The Crushing Weight of Financial Debt

14683632_sLast Thursday I met a very nice man from Dennis, let’s call him Jack. Jack recently took a course I taught about how to build a successful retirement system. He wants to do just that, but Jack has a major problem: he is drowning in debt.
Ahhh, that nasty word, debt; that deep hole that seems so effortless to dig, but impossible to climb out from. Debt is not just a problem for Jack. In fact, millions of Americans struggle every day to keep up with their debt payments and, for many, it seems that there is no end in sight.
The pile of debt can get so high that it is hard to find a place to start attacking it, which is oftentimes the most difficult step. Jack compared his situation to that of the people on the show “Hoarders”; when every room is filled with junk, the task of cleaning out can seem too daunting to even begin. Jack explained to me that he has spent hours and hours of his time trying to find a way to pay down his debt and he has hardly made a dent in it. He does not know what to do. Jack is not alone. Almost a quarter of 50- to 64-year-olds believe they will die with the debt they currently have, and 31 percent of people 65 and older feel the same way, according to a recent creditcards.com survey.
I’m sure many of you, Cutter Family Finance readers, are not drowning in debt, but you likely have loved ones—children, siblings or parents—who are. And although it’s not a fun journey, there is a way out. I told Jack that debt counseling is really not normally part of my business, but I would give him a roadmap for this journey. Let me explain what Jack and I discussed.
I firmly told Jack that he needs to take responsibility. The first step on the road to recovery is for him to recognize and break his bad habits. There is no point in doing the work to get out of debt if he will simply bury himself in it in another year. He needs to take the time to recognize the spending behaviors that have caused the problem in the first place and work to break them. I suggested he take a look at his budget for each month, and make more of an effort to live within it. One way to do this is to stop using credit cards. Consumers find it increasingly easy to mindlessly swipe their plastic through every register they see. By limiting himself to cash or debit accounts he will be more aware of his spending and unable to add to his debt in the process. Once he has curbed his spending problem, he will be ready to begin attacking his existing debt.
I explained to Jack that it’s important to lay out the information for each account in a format where he can see it all in one place so he knows what he is working with. He can use a spreadsheet, a chart, a series of pictograms, or whatever works best for him to understand his debt. Jack needs to separate each account by balance, rate, minimum payment and the number of payments he has left. This organization will allow him to plan out the rest of his steps in order to meet his goals.
Once Jack does this, he must determine how much he can realistically put toward paying off his debt, above and beyond his combined minimum payments, each month. This may require some stricter budgeting throughout the month. Jack must limit his spending wherever he can. He should pack a lunch for work instead of eating out, avoid frivolous or impulse purchases, or even turn down his heat at home by a few degrees. Small changes can give Jack the boost he needs to start to dig himself free.
The first two steps gave Jack tools to avoid incurring more debt, but step three is where the work begins. I suggested he pick two or three debts and pay off as much as he can above the minimum on those each month. The selection of these few targeted debt accounts should not be random. There is an easy order to follow when attacking these balances. Jack should pay off the one with the lowest balance first. This decision is wise both financially and emotionally as crossing accounts off of his list can simplify his journey and feel super satisfying at the same time. Second, Jack should go after the debts in order, starting with those with the highest interest rates. Paying down the debts with the highest interest rates early will help him nip the problem in the bud and keep his debt balance from rising. Finally, Jack should pay more than the minimum on any secured debt that has just a few payments remaining. If he pays above the minimum, he can eliminate the final payment or last few payments altogether, giving him a lot more freedom in his monthly budget.
I explained to Jack that the final step is simple; once he has dug out, he needs to make sure he does not fall back in. Oftentimes, the freedom associated with becoming debt-free leads to the same habits and behaviors that caused the debt in the first place. I told Jack that if he feels the need to reward himself, do it with a deposit into a savings account or a contribution into his retirement plan. Keeping himself debt-free and financially stable will be the greatest gift he can give himself.
As you all know, at this time of year it is easy to spend more than we should. We all want to surprise our loved ones with wonderful presents but, as I explained to Jack, the best gift he can give them is to take action and keep his family financially secure.
I hope you all have a wonderful holiday! It truly is a magical time of year.
Oh, and remember, even during the holidays we must be vigilant and stay alert, because you deserve more.