Financial Self-Care: The Rule Of 72: When It Applies To Debt

The rule of 72 is usually mentioned when we are talking about investments and savings.  Rarely is it used when talking about debt.rule of 72 and debt, pay down debt, be debt free, financial freedom

Interest rates have been incredibly low in the past few years.  This has acted as an incentive for more borrowing.  So much that almost half of the adult population is in deep financial trouble.  Almost half could not meet a $400 unexpected expense without borrowing or using credit.

While the interest rates have been low, credit card companies have enjoyed a “business as usual” with their rate of interest.  Many around 20%, (mine is 19.97%), with store credit cards hovering around 30%.

Contrary to some financial gurus, like Dave Ramsay who advise against having a credit card, I love mine.  It is convenient and it gives me points which I can exchange at the grocery store for food.  I cannot imagine not having one.  I buy online from Amazon, or I make airline and  AirBnB reservations.

I make it a point to not buy anything I cannot pay in full at the end of the month, and I religiously pay it before the due date.  It happened twice in the past 35 years that I missed a payment for a few days and I was not happy with myself when I saw the interests added to the next statement.

 

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Yes I am aware of credit card companies that offer lower interest rates, around 7%.  Those cards make it tempting to just pay the minimum or take longer to clear, because the interest rate is lower.  But it’s still a lot of money you give away at 7%.   You will be far ahead if you do everything possible to not have to rely on credit.  Once you build an emergency fund, you can be your own lending bank.

As mentioned above, many of you are probably familiar with the rule of 72 and the magic of compound interest, when it applies to savings and investments.  This means that if your investments grow at 6% a year and they are in a registered plan, you can double your initial investment in 12 years (6X12=72).  So the higher the interest rates on your investment, the faster your nest egg grows.

Well, compound interest also works if you borrow money.  Let’s say you borrow $5,000 when the interest rate is 18.9% (remember credit cards are usually at 20%).  You make payments of $100 a month.  Your debt will be clear in nineteen (19) years and the total payments will be $19, 564.00, that is almost $15,000 in interests alone.  You can use this calculator for your debt.

This is pretty sobering.

So what can you do if you carry a balance on a credit card?  Ideally do all you can to pay it off as soon as humanly possible, even if that means you need to make huge sacrifices to succeed.

Action Plan

.  If at all possible, make more money.   Even 3 hours a week at $20 an hour can bring in $240. more a month to put a dent in your debt.  I know a woman who works as a receptionist for a doctor 2 evenings a week and she makes about $300 extra a month.  Another woman I know works in a real estate office one day on the weekend – this also brings in about $300 a month, which she squirrels into her retirement fund.

.  If extra work is not a possibility, where are you willing to cut so you stop making the credit card company rich.

Here are some areas you might want to look at to operate (cut).  Those monthly cuts need not be forever, but just for long enough to divert the funds toward paying down your debt and building your emergency fund, starting with the one with the highest interest rate (another point I disagree with some financial gurus).

.  Beauty: spa – hair – nails – facials, etc.

Those should be the ones you find easiest to cut.  There are many services you can replicate for yourself at home, for a fraction of the price at a salon.  Doing your nails, coloring your hair, even doing some trims and giving yourself a facial.  It’s all doable at home. Potential Savings: $50-$100 

.  Gym membership

Do you actually go to the gym?  If not, it’s a no brainer.  Cancel.  If you do, can you see how you could build a home gym or use your body weight as well as walking, running, dancing, and other activities to save that $50 or more a month?  You can exercise outside, especially easy during the Summer months, whether you decide to walk or bike to work, swim at a nearby lake or join a Meetup team of some organized sport.  Potential Savings: $50-$100

.  Clothes

This one should be easy.  Not easy not to buy, but easy to make do with your closet full of clothes.  If you are like many women, you have enough clothes to change every day for at least a couple of weeks.  Potential Savings: $25 -$75

.  Dinner out – drinks after work.

Another place where you can probably salvage a couple of dollars, even a couple of hundred dollars or more.  Tell your friends you are cleaning your financial house.  Suggest pot luck or breakfast on the weekend.  I once had a client who realized she was spending over $500 a month on eating out every month.  Potential Savings: $100 – $500

.  Transportation

No need to sell the car yet but it could be an option.  It costs between  $5,000 and $9,000 a year to run a car- if you calculate the depreciating value, insurance, maintenance and gas.  If you can walk or bike to work or take public transportation,  you will also save parking which in a big city can cost $200 to $500 a month.  Savings: $300-$800

.  Cable and cell phone plan.

Cutting cable saves me $50 a month and I can still watch 5 stations with a rabbit-ear antenna. The basic plan would only give me a couple more channels.   As for cell phone, unless you need a high end plan for work, you can get prepaid plans for $10 a month, a big difference with the $75 to $100 some people pay.   VOIP home phone with Vonage is about $20. a month.  Surfing the net can be done at home on the computer, while making you rich – well almost.  Potential Savings $100-$200

.  Vacation

We all need time away from work to recharge but nobody needs a trip down South or overseas, or a stay out of town.  Unless you have a vacation paid for, I encourage you to have a stay-cation, in town.

Make it fun.  Explore your city.  Remember there are tourists staying in hotel room and spending big money to enjoy where you live.  Call the Tourism Bureau of your town and find out the different activities planned for the season.  Many are free.  Go for a picnic, go berry picking, a bike ride, some fairs or festivals, a visit to the local pool on a hot day or a nearby lake.  Museums usually have a free day.  Borrow books and movies from your local library.  Potential savings: $100-$300

.  Housing

This is a big one.  If your house costs you more than what you can afford, you can rent a room.  I did rent a room in the past – to International students, as well as to a woman who was working in my city 4 days a week but returned to her husband and kids on the weekend 120 miles away.

If that is not an option, looking at getting a smaller and cheaper place might be the solution. Potential Savings: $100-$500

But before you resort to that solution, I am quite confident that if you make cuts in the previously mentioned areas, you may not have to cut your housing costs, as you can save between $300 and $900 + from your monthly spending, money that can go to eliminate your debt, build your emergency fund and later on, invest to take advantage of compound interest, in your favor this time.

Let me know if you follow a plan to pay off your debt.  If you found this post useful, please share with your network and on social media.

 

 

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