How to get rid of soul-crushing amounts of debt
In this four-part Finance series for nurses, we’ve already covered in part 1 and part 2 the incredible wealth generating possibilities that come with smart retirement account investing. We even dove into how a nurse who started investing at the beginning of her career could retire with more wealth than some doctors.
Many of the ideal examples we gave for nurses were dependent on the nurse starting a career with little to no debt. Unfortunately, this isn’t usually the case. Most nurses start their career with some amount of debt, whether it’s in the form of student loans, car loans, or debt from credit cards, weddings, or big purchases. .
Then you throw in additional costs of living such as a house downpayment or major car repair, and suddenly you find yourself buried in a mountain of debt.
In this article we are going to cover:
- A proper mindset when it comes to debt
- A 4-step process for slaying your debt monster
- The best tools & resources for tackling debt
Disclaimer: I’m not a financial advisor (I’m a nurse!) and don’t pretend to be one online. We suggest consulting your tax and accounting professionals. This post is for informational purposes only.
Perceiving debt: You’re septic AND bleeding out.
In the first part of this series, we detailed how compound interest can snowball into huge gains. Similarly, debt can snowball just as quickly in the other direction, generating huge losses.
One way to think about debt is like a house fire. It might just start from a small spark, or a small amount of debt. The interest continues to add up, which increases the total amount you owe. This in turn increases the interest payment you owe on the next billing cycle, spreading like fire.
If left to burn for too long, your debt can blaze to an inferno where you only have enough cash to cover the interest payments, leaving you forever in debt. Additionally, the money that you put towards interest payments could be better deployed in your retirement accounts on assets that gain in value. Thus, the lost opportunity cost is even higher than we think.
So let’s talk about how we can put that fire out, ASAP. If you have high-interest rate debt weighing you down, there are only 3 things that you can do.
- Lower your expenses
- Lower the interest rate on your debt
- Increase your income
Here’s how we can apply these three debt reduction strategies for some common types of debt that us nurses experience.
Whenever I get in trouble at home, my wife says, “every decision you’ve ever made has led you to your current situation.” In other words, you have to live with the choices you have made.
I’m generally not the type of person who points fingers in regards to my current state of affairs…however… credit cards. The fact that we have such easy access to intangible money with credit limits far exceeding responsible (or realistic) levels in a society that places emphasis on living in the moment and material goods is a disaster of biblical proportions.
Easy access to credit cards are like giving someone a free ticket to an all-you-can-ingest buffet where the waiter drops a huge bill on the table mid-meal and is like, “you didn’t read your ticket? Only the first 30 minutes are free, now you owe $20,000. Don’t worry, you can work it off in the back for the next 20 years.”
We would be horrified if we saw an actual buffet preying on people like this, but that’s exactly what we let credit card companies do to us. Brb, just got a notification saying my credit limit increased and I didn’t even request it!
Step 1: Stop the bleeding: Decrease your spending
Apply pressure, cauterize the wound, elevate the limb – do whatever you’ve got to do to stop the bleeding. How does that translate? Stop the spending. Easier said than done, but it’s a matter of (financial) life or death.
- Option 1: Cut up your cards and go cash-only.
This is an extreme tactic to be used if you have really bad willpower (which actually is proven to not be effective). So if you have a sheer problem with self-control and saying ‘no’, this might be your best bet. You eliminate both he temptation (and possibility) to use credit cards to spend. No money, no honey (or debt).
The Envelope Method is a good strategy for allocating funds and staying within those limits. You set a budget for all the different types of recurring purchases, from groceries to rent, transportation, utilities, etc. Then at the beginning of the month, you put the cash into the corresponding (labeled) envelopes.
By tangibly having your whole month’s budget in the envelope, you are more conscious of the impact of every purchase and it becomes impossible to over-extend your budget because of the limited amount of cash available.
Once that envelope is empty for the month, you’ve got to get creative, or feel the pain of having to ‘borrow’ from another envelope. One way or another, it quickly becomes apparent where your spending goes awry.
For me personally, this method wasn’t super successful because I didn’t like carrying a bunch of cash around and having to switch envelopes depending on where I was going. Also there were urgent situations where it was a lifesaver to have a credit card on me (though it’s important to define what falls into this category. Hint: it’s not shoes).
Key Concept: Paying off debt = guaranteed return on your investment.
In the second article of this series, we talked about the S&P 500 Index Fund, which data shows is the best bang for your buck when it comes to retirement account investments. The historical average annual rate of return of the S&P 500 is about 7%.
7% is an important number to commit to memory. Repeat it after me…7%…7%…7%.
It is the baseline return rate that all of your investments should be measured against, because we know at the very least we can always throw any available money into an S&P 500 Index Fund and get a return of about 7%.
So whenever we are thinking about moving our available funds, we need to ask ourselves: “Is this financial decision going get me more than a 7% return on my money?”
This holds true for credit cards and loan payments, the latter we will cover below.
It’s important to remember that the S&P 500’s 7% return is an average…not a guarantee. We don’t really know what the return will be year over year, but we do know over decades, on average the S&P 500 will generate a (+)7% return.
Paying off your debt on the other hand, is a GUARANTEED return on your money.
For example, if your credit card has a 20% APR, that means the annual return on that debt is a (-)20% loss. It doesn’t matter if we are in a recession or the best market of all time, you are losing 20% of your money every year in the form of interest rate fees on your credit card balance.
In the first article we showed that the difference between a 2% rate of return and 7% rate of return can result in $500,000 extra in your bank account later in life, so a (-)20% loss is a huge deal.
By paying off that credit card debt, we are going from (-)20% loss to 0% loss, which you can look at as a (+)20% short-term gain on your money. That’s a better return than any index fund on the market!
- Option 2: Use debit cards
Debit cards, when used appropriately, can accomplish the same outcomes as the Envelope Method. Rather than having physical cold-hard cash, it’s a number in a bank account. It doesn’t have the same ability to allocate out the amounts, and you oftentimes don’t want that account going to $0, in which case you’ll likely have more money in that account than you should be spending each month (which gives you room to over-extend your budgets). If you lack that self-control we talked about, debit cards are definitely a good option, especially when used in conjunction with something like Mint that easily tracks your spending and corresponding categories. You can even set budgets!
Similar to The Envelope Method, this strategy didn’t work for me long-term. At any given time, I didn’t know how much I had on the debit card without pulling out an app and logging into my bank account. This was totally a #firstworldproblem, but it was super inconvenient to do every time I needed to purchase something.
My laziness ended up costing me when I was at a farmers market where I made like 10 different purchases at different booths with a zero balance on the debit card, so every transaction hit me with an overdraft fee. Whoops, so much for saving money.
- Option 3: Cashapp debit card with credit card backup
I’m a huge fan of Cashapp and their debit card (and no I’m not getting paid to say this!). You still have to log into an app to see what your balance is, but their app is much easier to use than a traditional banking app. You can combine your Cashapp debit card with my favorite online bank Capital One to create a digital version of The Envelope Method from Option: 1.
With Capital One, you can create an unlimited amount of different checking accounts, so you can create one for food, rent, transportation, utilities, etc. You can even setup automations to split a paycheck and auto-deposit your monthly budget into each account. Then you can connect any of those accounts to your Cashapp.
You could also just get a debit card for every single account you created in Capital One, but I try to carry as few cards as possible.
With the Cashapp debit card, you also get significant discounts at stores like 10% off Whole Foods or $1 cash back at coffee shops, which creates a strong incentive for using it over your credit cards without losing the convenience of using a card to purchase things.
Anytime you are trying to fix a really bad habit, you have to make the good habit as easy to implement as possible, and conversely the bad habit really inconvenient. In fact, I’ve seen some people go as far as freezing their credit cards in a big block of ice, that way in order to use it they’d have to wait hours for the block to melt. The idea was that by the time the block melted, they wouldn’t have the urge to make the impulse buy anymore.
Extreme…but whatever works!
Additional ways to lower your expenses
Whether you make a decision to focus on the credit card or student loan debt, the extra money has to come from somewhere. Sure, you can find ways to make more, but back to some of the great advice grandma gave us: “A penny saved is a penny earned.”
It will always be easier to reduce expenses than increase your income. And your time and sanity has a price – both of which will take a major hit when you’re working 60+ hours week over week.
Track your spending: What gets measured gets improved
Knowledge is power — so knowing how and where you spend your money is the first step in decreasing expenses. The most efficient way to do this is to use technology – the same kind that’s already made most all other aspects of our lives more efficient and transparent.
There are several apps that connect to your bank/credit card accounts and automatically organize and categorize your spending.
For years I used Quickbooks for tracking my personal and business expenses because tax professionals always recommend using it. My gripe with Quickbooks is the monthly fee. It costs $10/month which doesn’t seem like a lot, but when we are trying to tackle a mountain of debt, we shouldn’t add additional costs or recurring payments if possible.
Recently I discovered WaveApps which is a cloud accounting software similar to Quickbooks except that WaveApps is completely free. Instead of charging you for the accounting software, they make their money by charging for add-on services like bookkeeping or payment processing – which are great but not features you’ll necessarily need to get the job done. WaveApps user interface is less complicated than Quickbooks, but Waveapps lacks some functionality that I miss from my time with Quickbooks.
In WaveApps, there are no subcategories, so the best you can do is create categories with the same first word. Example: One category would be: “Automotive – Gas” and another category would be: “Automotive – Repairs & Maintenance”. In order to get the total amounts you will just have to add up the different categories manually. A lack of subcategories isn’t a major inconvenience though, so I still recommend WaveApps over Quickbooks.
Mint is another great app for tracking expenses. Of all the examples I listed above, Mint is probably the easiest to use. You can connect all your bank accounts to Mint and it will automatically pull the transaction data and even auto-categorize your spending.
Just be aware with any app that is free for you, the company has to make money somehow, and that usually involves selling your data. In this case the data you are giving up include: every purchase you make, your income, and your debt. That’s very sensitive data so be sure you understand what you’re giving up and make sure the company has a strong reputation when it comes to security.
A little extra effort can go a long way.
You can lower your bills with a single phone call. Call your internet service provider and ask them if they have any promotional rates right now. When they ask why, mention that you are looking to reduce your monthly bill and are considering all affordable options. This can apply to cell phone, gym membership, car insurance, etc. Don’t just assume that what you agreed to when you signed up is still the best offer they have.
Seriously…try it. You don’t get what you don’t ask for, or seek! The first time I tried this with T-mobile the guy on the other end was like: “Yeah, we do! We can knock off $10/month of your bill”.
Blew my mind. I tried to do it a year later and the lady on the other end thought I was crazy…Oh well. At least I saved $120 right? If you really want to take this strategy as far as it goes, when you get resistance to the idea of lowering your bill, tell them you are going to cancel your account (which maybe you should if there are more affordable options). You may get transferred to a customer retention team that has authority to offer you a better deal in order to keep your business.
Literally cut costs.
Cancel your subscriptions. Downsize your plans. Reassess the actual value and utility you get per-use.
Cable/Satellite TV is a huge waste of money (and arguably time). You can get internet-only plans for a fraction of the price and watch all of your favorite shows online, saving you $50-70/month. All the best content is being produced by the streaming services anyway.
Do you really need the latest iPhone? Or a plan with your provider you agreed to 10 years ago? Chances are, you’re spending at minimum $60-70/person each month on a phone plan?
Instead, you can downgrade your unlimited data plan, sell your newer model phone and get last year’s model used on Craigslist (or use the one you have lying around). Then you can hook the phone up to GoogleFi which has plans as cheap as $20/month. Sure, they don’t have data, but if you have stable wi-fi at home and at work…do you really need an unlimited data plan?
Another option is to subscribe to Apple’s Upgrade Program which is a monthly program where you pay $40-50/month and then every year you can just trade-in your phone and upgrade to the newest phone. You end up paying for the tax on the new phone which adds $99 to the whole process every year. But that’s really only worth it if you insist on needing a new phone every year.
It’s true that leases are generally a poor choice compared to ownership for things like cars and homes. The difference is that phones depreciate in value so much faster than cars due to things like planned obsolescence where manufacturers intentionally slow down older models to incentivize you to buy new ones.
In 10 years, the car will still be running. A house will still be providing shelter, and if it’s in a good location it may increase in value. A phone on the other hand turns into a brick in less than 5 years. So if it’s important for you to have a newer model phone and you’re bringing in steady monthly income, leasing through the Apple Upgrade Program may be worth looking into.
Cars: a personal finance disaster
For some reason when we finally start our career as a working nurse, we get this urge to buy a new car. I’m not sure why, but I suspect it’s because you probably were driving around in a beater during college, and upgrading to a nice car makes you feel like you’ve finally “made it”. I beg you to suppress that urge, because buying a new car is a financial disaster. Especially if you have credit card or student loan debt.
If you have car payments and you also have thousands of dollars in high-interest credit card debt, you can solve multiple problems at once.
If you sell your new car and buy a used one in cash, you get rid of the auto loan debt, get cash to put toward paying down your debt, and you free up monthly cash-flow which would normally be put toward your auto loan. But now it can be put toward paying down your credit card or student loan debt.
Or better yet, sell your car and don’t buy a new one. Instead buy a $500 bicycle and bike to work every day! Biking to work every day sounds crazy but it is more doable than you think. One of my heroes is MrMoneyMustache, the king of frugal living. He wrote an eye-opening blog post called The True Cost of Commuting where he calculated that “each mile you live from work steals $795 per year from you in commuting costs.”
That means that you can justify paying “about $15,900 more for a house that is one mile closer to work, and $477,000 more for a house that is 30 miles closer to work. For a double-commuting couple, these numbers are $31,800 and $954,000”.
I live in San Diego where it’s not possible to buy a house close to any hospital for less than $550,000 which is out of my price range. However, I was able to find a cheap apartment to rent within 2 miles of work which allowed me to bike to work every day.
Biking to work is a life changing experience that I highly recommend to everyone.
- You get some exercise before and after work which helps with the stress levels of working as a nurse.
- If you live in a metro area like San Diego, it ends up taking less time to bike places than it does to drive.
- You save even more time by parking your bike right next to the front door whereas car drivers have to find a spot in the parking structure which is usually much further away.
And it’s SO MUCH CHEAPER than owning a car. Since my wife and I share one car we save thousands of dollars on gas, insurance, registration, maintenance, etc. Going from a 2-car to a 1-car family probably had the most significant impact in the battle against our debt monster.
Step 2: Treat the infection: Lower the interest rate on your debt
Remember that uber-adulting concept of a credit-card? You know, when your parents (or grandparents) told you that it was important to have a good credit score? Well I hope you were listening, because this step requires a good credit score.
Credit cards are terrible if you don’t pay them off in entirety every month as they have an ongoing APR of 18.24% – 25.24%. Whatever you do, when it comes to credit cards, completely IGNORE the ‘minimum payment due’. When you pay only this minimum, rather than the entirety of the monthly bill, you begin accruing interest on the remaining balance. Just to emphasize, paying ONLY the minimum amount due will result in you carrying a balance, in which an interest rate is applied to. I was getting buried by the interest rate on that card and my solution was utilizing a balance transfer to a card with a lower interest rate.
- The Pros:
A balance transfer is essentially transferring the balance of the debt you owe in one place to somewhere else that has a lower interest rate. You can find credit cards that offer introductory 0% interest rates for a certain period of time to take advantage of. For example, the Capital One Quicksilver card offers a 0% interest rate for 15 months, which can give you a ton of breathing room so you can pay down the debt instead of just the interest rate payments. Another good resource is a local credit union which typically have fantastic rates and 12 months of 0% interest.
It’s important to note when you do a balance transfer you will get charged a % of the balance as a fee. With the Quicksilver card it was 3%, so $300 on a $10,000 balance, where other cards can go up to 5% or more. It’s also important to make sure that the card you are doing a balance transfer into doesn’t have an annual fee, otherwise you’re just adding more debt onto your books for no reason.
- The Cons:
This strategy is super dangerous because you are getting hit with a balance transfer fee each time and your credit score takes a hit each time because of all the hard pulls you are triggering by opening new accounts. But you know what else is bad for your credit score? Filing for bankruptcy! So you gotta do what you gotta do.
The biggest danger with this strategy is that if you haven’t taken the necessary steps to control the bleeding as discussed in Step 1, you can end up transferring the balance to a new card and then just filling up the old card with new purchases. It’s like opening up a new wound before patching up the old one. You won’t be able to dig yourself out of that hole, so make sure you have your spending under control before considering a balance transfer.
Student Loan Debt:
Nursing school (or any for that matter) has become ridiculously expensive. If you graduated nursing school with student loan debt it’s likely you have a mix of both federal and private student loans. The difference between the two types of loans are a great example of good debt vs bad debt…yes there is a type of debt that is “good” (not that dissimilar to HDL and LDL cholesterol :))
The big question is should you pay student loan debt down faster or contribute to your retirement accounts? Great question. Not a simple answer.
The key piece of information you need to make an informed decision is the interest rate on all of your loans. According to Nerdwallet, the current student loan rates for private student loans can range from 3.94% to 14.73% (yikes), with the federal rates ranging from 5.05% to 7.60%.
The massive range in private loan rates is why it’s so important to determine your exact rates. The answer to the big question posed above will depend entirely on your rates.
For example, if you have federal loans with a 5% interest rate, paying them off could be seen as a (+)5% return on your money. Since we know the S&P 500 will give us an average of a (+)7% return, you can make the argument that it’s a better use of your money to make the minimum payments on your student loans, and put the extra money into your retirement accounts.
Conversely, if you have private student loans with interest rates above 7%, it’s probably better to put any extra money you have toward paying down that debt so you can lock in a better rate of return than your S&P 500 Index Investment. But you have to be disciplined enough to actually take the money you would be paying your debt down with and invest it in an index fund. Resisting the temptation to use that available money on buying more crap can be a herculean task.
In either situation, it’s important to remember that maintaining debt is always risky, or a ‘thing’ – AND there’s no better feeling than being debt free and being able to snowball in a positive direction. There’s value in keeping things simple and just paying off your debt completely.
In the same way that balance transfers can be a solution to convert the interest rate on credit card debt, there are services which allow you to do something similar with the interest rate on your student loans.
This strategy is called “refinancing”, which is when one company pays off your debt with whoever is currently loaning you money, and now you are in debt to the new company, but at a much lower interest rate. Why? Because they have the opportunity to make money off the money they have.
SoFi is a popular service that has taken the personal, student, and home mortgage loan world by storm. They have an easy UI/UX, tech-first approach which ultimately just makes it super easy to understand your loans and pay them down.
The important thing to consider before refinancing, is whether any of your loans are available for deferment or cancellation. Oftentimes, you must consolidate your loans for refinancing and doing so might make them ineligible for any loan repayment programs.
[Call to Action]: Make a spreadsheet with all of your student loan and credit card debt. List how much you owe and at what interest rate. Prioritize paying down the debt the highest interest rates.
Dave Ramsey is one of the most popular personal finance gurus out there and he advocates a slightly different strategy for paying off debt than the steps I’ve laid out above. I feel it is worth mentioning in this article because I really respect his content. Ramsey recommends a strategy called The Debt Snowball which involves paying down the accounts with the smallest balance first. Even though mathematically it doesn’t make sense to leave higher interest rates on the table, he says “The debt snowball works because it’s all about behavior modification, not math. When it all boils down, hope has more to do with this equation than math ever will.”
The idea is that you will get such a psychological victory in getting an account down to zero that you will gain the motivation to tackle the next account and then next one vs. starting with a massive pile that feels discouraging because it doesn’t feel like you’re making any progress.
I am all about efficiency and I work really hard on de-coupling my emotions from the numbers, so I will always lean toward taking the quickest path toward my goals which in this case would be paying off the highest interest rate debt first.
That being said, getting your debt in an account to $0 feels friggin’ awesome. So I can totally see the value in Ramsey’s method.
Which debt repayment method do you think would work best for you?
Step 3: Get a blood transfusion: Increase your income
Once you have done everything you can to stop the bleeding (control your spending and reduce your expenses) and treat the infection (lower your debt interest rate), it’s time to replenish all the blood you’ve lost by generating more income. One of the major benefits of being a nurse is that a full-time work week is typically 3 days. Even if we spend an extra day recovering (or catching up on life), we’re still left with 3 ‘free’ days free to generate more income.
We touch on this a bit in our Trusted Guide to Money, but here are some strategies for bringing in more cash:
- Working extra shifts: Nursing departments are so short staffed everywhere that there are ample opportunities to pick up extra shifts when they get desperate. Since you already worked a full-time workload, all of the hours you pick up will be Overtime Pay which can add up to significant amounts of extra money.
- Work per-diem: Per-Diem shifts are a great way of boosting your income because your hourly rate will be higher than your regular job due to the fact that the hospital isn’t offering you benefits. Additionally, you are able to set your availability so you can pick up as little or as many shifts as you’d like. The downside of per-diem shifts is learning how a totally new unit operates. You have to work hard to be a part of the team and not be looked at as an outsider.
- Take Advantage of the Gig Economy: Uber, Lyft, Doordash, Instacart – I knew a few nurses that drove for one of these services on their off days, and it seemed like a great way to earn some extra income without taking on stressful nursing shifts. The downside is you are adding wear and tear to your one vehicle, which can cause problems that lead you to make a huge mistake like buying a new car out of frustration or desperation.
- Freelance Opportunities: Do you enjoy writing? Check out The Social Nurse and get paid to write healthcare related blog content! Are you a social media wizard? There are countless small businesses that need social media managers. Organized? Become a part-time virtual assistant. Whatever you are good at, you can find a way to get paid for doing it online. And if you don’t have any other skills, you can spend your off-days getting new skills using resources like Khan Academy.
If side projects or more hours don’t necessarily sound enticing and you want to focus on your nursing experience, you can leverage your skills into a better paying job.
- Become a (Trusted) travel nurse : If your goal is to pay off massive student loan debt and/or achieve a comfortable early retirement, becoming a travel nurse might be an excellent option for you. If you value flexibility and experience, opting for a travel position will likely maximize your income for the periods of time that you are working. As you know, I am a huge fan of solutions that solve multiple problems at the same time. Being a Trusted Nurse is that type of solution.
Here’s why from a financial perspective:
- Travel nurses get paid a lot of money: Because you are filling an urgent need for a hospital, they are willing to pay a premium for your time and willingness to relocate. It also allows you to capitalize on higher-paying opportunities at certain facilities or in certain states without having to make a full-on long term commitment.
- Tax-free money: If you qualify for tax-free stipends, you will receive tax-free money to cover the living expenses associated with the work you’re doing for the travel contract.
- Opportunity: Committing to a travel contract for a certain period of time means there is a definitive ‘light at the end of the tunnel.’ If you treat this defined period of time as an opportunity to earn and save, before taking some time off, a vacation, etc., you can really make a lot of money. This is not only a mindset opportunity but facilities that need travelers oftentimes means they’re also in need of travelers who wouod be interested in picking up overtime. Remember that first bullet point about travel nurses making a lot of money? Well you can really pour the gas on the fire by committing to working overtime while you’re on assignment for that specified period of time.
- You don’t necessarily have to “travel” to benefit from contract opportunities: If you’ve never explored travel nursing because you have a family or partner that limits your ability to move around, you can still benefit from the perks of ‘travel jobs’! Most of the time, the facility just needs a highly qualified RN willing to commit to work for a certain period of time. It then just becomes a ‘local’ contract. This is actually where a ton of facilities are starting to trend towards as it tends to be more flexible for them. So you can get all the benefits of a travel nurse without having to uproot your family!
What now? Let’s review:
1. Track and correct your bad spending habits by switching to debit cards and apps like: Waveapps, Cashapp, and Mint
2. Perceive debt like sepsis and a massive hemorrhage: Stop the bleeding by immediately tracking your spending and reducing your expenses. Treat the infection by lowering the interest rates on your debt. Restore health and get a transfusion by generating some extra income and putting that money toward paying down your debt.
There is always something you can be doing to fix your debt issues, but you have to be willing to make some hard choices in order to secure a future free from debt. Once you have stabilized your financial health, the real fun begins!
Stay tuned – in the next article we’re going to cover Advanced Strategies for Early Retirement.