Following last week's Q&A with Patty, we welcomed listener Brooke for another round of questions with Paula Christine. A recent divorcee, Brooke asked a number of questions about finances and debt, including:
If you have questions about your finances, and would like to talk to Paula, you can send her an email: Paula@PaulaChristine.com - or visit her website: https://paulachristine.com/
Paula: Welcome to Beyond the Paycheck. I'm Paula Christine. Living paycheck to paycheck and struggling to get ahead really sucks, but you can take control of your money and live the life that you dream about with knowledge and commitment. I'll provide you with the knowledge it's up to you to make the commitment.
So last week we talked with Patty and she had some questions for me and it was so well received. We've asked another one of our listeners, Brooke, to join us today. So Brooke's got a couple questions for me, so welcome, Brooke.
Brooke: Thank you, Paula. This is my first question. Okay. I am recovering from a divorce and financially it was catastrophic. So at the end of the day, or I should say at the end of the month. It's always a coin toss for me, because let's say I have a hundred dollars left over. Am I putting the hundred dollars in savings? Am I putting the a hundred dollars in an IRA? I just never know what I should be doing. And it's very confusing.
Paula: Okay. So without giving me specific information, do you have an emergency account set up?
Brooke: I have an emergency account set up. I can't tell you that it will cover six months, but it would probably cover three or four.
Paula: Okay. That's good. Are you contributing to a 401k?
Brooke: I have not been.
Paula: Okay. So I guess my answer to that question would be because you have an emergency account and if you're comfortable with that emergency account, I would start contributing to that IRA because you wanted to take advantage of compounding. So yes, you wanna be getting invested as soon as possible.
Brooke: All right. Thank you. And then I have another question. I have significant credit card debt. Again, as a result of my divorce. And I am one of those people that the credit card companies love because they're charging me an incredibly high interest rate.
So I have read Suzie Orman. I'm curious to know what you think is the best way to tackle credit card debt. Do you pay it down to the lowest credit card balance that you have, and then as you continue to do that and just keep adding on to the next one, do I tackle the highest interest rate card first or the highest balance first?
I'm again, very confused.
Paula: Well, you I hope not to confuse you any further, but I guess I would say that it depends. And the reason that I say that is because you've talked about two of the different methods for paying off debt. One is the snowball method. The other one was the debt avalanche, but there are two others that we'll talk about in just a second.
But here's how I look up paying off debt. So for me, when I think about paying off debt, I think about getting rewarded. So in the snowball method, that's where you pay off the smallest balance first. And then as you pay that off, then you start working on the second one or the third one, or however many debts that you have.
But what it does is it gives you that accomplishment that you've paid off that debt. On the other hand, the debt avalanche is the one you talked about that pays off the highest interest rate credit card first. So your other debt with a lower interest rate, isn't accumulating as much.
But there's also the method of debt consolidation. So it's saying that you're gonna take all your debt consolidated into one, one monthly payment. You can work with a payment that's gonna be in your budget and a timeframe. So it may take you a little bit longer to pay that debt. But it's one payment. You're getting it paid off. You've got a plan.
So that's another option that you might wanna look at. And then the other option, if you've got a lot of debt, you might wanna call a credit counseling service and see if they can help you work with your creditors to maybe lower your interest rates or lower the amount that is due. Does that answer your question, Brooke?
Brooke: Yeah, but I have another question. If I wanna consolidate all of the debt where do I go to do that? Because I'm assuming that I'm still gonna be charged a really high interest rate. So what do you recommend or who would you have me call?
Paula: I would start with your bank or your credit union, whoever you're working with currently. And see what they have to offer. There's some great calculators on my website, PaulaChristine.com. There's a resource there that talks about paying off debt, that has everything that we just talked about, plus links to the calculators. And what I would suggest is you go to each one. And use the calculators to see what when works for you.
But the thing is, is you gotta keep rewarding yourself. You gotta say, I got one paid off. Great. Now I gotta celebrate a little bit because you need that to continue to encourage yourself to get that debt paid off. So, whatever plane you do, just pick one.
Brooke: Okay. No, that is great. And that kind of rolls into my next question, which is cash versus a credit card.
You know, I sometimes feel that I'm more mindful of how I spend what I'm using cash, but if I use cash, then I'm not earning points on my credit card that I could use to pay for something else.
Paula: It's whatever works best for you. I mean, I'm more conscious too, when I have cash. I'm more aware of what I'm spending, but let's just say that you have $500 a month to spend. That's like your allowance.
And you can do it a couple different ways. You can just give yourself, you know, $500 a month to spend, and when it's gone, it's gone, or you can just keep track of it on your credit card. Cuz I know that I used my credit card points to pay for my business class tickets to grease this year. So there's some advantages to using your credit card, but you have to keep track of it.
Now you're in a situation where we just talked about that you have high debt. So I would go to the cash method and not use your credit card. You'd just be adding more to your debt. Only use a credit card if you can pay it off every month.
Brooke: Well, I will say that I do have one credit card that I use exclusively that I pay off every single month. That was the cardIwas referring to. The other cards that I'm still paying down, I do not use them.
Paula: Oh, perfect. Then yes. If, as long as you're paying it off and you're using those points for other things, just keep track of it. So just don't overspend.
If you head to 500, that was your number. Don't go 501. Don't go 550. Don't go 600. Only go to 500.
Brooke: Okay. All right. That's great. Thank you. I have a couple more questions. Back to the trying to pay down debt. It's a balance between being conscious or conscientious of spending money, you know, a smart manner.
But also I like to have a life. How do you do that? I mean, I don't wanna punish myself all year long, not take a trip or not go to a nice restaurant, but I'm also really trying to keep my eye on the prize of bringing the debt down.
Paula: Develop a plan. And if you're happy with the results of that plan, say that I've got X, the number of credit card debt.
And I do wanna take, a trip this year and I'm not talking about like a $10,000 trip, but you know, you may wanna go out to Saugatuck for the weekend or something like. Just plan it and know that you may take you an extra few months to pay off that debt because you have to have a life because if you're just working to pay off your debt, I mean, that really sucks.
So you want to be able to do fun things because you'll just end up resenting the debt and the situation and you can't live life that way. It's not any fun.
Brooke: Okay. I have a couple more questions. This is great. Thank you, Paula. Let's say I am in a situation where I finally have been able to pay down all of my debt.
Going forward. Do I allow myself? Let's say I'd love to travel and I wanna take one really cool trip with my kids once a year. Am I allowed to use a credit card? My low, like, I do have one card. That's a pretty low interest rate. Am I allowed to use that card to put the trip on the card, but no other debt.
No other credit debt, and then make a commitment to myself. Let's say to have that paid off within six months or 10 months.
Paula: Well, first of all, Brooke, you're allowed to do whatever that you want, but I would say that, can you save for that trip for six months and then pay cash for it? I'm just asking you that question.
If you can do that, that's what I would do. Okay. But if you can't, like you said, if you can pay it off in six months, then go ahead and charge it, get those points, cuz then you can use them for maybe another trip down the road. Pay it off in six months. And then when that six months is over, start putting money aside to pay for your next vacation.
And then maybe you can pay cash for that one.
Brooke: Okay. All right. That's great. And then my last question, which is really about, I have two children, about my daughter. My daughter is a nurse and she recently became aware of an incentive at work that if she picks up an extra shift, She will make a thousand dollars in that one shift.
And I can't tell her to pick up three a week, but I am encouraging her to pick up one or two a month because that could make a huge difference for her financially. So let's say she picks up one extra shift a month, which is an extra 12 grand a year. Where do you suggest she, or how should she use that money?
Should she put part of it in a 401k, you know, enjoy the other half? Like, what are your suggestions on that?
Paula: Well, without knowing her personal situation, if she has no debt, well, first, if she has debt, then I would use that to get out of debt.
Brooke: She just has student loans. Otherwise, no debt.
Paula: Yeah. Well that is a debt.
So she should work on, getting a plan to pay that off. And then I would suggest, you know, depending on how much she's putting into our 401k now and what her income is, potentially she might wanna max out a Roth IRA if she can. If not, maybe increase her 401k contribution and then use a part of it to travel or have fun.
Okay, great. But tell her if she could do that once a month, man. Can you imagine how much money she could have just doing that for a year if she did it once a week?
Brooke: Yeah. I think to be honest, once a week is tough because it's 12 hour shifts and they alternate between day and night. But listen, hypothetically, that would be amazing.
But I'm thinking even if she could do two a month, what a huge difference they would make.
Paula: It's $24,000. That's a part-time job. Yeah. Yeah. That's exactly right. Good for her. Good for her.
Brooke: Yep. Well, thank you very, very much. I appreciate your insight.
Paula: Thanks Brooke. Those are some great questions. I just want everybody to know that this is related to Brooke's situation. It doesn't apply to everybody, but if you have specific questions that you would like me to answer, please email me at Paula@PaulaChristine.com. Also check out some of my resources at paulachristine.com. Thanks again, Brooke.
Brooke: Thank you.