Finance
I have $68,000 in credit card debt and $50,000 in a 401(k). How can I get myself out of this trap with a $55,000 salary?
Dear Quentin,
I definitely don’t live extravagantly.
I have $68,000 in credit card debt on four cards and am making a minimum payment. The payments total $1,800 per month. My salary is $55,000, and the take-home pay is about $3,300 per month. This is my only income. At best, I can increase my salary to $70,000 in the next few years. I have no potential for a high income. I will not make it; I use savings, of which I have about $75,000, and put more on credit cards each month to pay my bills.
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I am divorced, 57 years old and my mother, 95, moved in with me because she was alone. I am her primary caregiver. She has no money and no possessions. She has a small Social Security benefit from which she gives me a few hundred dollars for our monthly food and gas bills. She recently qualified for some domestic help during the day, but I am at night and on weekends. This combined with my full-time job has taken its toll.
I would love to eliminate all that credit card debt with my savings, but that would leave me with next to nothing. Due to a possible emergency with my mother or my health or my home or other unknown matters, I become paralyzed at the thought of not having cash, so I continue to use the cards. There is about $225,000 equity in my house, but my interest rate is now 2.85% and my mortgage is $250,000 with 27 years left on it. I only have $50,000 in a 401(k).
I should do it. I don’t want to come here anymore. This is all so stressful – and that’s all I think about. Fortunately, there is light at the end of the tunnel. I am the future beneficiary of a life estate from my father after my stepmother passes away. She is 85. This will be real estate, a stock portfolio and other regular income with a current market value for my stock of approximately $2 million. At least, if the economy holds up.
Can I live on my salary if I don’t have to worry about credit card payments?
Search for help
Dear seeker,
Let him who has never ordered a package on Amazon AMZN or used a credit card cast the first stone.
But it’s also time for some tough love. You borrow from Peter to pay Paul. Or put another way, you borrow money from these credit card companies to pay for your groceries and your mortgage. You have the solution in sight. You just have to do it. It’s time to grab the nettle and pay off your credit card debt. Do what is necessary. But put it away. If you continue to catastrophize, you risk making an already difficult situation impossible.
First of all, you actually have a lot to offer. You and your mother have a roof over your head, you have food on the table, you earn $7,000 more than the average annual wage in the US, and you have a mortgage interest rate of 2.85%. And you’re very likely in for a $2 million windfall. This is much more than many Americans have. Plus, you’ll have a $75,000 war chest for a rainy day. Here’s the Moneyist’s weather forecast: It’s raining.
So here’s what you do: Pay off your credit cards – all four of them – and cut them up. That leaves you with an emergency fund of $7,000. Create a monthly budget for your income and expenses – utilities, property taxes, home insurance, mortgage payments, groceries and gas – and, instead of paying $1,800 every month for credit cards with a 22% interest rate and risk ruining your credit score, save $500 per month.
Assuming you had a 10% down payment, your current mortgage, excluding property taxes, shouldn’t be much more than $1,100 per month. With a net income of $3,300, you should be able to have money left over from the first to the last of the month. This $68,000 credit card debt has become a monster that seems to personify all your fears and insecurities. It’s time to slay that dragon, and that day is today.
It’s time for some soul searching
Your mother is lucky to have you, and I’m sure you’re lucky to have her too. If there is no long-term care insurance, you can look into Medicaid – keep your accounts separate — state and federal financial assistance as described in this guide from the AARP, and community support from organizations such as the Action network for healthcare providers and the National Council on Aging. Informal caregivers do $600 billion a year in unpaid worka figure that does not include wage loss.
In addition to budgeting, you also need to do some research. Why did you put so much money into this plastic, the most dangerous type of credit? Have you had emotional and/or financial difficulties after your divorce? What has brought you to this state of financial paralysis? Sometimes, when we are familiar with the chaotic and challenging emotional life, that is what we are drawn to. It’s time to break that cycle.
My intention is not to psychoanalyze you, my intention is to encourage you to ask these questions and find the answers for yourself so that you can (a) understand how you got into this financial ‘crisis’ and (b) you feel the power to change it. , since you do have the resources to do so. Unless we recognize that our emotional lives and our financial lives are connected, we are doomed to repeat the same mistakes again.
Christine Wilson, writing on the wellness blog: Live well and fully, says: “Chaos addiction refers to a pattern in which people often find comfort and familiarity in disordered or chaotic situations. This pattern may arise from previous experiences of instability or trauma, causing individuals to unconsciously seek out similar environments later in life. Unlike traditional addictions that involve substance abuse, chaos addiction is more about emotional patterns.”
We can have chaotic relationships with other people and yes, we can also have chaotic relationships with money. It can take many forms – from the impulsive shopper who uses credit cards to escape the real world to the gambler who risks his entire livelihood for a roll of the dice. Given your home ownership and obvious caregiving skills, there is most likely another underlying problem that has led to $68,000 in credit card debt.
Here’s a fascinating piece about impulsive shoppers and what – and why – they do what they do. Their purchases don’t just have to be luxury items like jewelry or designer clothing; “shopaholics” can get the same rush from purchasing everyday items like Clorox or Tide Pods. This studypublished in the Journal of Consumer Research, suggested that the process of shopping (and escaping) can be just as exciting as the package arriving in the mail.
The complexity of impulse purchases
“Consumers who lose control are more likely to purchase products that are more functional in nature, such as screwdrivers and dish soap, because these are typically associated with problem solving, which can increase people’s sense of control,” the authors wrote. Another theory: it could be that they are well-known household brands and simply remind them of their childhood. It’s not a judgement: we all do it to some extent.
The study found that buying even the most boring household items is enough to satisfy the cravings of compulsive shoppers. In one study, participants were asked to recall a situation in which they felt a great sense of control after shopping; They ended up buying more practical products at the supermarket, such as cooking ingredients and household cleaning products. This research may or may not resonate with you, but it shows that our psychological relationship with our finances is complicated.
You’ve shown a lot of strength and you’ve come a long way: Believe it or not, not everyone would dedicate themselves to caring for their 95-year-old mother or father when they are under so much pressure financially. We need to alleviate the shame and guilt surrounding credit card debt and start asking the hard questions: not just how to pay off debt, but why we got into debt in the first place.
The good news is that after you use your emergency fund for this emergency, your credit card balance will be zero. The same cannot be said for the average American household, which has nearly $8,000 in credit card debt, according to the most recent data from the US Census Bureau and the Federal Reserve Bank of New York; In fact, there was an estimated $1.12 trillion outstanding in credit card balances in the first quarter of 2024, up 13% from a year ago.
We are all guilty of overspending from time to time, but we need to face this and take corrective action if and when we do.
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