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I just turned 26 and for the past year or so I have been ignoring my debt and obsessed with investing (crowdfunding and stock market), and how to make more money. But, I recently sat down and did a breakdown of my monthly expenses and all the debt I have hanging over me, and then, how much more money I could invest if I didn’t have debt. WOW. It was a no-brainer at that point that I need to get rid of my debt. So, I am trying to figure out the best strategy to pay it back.
I am lucky enough to have a well-paying job so I am really looking for advice on the best way to tackle my debt – I have negotiated salary to the maximum, got rid of an expensive truck I bought (still making car payments, but they are very manageable, about half of what I was paying), cut cable completely, audited all of my monthly subscriptions and have a strict food budget.
The other variable in my equation is that I want to buy a nice ring to ask my girlfriend to marry me by the end of the year (5k – 10k). And, I want to hear your thoughts on how I should do this.
Consumer Debt Breakdown
(Not including my auto or student loan)
Credit Card: $10,000 – all around 21% APR
Home Improvement Loan: – $1,500 (28%)
Personal Loan: $3,000 – 30% – I know, I know… mistake
Should I pay down my credit card and use it to buy a ring? Use the NerdWallet (which I highly recommend) method and pay off each monthly, with the highest interest rate getting the most allocation and take out a loan for the ring?
Thanks in advance.
For starters, if you’re already engaged now, CONGRATULATIONS! If you’re still saving for the ring, I hope the following will help. I feel your situation is one a lot of people can relate to so let me try to address your two main questions.
Yes, NerdWallet is a great resource and they consistently offer evidence-based personal finance advice. Honestly, you can start and stop there and you’ll find everything you need for credit cards with 0% introductory rates and balance transfer offers. Given the high-interest rates on some of your current debt, I’m also going to recommend another option. Please keep in mind this advice will assume you’re serious about paying off your debt.
Debt Management & Consolidation Loans
I recommend you look into a debt consolidation loan. The pros of a consolidation loan are it centralizes your debt into one low monthly payment. It also forces you to have a due date, usually 36 to 60 months for most unsecured loans. When I was paying off my $30,000 debt, on two different occasions, I used consolidation loans to help. Implied within this sentence are the big risks that come with consolidation loans.
First, you need to have a good to excellent credit score to get the best rates. Specifically, I wouldn’t apply for a consolidation loan until your credit score is 700 or above. Preferably, you’ll want a score of at least 740+ to get anything close to the low rates advertised. When applying, your goal should be to beat or match the lowest rate you currently have (21% in this case). Keep in mind each formal application will be a hard credit check, which will temporarily lower your overall score. I recommend applying for one and no more than three loans at any given time. If you don’t qualify, wait three months or until your score returns to 740+. I’ve had good experiences with LendingClub but I also saw a spike in spam emails and snail mail after applying. This is annoying but no reason not to explore your options.
The second risk is self-imposed. Many people, present company included, pay off their debt with a consolidation loan, only to turn around and use their credit cards again. This, inevitably, results in a vicious cycle of constantly needing larger and larger consolidation loans (until you are denied). Before applying I would do a strong self-assessment and make sure you’re ready to make the monthly commitment to pay down your debt until you are debt free. In my case, I cut up all but one emergency credit card until the consolidation loan was paid off.
Lastly, if you already have a good credit score (740 or above), you may want to consider a peer to peer loan. These are similar to consolidation loans, but they sometimes have lower rates since they’re crowd funded rather than funded by a large bank or institution. You can read more about peer to peer (P2P) loans at PeerFinance 101. In full disclosure, I have used – and had a good customer experience with – P2P lender SoFi.
I don’t have anything new under the sun to add here. I would be hesitant to add another potential $10,000 in debt on top of your current debt burdens. I have two thoughts on this. One, back when I was in debt and considering an engagement ring myself, I had an open and frank conversation with my girlfriend. Together we decided that if I bought a ring, it wouldn’t be what either one of us wanted (temporarily). In the future, when I was debt free, I could replace the setting or buy a larger ring. Size doesn’t matter, until it matters. Now my mama didn’t raise no fool. If that’s not a conversation you think you can entertain without $10,000 in lost argument hours, I understand completely. This brings me to thought number two.
Life is short and money is made for spending. Even after going through my debt freedom journey, I know for a fact there was a lot of living I didn’t do because I chose to implement some lifestyle changes that inherently meant I couldn’t “live it up” as much. I don’t regret these choices but they are choices. Yes, a $5,000 and a $10,000 diamond are both forever, but the engagement ring is something she (her friends, family, and the social medias) will look at every day of that forever. If you don’t want 365 of days to pass where she has to look at the smaller ring, go big or go home.
I’ll end with this comforting sentiment. On PB51: Scraping by on $500K Revisited ft. Financial Samurai, I was shocked and appalled to hear The New Rule For Engagement Ring Buying: a man should spend up to, but no more than the initial purchase price of his car. Let’s just say given that the MSRP on a Dodge Charger R/T is over $34,000, my next book might be tentatively titled Debt Free Or Die Trying…Again.
Marcus Garrett is one-half of the Paychecks and Balances podcast, a certified internal auditor, and author of Debt Free or Die Trying: How I Buried Myself in Over $30,000 in Debt and Dug My Way Out By Age 30. You can find him on Twitter @PayBalances and Facebook: PaychecksAndBalances.