Chip Away

[ illustrations by Zoe Neely ]

Aaron Yeager became interested in finance when debt made it truly personal to him.

“I got into credit card debt, which kind of spanned most of my adult life up until a couple years ago,” says the former executive director of Know Personal Finance nonprofit, which is wrapping up services.

He started researching the topic, and he read anecdotes from many different people on a personal finance thread on the discussion website Reddit. But it wasn’t just the numbers that held his attention.

“I have a high interest in emotions and the way that people relate to money,” he says.

This perspective led him to focus on the emotional side of financial challenges while meeting with clients of Know Personal Finance for financial therapy sessions. Debt is a common challenge, as about a quarter of his clients came to him about it.

Yeager discusses different ways you can work on tackling debt and take control of your finances.

Make a Plan

To conquer your debt, you need to find a manageable plan that fits your life and start taking action. A good first step may be discussing your situation with a financial planner to look at the big picture.

Feeling ashamed of debt is very common, Yeager says, whether those feelings are stemming from pressure from family members or other causes.

“I find that a lot of people feel insecure,” he says, “even when the debt is manageable and they’re being responsible with their money.”

If a major change is needed, you might consider switching your career path, which has delayed benefits. He offers the example of going to community college to become a nursing assistant or dental hygienist. “To offset that debt, I recommend options that offer a lot of value for the cost,” he says.

Make sure you have a budget, and factor debt payments into it. Once you’ve done that, try adjusting your spending right away.

“Find a way to kind of optimize your expenses,” Yeager says. “Spend money only on things that you really value, and then minimize expenses on everything else.”

It can be overwhelming to think about paying all of your debts at once, so for all debts except your mortgage, consider using the snowball method to prioritize paying more on your smallest debts first and make minimum payments on everything else. You will pay off that debt faster, and each victory propels you to pay off the next debt. Or you can try the more aggressive avalanche approach that involves paying more on your debts with the highest interest rates first and paying the minimum on everything else. While it could take longer to see a breakthrough, this method could save you money on interest payments in the long run.

When it comes to prioritizing which debt to pay, Yeager says it’s best for him to keep it simple.

“My personal approach has been … if you have three credit cards, paying off the one that has the highest balance on it,” he says. “It’s easy to understand.”

On Credit

One of the most common forms of debt is credit card debt. High-interest rates can quickly add to the amount you owe.

“They can get out of control,” Yeager says. “You might have a $500 balance that increases to $2,000, without you even realizing it.”

The average amount for individuals varies, and so does the amount of time it takes to pay it off, depending on how much more or less than the minimum payment you make each month.

“It can be short or long term, depending on how aggressive you are,” Yeager says. He explains that if your minimum payment is $30, and you pay $100 each month, then it might be short term. “If you can only make the minimum payment because maybe you lost your job, then it would be more medium term,” he adds. Using a website like Mint can help you predict how long it’ll take to pay off the entire amount.

To afford larger payments and keep your bills in check, you can change some habits. “If you’re someone who really enjoys eating out, but you only shop when you need to, then make sure that your shopping budget is a lot lower,” he says.

Also consider taking your credit card out of your wallet. Yeager leaves his credit cards with his valuables at home, using cash or a debit card while he’s out.

“The less physical access you have to them, the better,” he says. “If you’re using cash or a debit card, you can see visually how much you have. Whereas with a credit card, because the credit limit can be high … it’s hard to really conceive of how much of a limit you have.”

Learning Curve

Another common type of debt is student loan debt from higher education, which averages at $40,000 to $50,000 per person and can take years to pay off.

On the bright side, the payment amounts are constant month to month, unlike credit card payments, so you always know what you need to pay and can plan ahead accordingly. One plan you may consider is an income-driven repayment plan, in which you pay a percentage of your income onto your loan each month. “I did that myself, and I think it’s very helpful,” Yeager says. Depending on how much you make, however, this may be less than the standard payment, so it might end up taking you longer than the standard repayment schedule.

No matter how much you end up paying each month, there is one thing Yeager says you shouldn’t do — refinance a government-backed loan. If you do, you’ll be switching to a private loan.

“A lot of those lenders, especially if they have a lower interest rate, can be either predatory, or they can just be a less reliable, a newer kind of lender,” he says. “Their reputation isn’t as established.”

Driving Cost

When buying a car, it’s important that you do your research and not be persuaded into any financial decisions by the car salesperson, Yeager says.

“Never take a loan offer from the dealer,” he says. “Look it up yourself, compare at least three lenders and do it independently.”

He recommends a five-year loan, or if you can afford it, a three-year loan. Overall, the most important thing is to research the best option for you.

“They can pressure a lot,” he says. “But at the end, you’re the one giving them a significant amount of money, so they should have the patience to let you do that.”

Living Expense

Research and planning ahead are also vital when buying a house. Yeager recommends following the 30 percent rule. To follow this, your mortgage, home insurance, condo fee, homeowner’s association fee and any other payments must not be over 30 percent of your take-home income. Whether you can stay within this bracket can help determine which mortgage you choose.

“If you can spend only 30 percent on it, then I would definitely emphasize the 15-year mortgage,” he says. “If you can’t, then take the 30-year.”

Something to keep in mind is that although debt is common, it can be manageable.

“With any kind of debt, as long as you’re able to save at least 20 percent of your take-home income per month, with that debt included in your budget, it’s probably a reasonable amount of debt,” he says.

Yeager was able to get out of credit card debt and is using an income-driven repayment plan on his student loans. But if you’re concerned you may not be able to handle your debt on your own, then you can look into meeting with a financial adviser or counselor.

“When your gut is telling you it’s getting a bit out of control, you might want to look into it as soon as possible,” Yeager says. “Don’t let it linger.”