As the cost of food, housing, and gas has continued to rise, many families are feeling the pinch. And we live in an expensive place. Families who are trying to raise children often feel as if they are living paycheck to paycheck or—worse—drowning in debt. If you’ve seen your credit card balances going up, you’re not alone.
It’s easy to get caught up in the busyness that is parenting these days. You’re not lazy if you run through the drive-thru between kids’ activities. You’re doing what you have to do to get by. At the same time, large credit card balances are not sustainable financially. Beyond that, there are competing priorities for any extra money in your budget.
While every family is different, I generally recommend you contribute enough to your employer’s retirement plan (like a 401(k)) to get the full match. It’s free money. Next, build some savings. Start with $5 or $10 a paycheck if that’s what you can do. Even a few hundred dollars in savings can make a difference when life happens. And then, when you are ready to start paying off those cards and dig your way out, how do you do it?
There are three different ways to pay down your debts. First—and I have to say it’s my least favorite—is the avalanche method. You pay the minimum on your debts; any amount you can spare goes to the account with the highest loan balance. Once that is paid off, you focus on the next largest balance, and so on. The problem I have with this method is that it takes a while to see concrete results and requires serious discipline to keep at it without any sense of satisfaction.
The second method is the snowball method; it’s the opposite of the avalanche. You put all your extra money towards the account with the smallest balance. This provides significant psychological satisfaction and reasons to continue—you feel success each time another account is paid off.
The most financially sound method is to pay off the account with the highest interest rate first. You will pay the least amount of interest overall and finish the soonest. However, sometimes, the positive reinforcement you receive from the snowball method will encourage you to stick with the plan.
Regardless of the method you use, tracking your financial picture with regular reviews of account balances—both savings and debt—will help keep you moving towards your goals. Dr. Edward Deming, an NYU professor, often said, “That which is measured improves.”
I love keeping a chart on your refrigerator so that you see it and it remains top of mind. Make spending a conscious decision and make choices with a goal in mind. It’s not saying you can’t do something or buy something. It’s saying you would rather do something else, like building savings or paying down debt.
When you make the decision to eat in or not put something in your shopping cart, send that money directly to your credit card company and color in your chart.
If you want to get a good overview of financial basics, please join us for our Financial Foundations class on October 23. You can find great resources and register for our educational events on our website at www.covingtonalsina.com. If you have questions, email us at info@covingtonalsina.com.
CovingtonAlsina is a Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax or legal professional before implementing any strategy discussed herein. CovingtonAlsina does not provide tax or legal advice. Past performance is not indicative of future performance.
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