with. Then I just committed to it. Automatic payments are your friend here. I had Quicken update every day and I checked new downloaded transactions every morning before work to make sure it got categorized and accounted for and wasn't a surprise. And I updated my Excel scenarios with real progress, because there is nothing better than seeing a line graph going in the right direction over time. In your shoes, I don't think I'd ask for forbearance on the student loans just because it would make me more comfortable to make some progress everywhere rather than to hardcore snowball one aspect, and would instead plan to snowball all the student loan debt once all the high APR credit card debt was gone (sort of like relaxing after the hard part was done), but you'll know best what suits you.

For actual card payback method: I went with an aggressive combo of snowballing while playing arbitrageur with balance transfers. (That is, I focused on paying off one card with a large balance first and then once that was done and they started offering me nice things again, I transferred other cards' high-APR balances to 18-month 0% promotional APRs, attacked the remaining high APR balances, and only attacked the low APR balances after high APR debt was paid off. If necessary you can transfer the already-transferred balance to gain another 12 or 18-month low APR period. Don't forget to account for the transfer fee, because the transfers aren't free.) I have to stress that this approach is only good if you are going to be incredibly on the ball about managing who gets what, when, and exactly when your terms are going to change and you have to take action again -- Excel is a key friend here too. If you want to set it and forget it, playing credit card keep-away is not a good idea; it'll be better to choose a monthly payment amount and set it to just go on your cards and periodically check in and adjust. Like I said above, you'll know yourself best, pick the strategy that you are likely to be able to stick to and that will not stress you out.

Now for the fun part - bonuses! I was also in a position where I got windfall bonuses. My advice? Split it half and half. Half for debt, half for funsies. Funsies can be vacation or a fancy kitchen gadget, or just chucking it in savings, or if you want you can apply it to the debt. The point is, only half of that money (whatever amount it is) is definitely going to go to your debt, and the other half is up to you to decide. That solved the guilt issue for me. Also, it's okay to play with bonuses in your Excel scenarios, but don't bank on them. Know what your plan is without bonuses, and then that will make any bonuses you do get even more delightful to spend whether it's on debt or that fancypants new Kitchenaid you always wanted.

The amount of your "not pre-allocated" income, that you have left over after your bills and your budgeted expenses, that you choose to go to paying down your debt vs spending like a normal person not burdened with debt will be a moving target. You'll probably find over time that this amount changes. Sometimes you'll make an exception so you can shift money for something you really want. One thing I find helpful (which I do still, even though now I have no student or credit card debts) is just to save up for things I want. I have an Excel sheet for it (of course). I knew last summer that I was probably going to need to buy a new laptop, but I don't want to dip into my emergency savings, so I set a date next year, divided up the amount, and now I save that portion every month so that next year I can buy my laptop with zero drama. Same with 3- or 6-month expenses; it's way cheaper to pay my health insurance semiannually, but it's way easier to pay in monthly installments: so I "pay myself" in monthly installments (i.e., I transfer to savings every month an amount designated for that payment) and fork it over as a lump sum to them every so often. The power to manage these things is one of those things that I gained with time, basically once the monthly uncertainty-panic-doom phase was over and I had more freedom to save up the extra monthly payment for the future at the same time as paying the real monthly payment. Getting one month ahead of expenses was absolutely a game-changer (e.g., my January rent doesn't come out of January's pay, it comes out of December's), but it came over time. Basically, for me, just having a plan -- removing as much uncertainty as I can -- makes literally everything better.

And good luck! It sounds like you're positioned much better right now than you have been, and making a great start on redeeming those dire financial circumstances. If you want to read something on the topic, Elizabeth Warren's All Your Worth is one I love recommending.
posted by sldownard at 4:26 AM on December 28, 2017 [3 favorites]

I just wanted to second that going to pure austerity can be ultimately self defeating, but setting "no spend days" (Tuesdays for me) or even a "no buying new clothes/tech/coffee month" regularly has been a really good tool for me.

+1 to the snowball method mentioned above; paying off some of the smaller cards first, even if not the highest balance or largest interest is amazingly helpful psychologically.
+1 to continuing to save the 401k; future old you will be VERY happy that you have that saved
+1 to spending half your bonus on fun (keep in mind that you can also shove some of your bonus into 401k, so that's what I usually do, save half, and then spend half)

I personally would see what other options you have for putting the student loans in forbearance, but continue to pay SOMETHING towards them; you maybe able to negotiate a smaller payment plan. it might be a better option to opt for 6 months of forbearance than the full year, but you do need to talk to someone about that.
posted by larthegreat at 6:15 AM on December 28, 2017 [1 favorite]

You should investigate a number of other strategies that can help reduce the credit card interest - namely, with your now six-figure income, you may qualify for a low-interest line of credit or a 0% balance transfer credit card that will allow you to make the same $600/month payment for a while but have all of it go towards principal.

I've made this move on the condition that I closed out my other cards (which seems doable for you as you're not accumulating debt) and it really helped - I was able to pinch my budget a little bit further during the transfer period and paid I think $9,000 in principal down in 6 months that it was not accruing interest. It did wonders for my worries and my ability to handle my debt as my minimums even were cut in half.

Go talk to a bank - you're in an income bracket where credit unions and banks really want you as a customer and may be able to offer you a suite of products that make it easier to chip away at the principal while also maintaining your other debt commitments.
posted by notorious medium at 6:48 AM on December 28, 2017 [5 favorites]

Because no one has mentioned him yet, Dave Ramsey’s podcast and Financial Peace University products may be appealing to you. Be warned that he approaches the world from an (old school, decidedly not Trumpian) conservative / Christian bent. I am neither conservative nor Christian and can look past it, but ymmv. There are a bunch of debt free screams on YouTube that will serve as good motivation as you move through this period.
posted by suncages at 6:50 AM on December 28, 2017

There is one really simple rule about loans: if you have more than one, always pay them off at the minimum allowable rate except the one with the highest interest rate. That one, you should seek to pay off as fast as possible.

This remains true even if you've got a huge loan at a low rate, like a student loan, and a smaller one at a higher rate like your credit cards.

To see why this is so, start by considering a case where you start with just two loans: $20k of credit card debt at 20%, and $100k of student loan at 5%.

Let's look at the simplest case: you don't make any payments whatsoever, and let both loans just rack up interest.
Year	Credit card	Student loan
0	$20000		$100000
1	$24000		$105000
2	$28800		$110250
3	$34560		$115763
4	$41472		$121551
5	$49766		$127628
Even starting from a fifth of the size, the credit card debt has now grown by $29766 while the student loan debt has only grown by $27628. Obviously as the years roll on, the credit card debt is the one that will spiral out of control and wreck your finances for you.

The absolute smallest amount you ever need to budget in order to stop any loan growing over time is just the interest that comes due on it. If you can't pay even that much then you're underwater, with more debt than you can service. It sounds like at present this is not you, so let's move on.

Minimum yearly budget for this pair of loans, then, is $4000 for interest on the credit card debt, plus $5000 for the interest on the student loan, which comes to $9000. If you were to spread that across both loans according to the interest each is charging, then obviously in five years you'd end up in exactly the same amount of debt you are in right now: no growth, but no shrinkage either. You could keep on paying out your $9000 lumps literally forever and still remain in debt.

Now let's see what happens if we just let the student loan blow out while applying the whole of that repayment budget toward the credit card loans first, only resuming student loan repayments once all the credit card debt is gone.

To simplify the arithmetic I'm going to assume repayments made once per year, and I'm going to calculate the interest due in any given year based on that year's initial balance. In fact you'd be making smaller payments more frequently, but the overall lesson doesn't change.
Year	Credit card	Student loan
0	$20000		$100000
1	$15000		$105000
2	$9000		$110250
3	$1800		$115763
4	$0		$114711
5	$0		$111447
The student loan that got completely neglected until year 4 has indeed grown, and is now $11447 worse than it was to start with. But $20000 of credit card debt has disappeared entirely. Compared to the no-growth, no-shrinkage scenario, you're already $8553 better off. And if ASIC's loan calculator is to be believed, keep throwing that yearly $9000 at the now-somewhat-grown student loan and it will be gone in under twenty years.

If you run a bunch of these scenarios, you will find that devoting as much as your loan terms allow of whatever repayment budget you have to the higher interest loan first always makes the best possible use of any given budget.

It follows from this that if you can take on an entirely new low-rate loan and/or add additional amounts to existing low-rate loans in order to pay off all the loans you currently have at higher rates than that, then you should do so. This is consolidating debt, and it's a good idea.

If I had tens of thousands of dollars in credit card debt, the very first thing I would do is seek to borrow, at a lower rate of interest, an amount sufficient to pay off all of it. Credit card interest rates are set insanely high to cover the ridiculous amounts that their completely insecure transaction model loses to fraud. If you're not using your credit cards, then you're not exposing your credit provider to those costs and you have no reason at all to keep paying for them. With a decent credit rating and a stable current income, you should be able to find a bank or preferably a credit union willing to extend you a personal loan. Even an unsecured personal loan should come in at roughly half the interest rate your cards are costing you.

If you can't do that, then you should at least seek to defer your student loan repayments for as long as it takes to pay down the credit card debt at the fastest rate your total repayment budget will allow.
posted by flabdablet at 7:13 AM on December 28, 2017 [7 favorites]

Just wanted to chime in and emphasize that YNAB has a lot of useful things to say about clearing out debt, budgeting to manage debt, and planning money well. I find the tool worth it for managing my budget etc (it keeps me honest about every dollar that passes through my hands), but the method for prioritizing and being realistic is good even without paying for the app. Per @corvine, it does have a learning curve, but it also has live online classes every day addressing things like this (including your specific situations), and I've found those really helpful for when I need to realign my thinking with my income / spending.
posted by beccasaurus at 7:32 AM on December 28, 2017 [1 favorite]

My suggestion is maybe a little different from the other answers - it's to not stress yourself out too much about min-maxing your debt repayment strategy. Sometimes the desire to be maximally efficient and pay the absolute minimum interest over time (or whatever) can backfire by either creating a barrier to getting started or by making it too complex a system to maintain.

I had a low 5-figure credit card debt and mid 5-figure student loan debt. The credit card is all on one card and at a relatively low rate. I just made a budget (using YNAB) that included putting as much towards the card as I comfortably could as an automatic payment while also building up my savings. No thinking about it, no strategizing. I'll have it paid off in a few months and I can't wait, but I didn't live on ramen in the meantime. I gave up most travel but not gym memberships, gave up expensive clothes and shoes but not buying healthy groceries, gave up super fancy restaurants but not going out entirely. LIFE IS TOO SHORT.

The student loan is a thing I am comfortable paying just the normal payment for essentially the rest of my life, so that's what I'm doing. I frankly do not care that I "should" be paying it off sooner - it's at a ridiculously low rate and the payments are affordable. If your payments are higher, definitely consider working on paying it off sooner after you've tackled the credit card debt, because you don't want to have to worry about $900/mo debt payments if you lose your job or when you retire. But my payment is like $250 so I'm pretty shruggo about it.

tl;dr: You're doing great, just put what you comfortably can towards your debt, direct some money to a savings account automatically, and don't put any new charges on your credit card. Just make progress and it will start to feel good.
posted by misskaz at 7:40 AM on December 28, 2017 [3 favorites]

Central point made by the YNAB "budgeting to manage debt" page:
You got into debt because, at some point (and perhaps at a lot of points), you spent more than you earned. This puts your budget, your priorities, and your sanity at risk.
That's one way to look at the process of acquiring debt. It's not the way I look at it.

The way I see it, credit is a tool for trading income streams off against lump sums.

If what you have right now is an income stream or even a reasonable expectation of an income stream, and what you need right now is a lump sum, you can get the lump sum as a loan and devote part of the income stream to paying that off.

If what you have right now is a lump sum and what you need right now is an income stream, you can lend your lump to a trustworthy debtor to generate one.

Debt is a perfectly reasonable thing to take on deliberately. People do it every day at no risk whatsoever to their budgets, priorities or sanity; in fact taking on a debt is an expression of priorities. Most people who buy houses, for example, do not save up for them, but debt finance them with a mortgage. Most people unfortunate enough to live in a country with inadequate government funding for education do not save up to go to college, but get student loans to pay for it.

But a loan is not a solution for the common problem of ongoing expenditure exceeding ongoing income. If that's where you're at, getting a loan will make the problem worse, not better, because a loan always costs more than the amount initially borrowed.

To my way of thinking, issuing credit cards to people who do not fully grasp this last point amounts to criminal irresponsibility. If there is finger wagging to be done about debt, let's wag them at bankers, not at those they exploit.

I just made a budget (using YNAB) that included putting as much towards the card as I comfortably could as an automatic payment while also building up my savings.

Given a scenario where I have credit card debt but no savings, I can't see how spending less on credit card repayments in order to build up savings (beyond a small cushion against the inevitable occasional unforeseeable expenditure) actually makes any sense.

I'd be paying the debt down as fast as I possibly could within a reasonable budget framework (I agree that living on ramen if you can actually afford not to is a bad idea), but that budget framework would not include a single cent toward long term savings.

If I'm being charged twenty cents per year for every dollar outstanding on my credit card balance, but offered only two cents per year for every dollar I put into a savings account, then as long as my income is sufficient to meet my outgoings and I'm trying to decide what to do with the surplus dollars, why would I choose to lose the eighteen cents?

I'd be budgeting to pay the credit cards down as aggressively as my income allows, with the expectation of continuing paying that same rate into long term savings/investments once the debt is all gone.

The only way I can see sense in putting money into savings that I could be using to pay down debt is if the savings account pays more in interest than the debt is costing. And if that set of circumstances applied to me, I'd be a bank.
posted by flabdablet at 8:20 AM on December 28, 2017 [1 favorite]

20K in personal consumer debt and 100K in education debt that is paying off. You feel overwhelmed and foolish, but this is manageable. The suggestions to get a debt consolidation loan or find cheaper interest are good. Paying off a loan at 24% takes longer than at 15% or even better 6%. If you can get any 0% balance transfer offers, read the details and consider seriously.

Rent is a very big expense, so keep alert to opportunities to reduce it, maybe a better roommate scenario.

If you need to improve your wardrobe, thrift shops are great. You may have to shop more often to find great stuff, but the savings are real. Use or learn cooking skills. Bring lunch from home, make coffee at home, cook healthy food, but try to be reasonably frugal. Ramen with fresh vegetables is tasty, but maybe not every single day. Make room in your budget for drinks after work, coffee with a friend, dinner out occasionally; you're in a new city and need to develop friendships and have a life.

There are a bunch of money and debt blogs that can help you find your debt-repayment strategy. They also provide a community that will help you stay on track. If you're reading budget blogs instead of fashion blogs, it will be easier to pay down debt instead of spending. mint, debt blogs, nerdwallet, Mr Money Mustache, Penny Hoarder, Get Rich Slowly, Dave Ramsey, and many more. Pick a few sites that you like, and read, be active in discussions, get encouragement.

Last of all. your education was a smart choice. You've been paying your cards. You're dealing with the debt. Give yourself a *lot* of credit. Saving money and paying off debt is often made to sound like penance. Think of it as giving yourself a future of financial stability. It will feel so good to get rid of the credit card debt and start making more inroads on the education debt.
posted by theora55 at 8:41 AM on December 28, 2017 [4 favorites]

There is one really simple rule about loans: if you have more than one, always pay them off at the minimum allowable rate except the one with the highest interest rate. That one, you should seek to pay off as fast as possible.

This remains true even if you've got a huge loan at a low rate, like a student loan, and a smaller one at a higher rate like your credit cards.

Another way of understanding why, even if you had a million dollars of student debt that was growing at 5% ($50,000) per year, and only $20,000 of credit card debt growing at 20% ($4,000) per year, it would still make sense to pay off all the credit card debt first:

Every single dollar outstanding on your credit card balance is costing you 20 cents per year.

Every single dollar outstanding on your student loan balance is costing you 5 cents per year.

For every single dollar you've budgeted for debt repayment, you'll get better value by spending that dollar on 20 cents of avoided costs than on 5 cents.

This remains true even if your current debt repayment budget does put you underwater.
posted by flabdablet at 8:55 AM on December 28, 2017 [2 favorites]

Given a scenario where I have credit card debt but no savings, I can't see how spending less on credit card repayments in order to build up savings (beyond a small cushion against the inevitable occasional unforeseeable expenditure) actually makes any sense.

The OP has zero savings. I also had essentially zero savings. I'm saying they should build up some savings for the "occasional unforseeable expenditure" alongside paying off their debt.

It doesn't have to make sense to you; it's the OP's budget, not yours. It's easier for some people to avoid adding to their debt load by not using their credit card EVER. That includes emergencies. I feel better emotionally having savings that I can use when my 13-year-old car breaks down or I need to move apartments because the rent went up 25%. Similarly, I've planned ahead for things like upgrades to my bike or knowing my 3-year-old phone or 7-year-old computer are going to need upgrading soon, so I save for those rather than putting them on my credit card, which is how many people get into debt trouble in the first place.

OP, just know that there isn't one right answer for how to tackle debt. Some people - using myself as an example - are willing to pay more in the long run for more breathing room or a savings account now. That isn't an invalid choice. Of course you should crunch the numbers to really know what that choice is costing you, but don't feel like you're Doing It Wrong as long as you are making progress. If you enjoy tackling it like it's a challenge to pay as little interest as possible, do that! But if that causes you stress or hardship or makes you feel guilt and shame, you can still make progress and be proud of it even if you are not making the most efficient choices.
posted by misskaz at 9:13 AM on December 28, 2017 [2 favorites]

I've also done the pay down the credit card while building savings and not stressing about it. Yes, there is some loss, but to me that loss represents peace of mind and security. I find it a fine payment for that service. Constantly worrying about the best way to do things, and when those things are money, is hell on my mental health. I know this is true for others too. If depression and anxiety are already issues, building a big huge life restricting plan on the new year is likely not going to be successful. Make a plan that you can work with and that works with your life. I agree with misskaz - LIFE IS TOO SHORT!
posted by I'm Not Even Supposed To Be Here Today! at 9:32 AM on December 28, 2017

nthing that this is very doable. Also nthing YNAB. I've found it invaluable in A. giving me an accurate picture of my finances, from the short to the long term, B. being able to see exactly how my day-to-day actions affect the bigger picture of my goals, and C. making things feel actionable. Nothing else comes close. Do be aware of the learning curve and the online classes, though.
posted by mosst at 10:28 AM on December 28, 2017

It's easier for some people to avoid adding to their debt load by not using their credit card EVER. That includes emergencies.

Point taken.

However, if there is a plan in place that's already paying the existing credit card debt down as fast as budgeted comfort will allow, and that plan can be trusted to the extent that the credit card debt is well understood not to be spiralling out of control any more, then committing to use the credit card only in an emergency could also be a workable solution for others.

Returning to the scenario of a credit card charging 20%, a savings account yielding 2%, and some budgeted amount (or perhaps some extra-budgetary surplus) allocated for financial management purposes, here's what a dollar of that amount could do.

It could go in the savings account, which means it's not paying down the card. That costs 18 cents per year more than paying down the card does, but it contributes to an emergencies cushion. The emergencies cushion will not actually be available, at least not fully, until the savings account has been building up for quite some months.

Or it could pay down credit card debt, which means it's not going in a savings account cushion. But because it's paid off some credit card debt, it's now available to be borrowed again at 20%/year in the event of an emergency. Relying on credit card debt, rather than a savings account, to provide the emergencies cushion also makes any remaining credit limit available from day 1.

If there is an emergency, and a dollar comes out of a savings account cushion to pay for it, that dollar is no longer earning its 2% return. The effective cost of spending a dollar from the savings account cushion is therefore 2c/year.

The effective cost of spending a dollar from a credit card cushion is the credit card interest rate, 20c/year. This is 18 cents per year per dollar spent more than it would have cost to fund the same emergency from a savings account cushion instead. But setting up the savings account cushion has already cost me that 18c/year/dollar on the way into the cushion.

So in the worst possible case - where an emergency consumes every dollar available in the cushion - the credit card cushion costs no more than it would have cost me to set up the savings account alternative in the first place. For smaller emergencies, the credit card alternative lowers overall cost, making being debt free that much closer.

I am sure that I am not the only person who, having checked and double-checked this reasoning, would opt to keep the credit card in a block of ice in the freezer and rely on that as my emergency cushion rather than deliberately choosing not to get rid of my debt backlog as fast as I could afford to.
posted by flabdablet at 10:55 AM on December 28, 2017 [3 favorites]

I've planned ahead for things like upgrades to my bike or knowing my 3-year-old phone or 7-year-old computer are going to need upgrading soon, so I save for those rather than putting them on my credit card, which is how many people get into debt trouble in the first place.

For people with no existing credit card debt, that's the procedure I would recommend as well. Earning interest on savings - even at the piddly rate that banks pay these days - is obviously and clearly a better thing than paying it out at credit card rates.

But if I did have existing credit card debt, I'd be saving for those things in the form of increased payments on the cards, not payments into a savings account. The reasoning is as above: if I have a dollar allocated for a bike upgrade, then between now and the time I spend it I'd rather that dollar was earning me 20c/year in avoided credit card interest than 2c/year in a savings account.

It can be hard to see past the fact that while you have existing unpaid credit card debt, everything you use the card to buy costs you the extortionate credit card interest rate. Paying $500 for a new computer on a card that doesn't qualify for the paid-in-full interest-free provisions just feels bad and wrong and irresponsible.

But if that $500 has indeed been earned in the months prior to that purchase, and has been used to pay down the credit balance before being re-borrowed to buy the computer, the end state of the card is pretty much as it was before the $500 was "saved" into it. You don't end up paying more interest after the computer purchase than you would have done if the card account had never been involved at all; what you've done instead is avoided the interest that would have accrued from carrying up to $500 more debt than you needed to during the saving-up period.

Again, I understand and accept that dealing with credit cards - especially cards that have a history of ill-considered use leading to formerly unsustainable debt - can be emotionally wrenching. But chronic anxiety is only ever made better by confronting and dealing with the issues that prompt it, not by running away from them. Learning to use credit safely and responsibly is an essential adult skill, and careful reasoning about how credit actually works is a damn good recipe for reducing finance-related anxiety to a point where it no longer requires expensive workarounds.
posted by flabdablet at 11:23 AM on December 28, 2017 [1 favorite]

If this were you, how would you approach this? Thanks for all your help.

One idea, and this greatly depends on your ability to contain spending to a planned amount, might be to get a credit card with a cashback policy and zero balance. The idea here is that credit cards are a pretty good deal, if you're what the industry calls a 'deadbeat' -- someone who pays in full every month. The benefits are sometimes clear, like the 1-2 percent cash back, but sometimes not so clear. Every credit card I have comes with a 'grace period' clause. If the starting balance for the monthly cycle is zero, then all purchases made in that cycle carry no interest charge.

So if your billing cycle starts On the 1st of the month, you buy lunch on a card on Day 1 of the new cycle, and on day 31 of the cycle you'll get a bill for what you used, due on the 31st of the month after that. This works out to a pretty good deal: 1.5 month interest free loan on the average purchase.

But, you may find it difficult to get from here to there. The credit score likely isn't helping. Normally I tell people to focus on the cards with the highest balance, but if you can clear out a low balance card with favorable terms, it might make sense to do so, as the grace period is incredibly handy and you'll end up freeing a bit of cash you can use to pay off the cards with.

Other crazy ideas:

Borrow from your 401k plan to pay off the CC debt. It's less punishing than a distribution, and the interest you pay goes into your account, oddly. The interest rate you pay on your credit card is presumably far higher than what you could expect to earn on your investments, so this can work. The mechanics of this are probably complicated if you don't have any 401k funds from a former employer to roll over, and I donno how the matching works (I assume they match your untaxable repayments and not the interest?). If you only have 6 months of 401k contributions, that may or may not be viable. If you just started this month, that may be a deal breaker.

Research your company's ESPP if it exists. The APRs on those can be higher than the maximum credit card rates. For example, Salesforce's ESPP lets you put away 10k of your salary and get stock worth like 11.7k back every six months. After taxes, that's an extra thousand or more towards your debt. Granted, you'll have to pay less towards your CC debt until the ESPP clears, but the CC interest is still less than your ESPP earnings so may come out ahead. Note this depends on a lot of details we don't have, like your CC rates, the ESPP discount rate, the lookback clause, or the ESPP's existence.

Convert to personal signature loans. Most credit cards will tell you why you have bad credit. If you've missed payments in the past, well, hopefully you've stopped. If you haven't pulled your credit reports, do so and verify the accuracy of what's on there. I've never gotten one of those, so I don't know what the credit score cutoffs might be. If you have a credit union it could be worth a chat to discuss whether this is a viable option.
posted by pwnguin at 1:58 AM on December 29, 2017

If, for you, money is about feelings - security, guilt, fear - then do things the feelings way:

1 Work out how much you can throw at improving your financial situation without missing out on an indefinite basis.
2 Build up an emergency fund of $1k-$3k
3 Pay the minimum on everything except your smallest credit card or loan amount. Throw the rest of the money at that.
4 Once your smallest debt is paid off, throw all the money you were paying at that onto your next smallest.
5 Repeat
6 Once you have no debt left, build up your emergency fund until it is 3-12 months worth of expenses (based on your own risk tolerance) using the former debt repayment money
7 Continue to build saving and investments

Lots and lots of people have gotten out of your situation in this way. My favourite example is jdroth of Metafilter and Get Rich Slowly fame.
posted by plonkee at 2:03 AM on December 29, 2017

A budget is critical here. Your income to rent ratio isn't that bad. I'm not a huge fan of YNAB for budgeting, but use whatever tool works for you. You say you make $100K per year. I'll assume your take home pay after healthcare and retirement is 55%, which is $4,500 per month.

$4,500 take home
$1,500 rent
$1,150 student loan payment (10 years at 6.8%, $100K balance)
$1,850 left

My advice is to figure out where the rest of that money is going. Typical areas to cut: Cell phone, coffee, restaurants, bars, cable TV, new cars.

Another idea is to consolidate your student loans to a 20 year term, lowering your payment to $760 or so. Don't do this to free up spending money. Do it to save money and pay off debt, and then go right back to paying the original student loan payment.

I'd recommend against any sort of forbearance, or to consolidating federal loans to a private lender. You lose a lot of benefits (like IBR, necessary forbearance, PSLF, etc.) that aren't worth it for people who will be paying loans for at least a decade.
posted by cnc at 9:14 AM on December 29, 2017

Here's another way to think about why accumulating savings and paying down debt are best thought of as an either/or choice rather than as two things it makes sense to do at the same time.

When I borrow things, I get to use them but I don't get to own them. That's what borrowing is.

Borrowing things often attracts a rental fee, to compensate the owner of the thing for their temporary loss of the use of it while I'm using it instead.

This applies to money every bit as much as it applies to apartments or skis or lawnmowers. Charging $1000 to a credit card for longer than a month means agreeing to pay a rental fee, in the form of interest, for the use of $1000 that isn't mine.

When I borrow a commodity like the proverbial cup of sugar, I generally won't give back the actual item I borrowed. Instead, I'll just replace it with the same quantity of the same commodity. Money is the ultimate commodity: it has no qualities beyond its spending value, and every dollar is interchangeable by law with any other.

It follows that if I'm carrying more debt than I can pay back right this instant, none of the money I currently have the use of is actually mine. Doesn't matter how I got hold of the particular lump of cash I see in front of me: could be wages, could be proceeds of a successful business transaction, could be anything. As long as I have access to less of it than I would need in order to pay back all my outstanding debts, I'm using money I don't own.

Now, one of the things I can use money for is lending to somebody else so that they can pay me a rental fee. This is exactly what I'm doing when I put money in a savings account at the bank: I'm lending money to the bank so that they have the use of it until I need to get it back to buy something with, and for as long as they do, they pay me a rental fee (interest) for every dollar I've lent them.

But if I'm carrying more debt than I can pay back right now, then putting money in a savings account is renting out rented money: money I don't own but am paying a fee to use. This would be a reasonable thing to do if the entity I'm lending to would pay me more per dollar lent than the entity I borrowed from, or if it would be more convenient to get any given amount back from my debtor when I need to pay for something than it would be to re-borrow the same amount from my creditors.

But when my creditors are credit card providers, and my proposed debtor is a bank, neither of these conditions is true. Borrowing money from a credit card provider in order to deposit it in a savings account makes no more sense than paying $200 per week to rent a pair of skis I have no immediate use for in order to lend them out for $20 per week and to keep on doing that for weeks and weeks and weeks. And that doesn't become less true simply because I might have started paying rent on that money so long ago that I've forgotten it was never mine.

If I owe a credit card provider $10000, and I find myself with $100 in my hand that I don't immediately need to spend, the sensible thing to do is just give it back to the creditor who actually owns it so they'll stop charging me rental on it. Because it's not mine! It never was mine! I had the use of it, but it was always their money. I borrowed it from them. If I have no present need to buy something with it, and I can't make more than I'm paying for it by lending it to somebody else, I should just give it back.

If I then need the use of that paid-back $100 at some point in the future, they'll happily lend it to me again; that's what they do. Funding a purchase with a credit card is often even more convenient than funding it from a savings account (which is, of course, exactly why so many people get stuck with more debt than they can service). But unless and until that day comes, I have absolutely no reason to keep renting that $100 from them.

Hell, by the time I need their $100 again I might even have paid off all my debts and qualified for completely rent-free borrowing for a month at a time.
posted by flabdablet at 4:17 AM on December 30, 2017

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