One of Heidi’s biggest fears is growing old with credit card debt, but it sure looked like she was headed that way last year. That’s why Heidi took a second job.
The 41-year-old, who lives near Pittsburgh, has about $30,000 in credit card debt. Right now Heidi — who asked that her last name be withheld — moonlights for 5-10 hours each week and puts 100% of the income toward paying down the bills.
“It’s going slowly. I work very part time at a community college,” she said. At the moment, the second job lets her put $200 extra per month into debt payments. That’s hardly enough to reach her goal of being debt free within four years, but it gets her moving in the right direction.
There are only two ways to get out of debt: Make more money or spend less. While much attention is given to cutting the family budget, the fastest way out of a debt hole is usually higher income. That advice isn’t very meaningful in an economy where wages have been essentially flat for a generation — unless workers are willing to take on a second job to plug the gaps.
How Many Second Jobs? Hard to Tell
Labor Day is quickly approaching, a time when economists will argue about the state of American workers. Unemployment is low, but so are wages, and hours worked are up, making for a very muddled outlook.
And there is much going on that government statisticians cannot see. The obvious response to low wages is finding a second job, but data from the Labor Department suggests that the number of Americans holding both full-time and part-time jobs has been holding steady for years. The data might be wrong, however. The Labor Department can’t see into the shadow economy, where workers are paid cash for side jobs. Bernard Baumohl, chief global economist at Economic Outlook Group in Princeton, N.J., told the Boston Globe last year that the side economy is booming since the recession.
‘‘More people have actually entered and remained in the underground economy than we have seen before,’’ he said. Add to their ranks people who sell their goods and services at sites like Etsy, or through sharing economy jobs at Uber or Airbnb, and you have a very confusing second-income environment.
Heidi says she gets pretty tired some weeks, shuttling between jobs, but in a sense, she’s lucky. She has no children, and her husband — a programmer — works late hours for West Coast clients, so she doesn’t feel like the second job is costing her family time.
Heidi blames herself for her debt.
“I have a shopping problem,” she admitted. Now, she gives herself an allowance on a debit card and when that’s spent, she stops shopping. But she’s probably a bit too hard on herself. She’s also spending $6,000 a semester on graduate school right now, trying to get ahead in her career.
Since Heidi is at a community college, her second job is actually aboveboard — she shows up in the Labor Department’s guess that about 5% of adults hold full- and part-time work. She would work more hours if she could — and she does, when someone calls in sick.
Running the Numbers
While $200 a month doesn’t seem like much, Heidi does have mathematics on her side. Earning money that you spend paying down debt is a bit like getting paid twice. You get a paycheck, of course. But you also avoid paying interest. Every $1 spent on debt can really be worth $2, $3, or more depending on circumstances. I’ll use round numbers to make it obvious. Imagine Heidi is paying 10% interest on that $30,000 in credit card debt, and she’s only able to pay $300 monthly. It would take 215 months — 18 years — to pay off the debt. But if she adds $200 a month, thanks to a second income, she’d pay off that $30,000 84 months — less than half the time. A little extra income, and a little less debt, can go a long way. It can even save you money by improving your credit, since being close to your credit card limits can have a negative effect on your scores. (You can see how your credit card balances are impacting your credit scores for free on Credit.com.)
Of course, 84 months is still too long. Financial advisers generally say that if you can’t make a plan to pay off your non-secured, non-student loan debt within five years, you should start examining other options, like bankruptcy.
To pay off her debt by age 45, Heidi would have to pay more like $750 monthly — she knows her 10-hour-per-week job gets her nowhere near that. So for now, she’s trying the “snowball” method in which debtors pay off their smallest debt first, regardless of interest costs, with the idea of paying off one debt entirely. Theoretically, that creates positive momentum toward paying off larger debts. (A more traditional strategy is to pay off the debt with the highest interest rate first, which saves the most money in interest charges.)
Snowball is helping keep Heidi focused on short-term goals, she believes.
“At times I think we are pretty close,” she said.
More on Managing Debt:
- The Credit.com Debt Management Learning Center
- How to Pay Off Credit Card Debt
- 5 Tips for Consolidating Credit Card Debt