Advertising
Advertising

You Can Save a Ton of Money With Financial Compartmentalization

You Can Save a Ton of Money With Financial Compartmentalization

Using Only One Account Doesn’t Save

Many people were fortunate enough to take a vacation this summer, and some of them probably even journeyed to the islands: now it’s time to take your personal finances there using a method known as the Island Approach. But unlike a real vacation, this trip to the islands can actually save you a ton of money!

You see, the Island Approach is a compartmentalization-based personal finance strategy that entails using individual accounts for specified purposes in order to:

  1. accrue the best possible collection of terms for each type of transaction you’ll make, and
  2. garner a better perspective on your spending and payment habits.

No single financial account beats the rest of the market in every single category, after all. For example, a certain credit card may offer the most lucrative rewards, but won’t provide the longest 0% introductory period. Likewise, a particular checking account may waive all ATM fees, but isn’t likely to have the highest interest rates.

Advertising

What’s more, if you use a single credit card for carrying revolving debt and making ongoing purchases, or use a lone checking account for savings and everyday cash management, it can be difficult to determine what’s what and ultimately track your progress.

The Island Approach can solve all of that. It can also apply to any one segment of your personal finances, or to the full breadth – from credit cards and everyday cash management tools to investments and loans.

For simplicity’s sake, we’ll limit the following example of how the Island Approach could work in a practical sense just to credit cards.

Advertising

The Island Approach in Practice

Let’s say that you make the majority of your everyday purchases with plastic and currently have $6,600 in credit card debt (the national household average).

If you prefer the ease of using a single credit card, you’ll be forced to choose between:

  1. the most lucrative rewards your credit standing will allow you to get
  2. the most attractive financing deal, or
  3. average terms across the board.

You may also find it difficult to budget since your ongoing expenses are jumbled up with your revolving debt, which generally leads to higher interest payments. Interest is assessed on the average daily balance held on accounts with a revolving balance. When you use the same card to both revolve debt and make new purchases, your average daily balance will equal the sum of your debt and the new purchases.

Advertising

Interest will apply only to your revolving balance when you isolate debt and ongoing expenses. You’ll also give yourself built-in protection against overspending. We should all be able to pay off gas, groceries and other recurring expenses each and every month, so the presence of finance charges on the card designated for everyday spending will be a clear signal to cut back.

Then there are the improved terms. Rather than being stuck with one average card, you’ll be able to strategically take advantage of different market-best credit card offers. For instance, you could get:

  • The Slate Card from Chase (to lower the cost of existing debt): This balance transfer credit card offers 0% on transferred debt for the first 15 months and doesn’t charge either a balance transfer fee or an annual fee.  Assuming that you allocate $200 to paying down your balance each month, the Slate Card will save you nearly $1,800 in fees and finance charges while helping you become debt free nine months faster, compared to a regular card with a 17% interest rate.
  • The Blue Cash Preferred card from American Express (to maximize your everyday rewards earning): This card offers 6% cash back at supermarkets, 3% at gas stations and department stores, and 1% on everything else, in addition to a $150 initial rewards bonus for spending $1,000 in the first three months. Such rewards are not only worth the $75 annual fee for most consumers, but they’ll also enable you to effectively subsidize some of your most prominent recurring expenses.

You may even decide to get a bit fancy with the Island Approach and supplement your base cards with attractive one-time offers as they pop up. Issuers have made it a practice in the post-recession environment to offer lucrative sign-up rewards bonuses and financing deals. With the current offers in mind, you could get $400 in free money just by opening a card like the Chase Sapphire Preferred or the Barclaycard Arrival and meeting initial spending requirements.

Advertising

Bottom Line

The Island Approach is a personal finance strategy that entails using individual accounts to meet specific needs. It enables you to maximize your product terms, save money on interest, and keep better track of spending and payment habits.

However, there’s a reason it’s called ‘personal’ finance, and if you don’t think that keeping tabs on a number of different accounts will work for you, by all means opt for a more comfortable strategy. Just make sure to adhere to a budget and pay off debts as quickly as possible and you’ll be fine.

More by this author

The Simplest Ways To Save Money In Your Next Trip You Can Save a Ton of Money With Financial Compartmentalization

Trending in Money

1 How To Pay Off Credit Card Debt Fast: 7 Powerful Tips 2 How To Make a Million Dollars in 7 Steps 3 7 Cheap but Powerful Products That Can Help Your Waste Less Food and Save Money 4 How To Retire Early (And What To Consider Before You Do) 5 How To Create a Budget (The Complete Beginners’ Guide)

Read Next

Advertising
Advertising
Advertising

Published on January 8, 2021

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

How To Pay Off Credit Card Debt Fast: 7 Powerful Tips

Ever wondered whether your credit card debt is the reason you’re in a bad financial situation? You can’t enjoy any fun activities because a good chunk of your money goes toward debt payment. Heck, you’re even behind on some of your monthly bills.

The effects of clumsy debt management are too many to list here. This guide is going to help you discover how to pay off credit card debt fast and start chasing your financial goals.

Debt problems are the last thing anyone wants to encounter. But things can get out of hand when all the “little debts” you take accumulate in interests.

What if you knew some simple and proven ways to be debt-free quickly? Implementing them would mean better financial health for you. It becomes possible to free up cash for your “wants.” These include taking a trip or buying something you’ve always desired. All that while paying your bills on time!

Let’s not wait any longer. Here are 7 powerful tips for paying off credit card debt fast:

1. Pay More Than the Minimum Credit Card Payments

Many people only pay the monthly minimum on their credit cards. Truly, that’s the right amount for staying on good terms with your credit card company. But you need a different approach if you’re looking to achieve financial independence within a short time.[1]

Most of your payments go toward interest costs when you only pay the minimum amount. A substantial sum of your balance remains standing. As a result, it becomes more expensive to eliminate your debts.

Advertising

You don’t want to wait more than 10 years to get rid of debt while it’s possible to do it sooner. All you have to do is double that $100 minimum payment to $200 or go higher.

The good thing is that minimum credit card payments are affordable in most cases. By paying a higher amount, you reduce your interest costs, lessen your borrowing period, and boost your credit score.

2. Start With High-Interest Credit Card Debt

If you have more than one credit card debt, prioritize putting the extra money toward the ones with the highest interests. This debt pay-off strategy, known as the debt avalanche method, is essential for being debt-free quickly.[2]

First, you need to list down all the credit card debts you have in the order of their interest rates. Next, you choose the one with the highest interest and pay a significant amount toward it each month. It can be an amount twice or even thrice larger than the minimum payment.

At the same time, you make monthly minimum payments on the other debts. Their interest charges won’t be as costly as that of the first debt on your list. You only move on to the next high-interest debt after the first one is gone. Remember that your focus is on the interest rates and not the balances.

3. Revisit Your Budget

Budgeting is useful for tracking your financial moves. Once you create a budget, some tweaks along the way can make it work for you better. One situation that requires you to revisit your budget is when you’re struggling with debts. It might hurt a bit to slash some expenses. But you also don’t want to miss out on achieving financial freedom in the long run.

You can reduce some variable expenses to free up more cash for credit card debt payments. They’re the ones that change from time to time. Some examples are groceries, fuel, and clothing.

Advertising

Other opportunities for cutting down your spending lie in non-essential expenses. Instead of dining out all the time, you can cook at home more to save money. You can also share some subscriptions with friends and pay a fraction of the cost.

If you’re determined enough, you can eliminate all your unnecessary expenses and focus on paying off your credit card debt first.

4. Avoid Using Your Credit Cards

Do you want to know how to pay off credit card debt with a low income? One simple way is to stop using them. Having your credit cards everywhere you go means that you’ll be more tempted to buy unnecessary stuff. In this case, you spend money that you don’t really own and get deeper into debt.

The quickest fix to stop the debt build-up is spending with cash. You’ll be more aware of everything you can afford at any particular time. If you decide to keep one or two cards to ease the transition, always make wise choices. For instance, only use them when experiencing financial difficulties.

It’s best to categorize your fun activities under “discretionary spending” in your budget. This way, you won’t need more debt to kill your boredom. By halting your credit debt from accumulating, it’s easy to pay down what you already owe and be happy with the progress.

5. Start a Side Hustle to Boost Your Income

You’re probably turning away a lot of money by not monetizing your skills. Everyone has something that they’re good at doing. And you can use that to generate extra income for attacking your credit card debt.

If you look around your neighborhood, you can find several side hustle opportunities. It can be pet sitting, tutoring, or lawn mowing. You can start an online business by offering services such as digital marketing, content creation, and web development. Such skills go in high demand on freelance sites and job boards.

Advertising

Finding clients on social media is also a good strategy to utilize your skills and make more money. Facebook groups, Quora Spaces, and subreddits are some places to look for side jobs. You only have to join a niche-specific platform, share your services, and respond to any opportunities.

It’s possible to learn a skill, practice it, and earn from it. Use the free resources online or purchase some e-courses to get started.

6. Sell Your Used Items for Extra Cash

Starting a side hustle isn’t the only way to generate extra money. You can turn unwanted items into cash for paying off credit card debt. Whether it’s an old TV, book, or furniture, there is always someone itching to buy your used stuff.

A garage sale, as much as it’s old-fashioned, is perfect for getting your neighbors and passers-by to buy from you. You keep all the money because there are no business permits or taxes involved. While you may not make much cash, it’s better than leaving your stuff to go defunct in your storage.

Other than that, you can sell your used stuff on online marketplaces. Facebook groups are great places to start if you want quick approvals and hence sales. You only have to ensure that your listing follows Facebook’s commerce policies.

When selling any pre-owned items online, ensure they’re in good shape to avoid problems with your buyers.

7. Know When to Seek Help With Your Debt

Asking for help with your credit card debt can be challenging to do. But letting it drown you is a road you don’t want to take. While you may feel embarrassed at first, it’s the best way to get back on track when you run out of options.

Advertising

There are tons of non-profit credit counseling organizations that can offer you free guidance on how to escape the debt trap. An example is The National Foundation for Credit Counseling. They simply review your finances and help you determine the source of your financial problems. After that, they match you with an actionable debt management solution.[3]

In extreme cases, the debt solution can be:

  • Debt relief – where your debt is partially or wholly forgiven
  • Debt consolidation – taking out one loan to repay others
  • Debt settlement – the creditor forgives a significant portion of your debt
  • Bankruptcy – legal process for seeking relief from some or all your debts

It’s necessary to carefully weigh your options before deciding on the way to go. Find out how it might affect your credit score and any other risks.

Wrapping It Up

Debt is a major setback when you’re trying to prosper in life. Paying off credit card debt is essential if you want to reach your financial goals. That means having more free income, a good credit card score, and even a chance to retire early. You become more productive each day because of the peace in your mind.

So, you now have some tips on how to pay off credit fast. Go ahead and get rid of that good life progress killer!

More Tips on How to Pay Off Debt

Featured photo credit: rupixen.com via unsplash.com

Reference

Read Next