How Can Discretionary Income Help You Pay off Debt
My great aunt Irene, who lived to be 104, used to say, “There is too much month left at the end of my money!” She rarely had any “discretionary” income.
Discretionary income is money left over after you pay all your monthly bills using Billry®. For those who want to build wealth, using Wealthry®, then managing discretionary income is a powerful strategy that helps.
When a person wants to get their finances under control, they can do this by working with one of the trustworthy and qualified debt management companies to support their efforts. Many people find that they need assistance and encouragement to get out of debt.
It helps to work with another person. It also helps to use the online tools found in the Goalry Mall, such as Budgetry®, to keep expenses under control and Debtry® to organize a debt payoff planner as a long-term strategy. These efforts include preparing in advance for an unexpected financial emergency.
Getting Help with Debt Management
Having a debt plan to manage all your debts allows you to set the goals to pay them off. It is possible to become debt-free if you stay focused on your strategic plans. You must be consistent and have the willpower long enough to make a sincere effort. Those who are successful are people who can stay on track with budgeting and follow a pre-determined financial plan.
Use the Creditry® system to get help repairing credit. Use the Loanry® system to find more information about borrowing options, which might be available to help you, depending on your circumstances and credit profile.
What do You do if You do Not Have any Discretionary Income?
Stop wasting money on frivolous things. Buy only necessities and get them when they are on sale. Become a penny pincher. Make your coffee instead of paying $5 to $10 buying a daily gourmet coffee at a shop.
Many people, who did not lose their jobs during the pandemic, ended up with more discretionary income because they were not going out. They did not spend their money on events, movies, bars, restaurants, traveling, and vacations.
What You Should Not Do
Some stayed home and, partly out of boredom, used credit cards to buy all kinds of unnecessary stuff. That is a terrible thing to do. A person who indulges in additive shopping behavior may be a shopaholic. If this describes you, there is no shame in reaching out to get some counseling help. Addiction to shopping is like another addiction, such as gambling. If you let a shopping addiction get out of control, it can destroy your life.
Common Sense Rules for Using Discretionary Income
Almost everyone you ask, “What would you do if you win the lotto?” says the same thing. People say they would pay off their bills as the first thing they would do. Winning the lotto provides a sudden infusion of discretionary income, and the most obvious thing to do is to get rid of your bills!
How would it feel to have no more bills?
The reason paying off all the bills is so important to people is that bills represent a major stressor. Having not to worry about paying them provides great relief. People who go through bankruptcy notice this. They are debt-free after the bankruptcy, if they file under Chapter 7. After the bankruptcy is finalized, people feel like a great weight has been lifted off their shoulders.
The Hidden Dangers of Bankruptcy
Those who file bankruptcy are shocked to receive credit card offers right after the bankruptcy is finalized. Those darn credit card companies want to enslave the people with debt again. They send credit card offers (with very high interest rates) to those who finalize a bankruptcy because they know the people cannot file another bankruptcy for a long time.
If you file a Chapter 7 bankruptcy, you have to wait seven years before you can file another one. Suppose you load up on credit card debt after filing bankruptcy. In that case, the credit card companies will be able to force you to pay by garnishing your wages (making your employer deduct a portion from your paychecks) and other strong-arm methods.
Those $1,400 Stimulus Checks
Many people were desperate to get this money from the stimulus checks. For others, this was discretionary income. It was extra money if they still had a job, and they were financially stable during the pandemic.
If you were suffering and desperate for the money, I understand how you feel. For those who had a windfall when they were doing well, this discretionary income should have been used in these ways, in this order:
Pay down or pay off high-interest credit cards
Build up an emergency fund
Invest the money
The stimulus checks were a good example of discretionary income for some people who did not need it for other reasons. However, those stimulus checks were not such a big amount for people who were not in financial trouble. Creditcards.com says the average consumer has an unpaid balance of $5,897 on all their credit cards when added together. An extra $1,400 should have reduced this amount, but it is not enough to eliminate it.
The Hidden Return on Investment
Investors like to calculate a return on investment (ROI) for the money they invest. If you put money in a savings account at a bank, you might be lucky enough to get a paltry 1% annual interest.
If an investor makes an annual return above 5%, by investing in the stock market, that is a good investment return compared to the overall rate of return of the S&P 500. The S&P 500 is a weighted average of the investment performance results from 500 of the largest companies in America.
An investor who makes 10% ROI or more is either a financial genius or very lucky. Usually, the higher the rate of return achieved, the more risk there is of losing it all.
ROI that Blows the Mind
Here comes the amazing part. Are you ready to be shocked?
What if I told you that the average consumer has six to eight potential investments that offer 100% risk-free returns of 18% to 30% a year?
Your immediate thought might be, “This guy is nuts!” Nobody offers a 100% risk-free return of 18% to 30%. Everybody knows that a higher return comes from taking more risk. For such risky investments, you might make 18% to 30% for a while and then lose all your money after that.
The things I am talking about are carried around by average consumers and are very common. These “investments” are their credit cards with unpaid balances. Read the fine print of the credit card companies’ terms and conditions, and you will see the outrageous interest rates charged by them. Except for special promotions, the credit card interest on the unpaid balances ranges from 12% to 30% annually. The average is 18.25%
If you pay down a credit card bill using discretionary income, this is a wise move. If the credit card has an 18.25% annual interest rate, you just saved yourself the equivalent of making 18.25% on an investment of the same amount of money.
Maintaining a High Balance on a Credit Card is Terrible
Here is how the math works using an annual interest of 18.25% with daily compounding. Daily compounding means that today’s daily interest rate is charged on the unpaid balance plus the interest charged and the remaining principal balance up to yesterday.
Imagine the unpaid balance is $1,000. The daily interest rate that sums up to an 18.25% interest rate is 18.25% divided by 365 days. This equals 0.0005 (0.05%) per day. On $1,000, this is $0.50 in interest. On the first day, that interest is charged, the new balance becomes $1,000.50, and then, the next day it is higher.
On the next day, the interest rate is applied to the $1,000.50, and the new amount added is 0.50025.
The tiny incrementally increasing amount from daily compounding adds up. For a $1,000 unpaid balance on a credit card for one year the amount due to increases to $1,200.16 making the effective interest rate 20.16% due to daily compounding.
Be sure to consider the negative impact of daily compounding for credit card interest charges. Hunt for this in your credit card terms and conditions to learn exactly what you are paying in interest. Use the APR interest rate figure because that includes all the costs of the borrowing on top of the regular interest rate.
Consider that if you invested $1,000 and the investment had an ROI of 20.16%, you would have $200.16 profit from the investment. If you pay off a credit card using the discretionary income that you would have kept for a year with an unpaid balance of $1,000, you just saved yourself the same amount of $200.16 in credit card interest that you do not have to pay.
The average person carries six to eight credit cards in their wallet. If those are high-interest credit cards with unpaid balances, those are all investments when paid off. Take any discretionary income and pay off high-interest credit cards first before you do anything else with the money. The money you save is 100% risk-free and equal to having a very high ROI on an investment.
Getting Rid of Credit Card Debt in Three "Easy" Steps
For step one, the first thing to do, if you want to get rid of credit card debt, is to cut up all of your credit cards, except one that has an available balance for an emergency. Cut all but one in half. If you only keep one credit card for an emergency, you will be able to manage the other credit card accounts.
You do not close the accounts by cutting up the cards. Instead, you keep yourself from using the credit cards without first having to request a new one. Forcing yourself to request a new card puts a short pause between the impulse to buy something and receiving the card in the mail to charge something on it.
For step two, add up all the unpaid balances on all credit cards you have. Divide this number by 36. This is the approximate number you need to have of monthly discretionary income to pay down the balance (without the interest) within three years.
For step three, you must find a way to have this amount of monthly discretionary income.
Here is some math as an example:
- Imagine you are an average person with a total unpaid balance of $5,897 on credit cards.
- Dividing $5,897 by 36 equals $163.81. This is the monthly amount you want to use to pay down credit card balances.
- Find some way to have $163.81 of discretionary income each month to pay off credit cards.
There are two ways to find $163.81 per month. The first way is to reduce expenses by this amount. The second way is to increase monthly income by this amount. You might be able to do a bit of both.
Conclusion
Do not count on winning the lotto. Creating and properly using discretionary income is your best way to pay off debts. Use the Budgetry® tool to set up a budget. Take a hard look at all your monthly expenses to see what can be eliminated. Use the Creditry® tool to get your credit history under control. Use the Loanry® tool to see if there might be a way to consolidate high-interest-rate credit cards into a personal loan at a lower rate.