2. Manage Debt
A deeper discussion on managing debt.
Posted October 13, 2024
This blog is a continuation of Starting Personal Finance.
Whether it be credit cards, car payments, or student loans, we all have some form of debt on our books. The goal is to make sure that we control our debt, not the other way around.
Credit Cards
Credit cards are tools that allow you to spend money before your paycheck rolls in while earning rewards like cash back and travel perks. They also help build your credit score, which impacts loan rates, rental applications, and more.
However, credit card companies aren’t charities - they use rewards to encourage spending, profiting when users overspend and fall into debt.
To benefit from credit cards while minimizing the risk of serious debt, set up automatic payments to clear your full statement balance each month. I personally go the extra step of clearing my balance every paycheck, but as long as you pay the statement balance every month you should be good. Avoid using your credit card if you can’t pay it off in full, as it’s not worth accumulating debt for a few extra points.
For more on how credit cards work, start with this video, and then look check out this video to know which cards to get first. Use this website as a resource to maximize your rewards.
Remember, though: collecting reward points isn’t a path to real wealth, and your time may be better spent focusing on other areas of personal finance. I’d recommend reading through the rest of my guide before coming back to optimizing credit cards.
Buy Now Pay Later
Buy Now, Pay Later (BNPL) services like AfterPay, Klarna, and Affirm let you spread payments over weeks or months “interest-free,” making them appealing for larger or unplanned purchases. Sounds great, right? What’s the catch?
BNPL can trick your brain into thinking you can afford more than you actually can, leading to overspending and potentially building bad financial habits. Multiple monthly payments from different BNPL purchases can quickly add up, creating a cycle that becomes hard to manage. A $10 monthly payment for shoes can quickly turn into $50 or more when you add jeans, sunglasses, and other convenient purchases.
If you miss a payment, you may face late fees, interest charges, and potential damage to your credit score (depending on the service). Frankly, it’s less stressful to save for a big purchase than to use one of these services.
High Interest Debt
The cold, hard truth is that high interest debt KILLS wealth. The more aggressive you are and the sooner you pay it off, the better. Pay off high interest debt (over 5%) as aggressively as possible.
For a more in-depth guide on eliminating debt, I recommend looking at Ramit Sethi’s book (found below in Pursue good advice). He also wrote an article on how to pay off debt.
Once we’ve effectively managed our debt, we’ve stopped the financial bleeding and can start focusing on growing our money.
Back to Starting Personal Finance.