SALT LAKE CITY — One man saved his life by losing his wallet.
In February, Greg Vandagriff, 28, sat at home all day, unsure of how to entertain himself while he waited to receive new credit cards.
"It shut me down. Took me out of commission. I realized I had no way of amusing myself that didn't involve spending a lot of money," Vandagriff said.
In 2012 he spent about $55,000. This in spite of taking in only $29,000 that year, overspending by about $2,000 per month. By March, he was more than $80,000 in combined credit card, car and student loan debt.
It took losing his wallet to get a painful wake-up call.
Consumers in the United States are on track to add almost $47 billion in new credit card debt in 2013, according to projections released last week in Card Hub's report on first quarter credit card debt.
Card Hub is an online resource that provides credit card comparisons and reviews so consumers can make educated decisions on getting credit cards to match their needs. The site also provides tips for managing credit cards and finances successfully.
Card Hub generated the numbers by combining the amount of new debt incurred in the first quarter — more than $34 million — with the amount of debt paid down, nearly $32.5 billion. This amount is 7 percent less than the same period last year, indicating that as the economy recovers, so does the appetite to use those credit cards.
The data show people spending more than they can afford, he said. A typical pattern is when people use credit cards for their daily expenses and delay paying off the full balance. The debt can quickly balloon to unmanageable levels.
It is important to take a look at risk factors for "personal recessions," according to Will Vandertoolen, director of counseling services at AAA Fair Credit Foundation. First quarter spending patterns indicate a "tolerance toward debt," he said.
Debt management solutions are simple, said John Kiernan, senior analyst at CardHub. CardHub offers five solutions for effectively navigating this path
1. Stick to a budget
The first step to managing debt is to prioritize expenses — including debt and emergency fund payments — and cut out excesses. "People have gotten to the point where many things that are truly luxuries they consider necessities," Kiernan said.
Thirty-two percent of Americans prepare a detailed budget each month, that tracks income and expenditures, according to a Gallup Poll released in early June.
The Malloy family of South Jordan is among those who do. In February, Emily Malloy decided she was done with living paycheck to paycheck. They went from two cars to one, dropped their cable package and switched homeowners and car insurance policies.
She listed all the family's debts in a notebook and created a plan that would make them a debt-free family. Each time she pays a bill, she lists the new balance in her notebook so she can see the progress they are making; it's old-school balancing a checking account.
The Malloys eliminated their credit card debt — nearly $5,000 — in just more than two months and paid down more than $6,300 in total debt. Tax refund and work bonus money that they would have normally used for extra expenses were applied to reducing their debt instead.
“I would love to keep up with the Joneses, but I don’t want to pay their bills. I’m OK making my life as beautiful as I can on a budget,” Malloy said.
In March, Vandagriff made lifestyle adjustments to stop living above his means.
The limited-edition BMW he drove was swapped for a 14-year-old Lexus. He sold his designer watches, handgun, iPad, clothing and any personal possessions he did not need. He used to spend around $24,000 per year on shopping, eating out and entertainment. Now he spends $227 a month.
"It's been a huge scaling back in my lifestyle and it really hurt. Status took a hit," he said. "But it was also probably the greatest thing that could have happened to me in my life because it forced me to realize and face these problems that I was running away from by overspending."
In March, Vandagriff began blogging about journey in getting out of debt on gregoutofdebt.com. Since that time he has paid down $20,000 of debt. His motivation for blogging is to provide accountability for himself and to help others who are looking to change.
Both Malloy and Vandagriff recommend a certain amount of flexibility with budgets because financial needs change from month to month. Vandagriff said he has identified the areas of his spending that are most important to him, and has "ruthlessly cut spending" in other areas.
2. Build an emergency fund
Eliminating debt includes creating a safety plan to guard against further debt that could come through job loss, emergencies and economic downturns.
This was one of Vandagriff's first steps. Before he started paying down debt, he put about $1,000 into his bank account as a cushion for emergencies. One of the biggest mistakes people make when they start paying back debt is they don't save for emergencies, making it that much easier to use a credit card when a financial need hits, he said.
He sets aside a little money each month to prepare for anything from car registration to future hearing aids.
"I never want to go back into debt," he said.
He now pays for college with cash and began investing in emergency savings at the same time he started paying down his debt. It was a departure from his former habit of subsidizing his lifestyle with student loans, using them to pay down credit card balances.
3. Use The Island Approach
People who use credit cards should employ what CardHub calls The Island Approach: use different credit cards for different transactions.
Credit cards are not necessarily bad, Vandertoolen said, and can be beneficial for building credit, but only if they are used like a debit card, with the balance paid off each month.
CardHub suggests putting existing debt on cards that have 0 percent interest rates and no introductory or annual charges. This way people can pay off debt without accruing interest. CardHub also suggests using rewards cards for everyday spending.
"That allows you to not only get the best collections of terms possible but also separate debt from ongoing expenses," Kiernan said.
This strategy comes with a warning, however. Jeff Lambert, a certified financial planner, people should avoid debt when possible and consumers should avoid putting balances on credit cards if they do not already have debt.
4. Use systematic approach to pay down debt.
The fastest way to pay off debt with the least amount of interest paid is to apply more money toward the debt with the highest interest rate first and make minimum payments toward the rest, Kiernan said. Once the high interest rate debt is paid off, apply that payment to the debt with the next highest interest rate. Continue this method until all debts have been paid off.
By following this method, the Malloys have paid off their credit cards and have made a sizeable dent in their car payment, which they plan to pay off by October. They will then whittle down student loans, followed by their mortgage, which they hope to have paid off within 10 years.
"It will be a good feeling knowing that I don't owe anybody anything," Malloy said.
5. Consider a job change.
Getting out of debt requires people to live within their means. But increasing income allows more money to be dedicated to eliminating debt. That means it may be time to explore the job market to see if there are opportunities available that would pay more. It may also be the time to acquire new job skills.
Vandagriff said even though he has a full-time job as an email marketing manager and part-time marketing consulting gigs, he is working toward finishing his college degree.
"I strongly belive in investing in yourself," Vandagriff said.
He has attended college off and on for eight years and is now set to graduate from Utah Valley University with a degree in Information Systems in the spring of 2014. The school's flexible classes have allowed him to study in addition to work.1 comment on this story
"To me, a college degree is worth about $20,000 a year. I've hit a glass ceiling and so once I get a degree it's going to massively improve my ability to pay off debt and to be able to live the kind of life that I want," Vandagriff said.
Although he was nervous to be open about his financial struggles, he said, he has received a lot of support from his friends and family.
"Materialism is a very widespread problem. Maybe not on the same scale as me, but other people can relate and they really admire and respect you if you're open about it and see that you're trying to change your ways," he said.