DEBT is the four-letter-word of personal finance.
Most people have some debt with which to deal. Once the debt level gets to a certain point, it is nearly impossible to rid yourself of it. Interest payments crowd out all the productive (and fun) uses of your money until the whole thing implodes in an avalanche of expletives and misery.
Good Advice?
The personal finance gurus have their theories on how to deal with debt. There are some good ideas with hard and fast rules and heated discussions about whether any debt is good debt.
These advisory approaches, however, treat you – the person in debt – like a child who cannot make good choices for yourself. I have found in my personal, parental and professional life that if you treat people as inferior or incapable, they make every effort to meet your expectation of them.
So let’s try something different.
The Root Cause
I believe (please give your opinion in the comments) that the root cause of our problem today is the triumph of marketing. Immediate gratification and impulse beat out rational thought, logic and patience - and we as a society have been deluded into thinking that such behavior should now be celebrated.
If you want something … you should have it.
If you can’t afford it … who cares? You should have it anyway.
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Save by Spending
See that lovely flat screen TV? You know you want it. You might come up with some bogus excuse, but the truth is you want the TV. You don’t need the TV. Nobody ever died because their TV wasn’t big enough.
Here is where the logic (or lack of logic) really gets turned upside down. You can “save” $500 by buying that flat screen TV today. You want it … and now you can have it and “save” at the same time. Yay!
The truth is you don’t really “save” anything by buying something – your bank account is still smaller. But good marketing and a societal shift that gives a free pass to and actually encourages anybody who falls for this trick allows us to blow our budgets every year and actually feel good about it.
The Worst Offender
By far the biggest offender is our own government who not only spends more money than they make, but encourages us to do the same with our own accounts. Some example for our “leaders” to set. It is no wonder that most Americans are in hock up to their eyeballs.
You Know It’s a Four-Letter Word When…
If this conversation bothers you, you’re not alone.
Debt does that to you. It is the raw underbelly of personal finance. Debt is at the heart of more family financial arguments than all the other topics combined.
Debt is the giant, stinky elephant in the room that nobody wants to talk about, but if we don’t start dealing with it very soon, it will kill us all (and probably bury us in manure).
4 Steps to Deal with Debt
Step #1: When at all possible, spend (including minimum payments) MUCH less than you make. Shooting for twenty percent of your gross income is a good start.
Take those real savings and:
- Build cash reserves of three months of expenses and then,
- Pay down the debt (usually starting with the highest interest rate).
Step #2: Negotiate your debts.
No damage is done by asking for an interest rate reduction or a debt workout. It won’t ding your credit score and won’t (can’t) make the terms on your account any worse, so ask! Do this for yourself, though. Don’t pay someone else to renegotiate your debts for you.
Step #3: Move up; add a second job or add value to your current work so you can get paid more.
Where you are is where you are, but you can always grow from there. Increase your income, but don’t increase your expenses or lifestyle. Every extra dollar you earn should go directly to saving, debt or retirement.
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Step #4: Be patient.
How do you eat an elephant? One bite at a time. You didn’t build up this debt overnight. You won’t get rid of it in a week, either.
John Buerger is a Certified Financial Planner™ professional licensed with a registered investment adviser that provides personal financial advice online for a fee. John is a wealth coach and an online advice pioneer who teaches his clients to make better money choices. Contact John for help with virtually any financial need.
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The Truth about the “D” Word: DEBT was originally featured on Quizzle Wire
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