Episode Transcript
I definitely knew it was out of control when I went over my credit card limit. It was a lot of spending.
For a lot of people, debt is real. What do you say to them?
Know that you're not alone. Don't get discouraged.
I didn't plan to go overboard the way I did. You only live once, and then it's like, wait a second.
Putting a plan in place will help you achieve your goals. Celebrating the little wins will help keep you motivated in the long run.
How did it feel when you started to see that big number come down?
Amazing. It was a light at the end of the tunnel.
[MUSIC PLAYING]
Debt. It can be easy to get into and hard to climb out of. Right now, Americans are carrying nearly $1.2 trillion in credit card debt, a record high*. So today we're talking strategies to tackle your debt, get control of your finances, and focus on your goals.
Hi, I'm Ally Donnelly, and this is Money Unscripted, a podcast from Fidelity Investments. Before we get into those strategies, I want to tell you about Sheyna. Because of some big things in her life, she started emotional spending, and that spending spiraled out of control. So how did she dig out of her debt and focus on her big-picture goals, like building an emergency fund and saving for retirement? Let's see.
Go weave. Go weave. Over, over.
[BARKS]
Yes. Good job. Wow. You are so good. Yes.
So this is where the money went.
All of this. OK. It costs more than you'd think.
The cost for all this dog training equipment, about $10,000. Sure, Sheyna and her dog, Spin, love the training, but the jumps and tunnels are part of a two-year spending spree gone wrong.
I didn't feel the money leaving my bank account, really.
It started mundanely enough. Sheyna took out a home equity line of credit for a fence, landscaping, and other improvements for her new house. But then she started buying all sorts of stuff she didn't need. Clicking, ordering, charging, spending, and spending until she was in a mountain of debt, more than $45,000.
Once I started, it just snowballed.
The spending.
The spending. One thing we don't talk about enough is the way mental health can affect your finances. My father had died in 2022. We moved at the end of 2021, and those are two hugely stressful events. And I just found myself depressed and anxious, and the spending just got out of control.
Was there a final purchase or a moment when you looked around and thought, I got to get this under control?
Yes. Honestly, it was shocking when I got the notification that I had reached my credit limit. It was just mind-blowing because I didn't think I had spent that much.
We haven't mentioned this before, but you're a personal finance writer. You write about other people's challenges.
Yeah.
But yet you didn't necessarily take your own tips and advice.
You know, it's-- even if you know all the right things to do, it's hard to do those things.
Yeah.
But I think getting help for the mental health issues definitely helped me get back in line financially. So I was able to feel more in control just across the board. Another thing that helped was just focusing on my goal of retiring. That helped get my spending under control and also crystallized that my most important savings goal is saving for retirement. So I've got to find money to save, so I can't be spending it or paying down debt.
What was the plan? How did you start to build a plan?
My first step was moving the credit card balance to a 0% introductory interest rate card. So that helped a lot, just not having the interest piling up. Then I wanted to pay off the home equity line of credit first because it had a high interest rate. And then I started tackling the lower interest rate debt.
So I got a bonus at work. The tax refund-- that paid off a huge chunk. Any bits of money I had were going towards this debt.
I'm assuming you also stopped your impulse spending.
Yes, yes. No more impulse spending. I tried to get rid of all the accounts that made it easy to buy online.
At the same time, she started tracking her spending very closely and stuck to a budget.
That, at first, was overwhelming and frightening. But now I can look at it, and I know where I'm spending, what's happening. Nothing's a mystery. I feel a little confident, maybe proud of myself, even. Like, I was never the type of person to track my spending, and now I'm like, oh, I'm that kind of person who does that.
[LAUGHS] I'm a runner.
Exactly.
So yes, I feel like I can manage my own finances and it's going to be OK in the future.
What are the challenges you're still facing?
It's just been a struggle to keep up with all the expenses and save for retirement. I would love to retire at 60, so that's a lot of saving.
How does what you've put in place-- the tracking your spending, the new habits, the stopping the impulse-- how does it make you feel about your future?
I feel excited about the future because knowing my expenses exactly will help me in retirement since that's a big focus. I know that I can pull back the reins in some areas and keep my expenses sort of level, which is a good feeling.
What advice would you give someone else in a similar boat?
Don't feel bad. Don't hide from it. Pay down the debt. Reduce your expenses.
And it can be done.
It really can be done. It can be. It takes time, effort, and just paying attention to it. And the more you pay attention to it, the easier it gets. I finally paid off my debt and I feel great about it.
You are so good. You are so good. What a good boy.
Thanks to Sheyna for sharing her story, lessons for us all there. Let me bring Mark Greenfield into the conversation now. He's a Fidelity VP and financial consultant, and he's going to walk through ways you can start paying down your debt and building wealth. Mark, thanks for being here.
Hi, Ally. Thanks for having me.
So we heard it from Sheyna how easy it is to fall into that debt and then the struggle to just start paying it back. I want to go deep dive on strategy in a minute, but I first want to ask, what do you say to people who might be in a similar situation to Sheyna?
Yeah, getting into debt can happen quickly. With online shopping, credit cards, tap to pay, spending money is easier now more than ever.
Yeah.
Know that you're not alone. When it comes to paying down debt and saving for retirement, we want to celebrate the little wins. Celebrating the little wins will help you stay motivated throughout the process. If we don't address the debt, it can have a significant impact on your ability to accumulate wealth over time.
OK, so I'm motivated. I'm ready to jump in and pay down the debt and kind of jumpstart my savings. What are my first steps?
First, we want to get organized. We need to understand the amount of debt that you have and the rate that you're paying on that debt. It will help us prioritize which ones to pay down first.
So along with the debt, I imagine tracking my spending is probably a good idea.
Having a formal budget can be key. Knowing the amount that you have coming in every month and what you're spending will help you determine where you can cut costs so you can start to go after that debt.
OK. So there are two key methods I know you talk about for paying down debt, and both are related to snow-- avalanche and snowball. Walk us through these.
That's right. So starting with the snowball method, we want to start to pay down the debt with the smallest balance. We want to make any extra payments we can towards that debt with the smallest balance.
Until it's paid off?
Until it's completely paid off.
OK.
Once it's paid off, then we want to move on to the debt with the next smallest balance. Here, we want to make sure we're paying the minimum payment plus the extra payments we're making for the first debt apply to the second one.
OK.
We want to continue to do this until the debts are-- all your debts are paid off. It's important to note that during this time, we want to make sure we're making the minimum payments on all your debts.
OK. How about avalanche?
With the avalanche method, we want to start with the debt that has the highest interest rate. We want to put any extra payments we can towards that debt with the highest interest rate until it's completely paid off. And then we want to move on to the debt with the next highest interest rate. Pay the minimum plus the amount you were paying on that first loan. Keep going until all your debts are paid off.
OK.
Just like the snowball method though, we want to make sure that we're maintaining or paying all of our minimum payments on your debts throughout this time.
Any way to make that easier?
We really encourage you to put on automatic payments. It'll provide consistency and help you avoid late fees.
OK, so as I'm looking at my own situation and I see these two methods, like, how do I know what's right for me? What are the benefits?
With the snowball method, where we start with the debt that has the smallest balance, it'll help keep you motivated through the process and celebrate those little wins that we talked about. With the avalanche method, where you start with the debt that has the highest interest rate, it could help save you the most on interest over time.
We've been focusing on that paying down, which obviously is critical. But how about getting a little bit ahead and tips to curb the spending in the first place?
Of course. Adding some sort of friction to make it harder for spending can certainly help. For example, you could remove your credit card from your mobile wallet. Another idea is that you could make purchases over a certain dollar amount a conversation.
What does that mean? So whatever I'm comfortable with is like-- what does that mean?
Yeah. Think of it as finding a sounding board, whether it's a partner or a friend, or really taking some time for yourself to think about if you need it. In addition to that, when we think about online spending and impulse buying, when you add something to your shopping cart, you could leave it there for a few days to see if you still really need it or if it's something that you wanted.
Yeah, and Sheyna is doing a lot of that now, which is terrific.
Great.
So back to her, one of her big motivations to pay down the debt was to get back on track for her financial goals, including saving for retirement. So how do we weigh debt versus investing?
Yeah, there's a lot of debt out there. Car loans, student loans, mortgages, and of course, credit cards. At Fidelity, we have a guideline of 6% that will help you prioritize. Generally speaking, if you have a debt with an interest payment of more than 6%, we want to prioritize paying off that debt over saving and investing for retirement.
We're all different, and we all have different financial priorities. Any advice on how to juggle those things?
At Fidelity, we do have a hierarchy when it comes to saving and paying down debt. Number one, we want to make sure that you're making the minimum payments on all your debts over this time frame. The second piece of it is we want to have you start to build up an emergency fund in case something comes up. Here at Fidelity, we want to start targeting about $1,000.
The third priority is thinking about your 401(k) or your 403(b). If your company offers a match, we want to take advantage of it. For example, if your company is offering a 3% match, we'd encourage you to invest at 3%. It's like free money.
From there, we want to go back to your debts, and we want to make sure that you paid off all of your credit card debts. Lastly, we want to think about that emergency fund again, and we want to build it up to cover between three to six months' worth of essential expenses.
I want to talk more a little bit more about motivation. So once I've paid off my debt and then I'm thinking about that next dollar I have, where should I think about putting it in terms of saving it or putting it toward retirement goals?
Yeah. I mean, first, congratulations on paying off your debt. It's definitely a win to celebrate. Ideally, we want to try to save 15% of your pre-tax income towards retirement. That includes what you're contributing as well as any sort of match that your employer may be providing.
Now, where that next dollar goes after that really depends on your priorities. Are you looking to purchase a car? Do you have student loans? Are you saving for a home? Thinking about that priorities-- or those priorities-- will help you determine where the next dollar goes.
As people are leaving this conversation and you want them to take some key lessons, what do you hope those takeaways to be?
Number one, don't get discouraged. Number two, putting a plan in place will help you achieve your goals. And number three, by already having this conversation, you're headed in the right direction.
Awesome, Mark. Thank you so much.
Thanks for having me.
If you’re looking for more resources on paying down debt and investing for your future self check out Fidelity.com/MoneyUnscripted. Be sure to like, follow, subscribe to the podcast.
We’ll see you next time on Money Unscripted. It’s your life, get your money’s worth.
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[Footnotes + Disclosures]
*Federal Reserve Bank of New York
Investing involves risk, including risk of loss.
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. The views and opinions expressed by the Fidelity speaker are his or her own as of the date of the recording and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product. Neither Fidelity nor the Fidelity speaker can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.
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