Best ways to manage discretionary debt/spending.

What are some tips on how to handle discretionary debt and spending habits?

Well.  There is a bit more to it than stop spending and living in a budget.  What are the reasons as to why you or your significant other are spending so much money on non-core things or experiences?  Are either of you trying to fill a void?  Shopping therapy is really not a method on making someone feel better.  It’s a temporary high which keeps on growing for more and more.  It’s basically like an addiction to spending…   You need to set a budget for yourself or your partner (as long as s/he is aboard) and stick to it.  For example, Dave Ramsey and Suze Orman both have some good ideas on how to pay off debt.  One starts with the highest APR and pays that one off first and then go on to the next debt (loan/credit card/etc.) and progress from there.  While I agree on this method, I disagree that credit cards or loans are the devil and need to be avoided.  Unfortunately, credit is a necessary evil in life these days.  I see nothing wrong with using credit cards for “rewards” as long as one pays them off at the end of the month.  Once you get back to square one, no discretionary debt, then you can of course do this.

Here are my suggestions:

1) Gather all of your debts and list them on a spreadsheet.

2) STOP SPENDING ON THESE CARDS AND NON-NECESSARY ITEMS/TRIPS/ETC.

3) Take your NET income (earned income after taxes), subtract essential expenses (I.E. Rent/Mortgage, Utilities, Car payments, Cell/Cable, Food, etc.) and make a plan to pay more than minimal payment on each.  Let’s say you have three loans or credit cards equaling  $7,500.00 and you have $300.00 a month left over after all essential expenses are paid off.  Here’s what you do.

Loan/Credit card # 1 – APR 12.9% – Balance $2,400.00

Loan/Credit card # 2 – APR 15.9% – Balance $3,200.00

Loan/Credit card # 3 – APR 22.4% – Balance $1,900.00

Which balance do you attack first?  If you selected Loan/Credit card # 3, you are correct!  Why?  Simple.  Look at the APR.  On Loan/Credit card # 1 & 2, you would pay only the minimal payment due and all the rest goes to Loan/Credit card # 3.  After Loan/Credit card # 3 is paid off, what’s the next balance you attack?  If you selected Loan/Credit card # 2, then you’re correct again!  Pay the minimal amount due on Loan/Credit card # 1 and all the rest goes to Loan/Credit card # 2.  Once Loan/Credit card # 2 is gone, go after the final one Loan/Credit card # 1.

But Drew, how do I control myself or my help my partner/spouse from getting into debt all over again?  Do I swear away credit cards forever and just go on the cash envelope method?

Well, you can.  However, I am not one who likes to carry a lot of cash around nor I prefer the banks paying me (in rewards) rather than I pay them.  You can actually call your credit card company up and setup a limit on your credit card.  Whereas, if you have $300.00 in excess money left over after all your essential expenses are paid off, then that would be your limit, or fun money if you will.  Just call up American Express, Bank of America, Chase, Citibank or whoever your card issuer is and tell them you would like to setup a monthly limit for your credit card or authorized user.  Most banks will allow this.  I know American Express, Citibank and Chase do.

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