THE PROBLEM WITH HAVING DEBT
Debt can crush us, hold us back and keep us awake at night. It can get in the way of dreams. And it definitely can keep us from reaching financial independence.
When we borrow money to buy large homes, luxury cars, high-end clothing, vacations and other things we don’t need, we are inviting unnecessary stress and worry into our lives. And that stress and worry can destroy marriages and families. It can adversely affect our health. It can affect our mental state and, in some severe cases, prompt a person to commit suicide. It’s a serious problem that goes beyond finances and the obsession to buy more can be a form of masochism in our modern culture.
With all of these negative qualities, it’s surprising that so many people borrow money to help pay for their lifestyles. The average American household has $6,929 in revolving credit card debt, auto loans totaling $28,033 and a mortgage of $184,417. The average student loan is $47,671, with one in four Americans currently paying on this type of debt. On top of that, roughly 41% of Americans are currently paying off medical debt.
Some debt can’t necessarily be avoided: A lot of medical debt is carried by people who have health insurance, for example, and, to a degree, a mortgage is inevitable unless you choose to rent.
But most other debt can be avoided. Borrowing to buy a higher-end car when you can just as well buy a used Honda for 12K is debt that can be avoided. So can credit card debt that arises from overspending on vacations, designer clothes and just extra “stuff” that isn’t necessary for existence. In our quest to get the latest and greatest thing, we forget about things that matter more: love, friendship, peace and time.
IS THERE SUCH A THING AS GOOD DEBT?
The quick answer is yes. Borrowing money (within reason) to get the necessary degree you need for a well-paying job in the field you want can certainly be worth it. So can borrowing to buy a reasonable home and a decent car to get you to and from work.
But here’s where many of us go wrong: We buy more house, car and stuff than we need. The mortgage lender approves us for 300K so what do we do? Borrow 300K. The auto lender approves us for 25K so what do we do? Borrow 25K. We have to stop and and realize that just because we are approved for a certain amount doesn’t mean we should accept their entire offer. When the lender approves you for 300K, consider borrowing just $200,000. When they approve you for a 25K auto loan, borrow only $15,000 or less.
As for student loan debt, college students have to stop choosing expensive and out-of-state schools if it’s going to end up being a financial burden. Besides, a college degree often isn’t even necessary.
A college degree in less lucrative fields, such as art, for example, often aren’t worth the money spent on them. Like a lot of things in American culture, college degrees are more about making someone else rich (the lenders and universities) without much regard as to whether or not it is the best thing for you.
HOW TO PAY OFF DEBT QUICKLY
If you’re already knee-deep—or even neck-deep—in debt, you can emerge from it without feeling like your life is over. But it will take some sacrifice and work.
There are different debt pay-off strategies out there. Two of the most popular is paying off the smallest bill first and then the next smallest and so on (called the debt snowball). The other is taking the debt with the highest interest rate and tackling that one first, then the debt with the next highest interest rate etc (called the debt avalanche). Of course, you may only have one debt that you’re working on so the prior two principals wouldn’t be applicable.
I like the idea of paying off the smallest loan first. For me, there is no greater feeling than getting a debt account paid off. When I made my last student loan payment, I was ecstatic. I felt elated. I had been paying on that sucker for 15 years.
Another time, I had a small medical bill. I could have paid off immediately but, much to my surprise, the hospital didn’t charge interest on the loan so I decided to make monthly payments and took 9 months to finish it off (so I could pour more money into dividend stocks). Even though it was substantially smaller than the student loan debt, I was relieved to make that last payment.
Also, I’m all about having less to manage in my life—because the more accounts you have, the more time you have to spend managing them. Therefore, if I owed on more than one account, I would pay off the smallest one first, then the next smallest and so on. It’s like ticking a box off on your to-do list. So even though it may make more sense financially to pay off the account with the highest interest rate, paying off at least one of the debts when you have more than one can be liberating.
Sell, Baby, Sell
In the meantime, the best way to plow through debt is to sell off anything unnecessary until it gets paid off. Look at the balance of your smallest loan and then look around you. I bet there are things you own that you could sell to raise some money—and the larger the debt, the more drastic your sell-off will have to be. Have more than one computer? Time to sell. Bikes collecting dust in the garage? Time to sell. Own a luxury car? Time to sell. Have a house the size of a football field? It’s definitely time to sell.
I’m always amazed at how some people complain about their debt but yet they have a large home, two newer cars, have the latest iPhones for their entire family members (even the dog has his own iPhone) and they take multiple vacations a year. To me, it’s very obvious as to why their net worth is in the red.
What about shares in stocks and bonds that your own? If it’s in a retirement account, you could be hit with a 10% early withdrawal penalty plus ordinary income tax—and the extra money could bump you into a higher tax rate for the year. (The IRS doesn’t care if you use that money to pay off debt. They just treat the withdrawal as extra income to you.) If you have a 401(k), you can borrow against it and end up with a lower interest rate. This is usually a better choice rather than taking a withdrawal.
If the stocks and bonds are not in a retirement account, then they might be worth selling if you have a high interest rate, the debt is a large amount and you’re struggling to make the monthly payments.
I would say it also depends on the type of debt. I would never sell stocks or bonds to pay off a mortgage or auto loan (if I had either) because a home and a car have utility and we all need a place to live and a means of transportation. I would sell the home or car instead and buy a smaller place and a cheaper vehicle (or use public transportation).
But if it’s a student loan, credit card or medical debt, I would work on paying that off first even if the interest rate is lower. Why? Because having debt hanging over me would bother me. Plus, even with my investment of choice, dividend stocks, there is always risk. But paying off debt is a guarantee boost in my overall net worth. Once it’s paid off, it’s done.
Reduce Your Principal or Interest
Also, you can always try to negotiate your debt down. In my article, 4 Ways to Save Big on Healthcare, I talk about how I was able to reduce a medical bill simply by asking. (One thing I’ve learned in life is that it never hurts to ask.) You can also ask your credit card company to reduce your current interest rate. Most will agree to reduce it by at least a of couple percentage points.
If your credit card company refuses to budge on the interest rate, you can look into a transfer to another card with a lower rate. There are too many options these days for credit cards and sticking with one with a high interest rate doesn’t make sense. And if you have a credit score above 700, you will most likely qualify for a 0% APR credit card balance transfer. Obviously, this would be the best option if you can qualify.
If you have a credit score above 640 but not above 700, you might qualify for a personal loan, which will usually have a much lower interest rate than the typical credit card. You can use an internet-only personal loan company for the loan and shopping around won’t hurt your credit score.
Reduce Your Living Expenses
If you’re serious about paying off your debt then you have to be willing to make some changes. Here are some ideas to cut down your living expenses while you pay off your debt:
- Shop at the dollar stores for toiletries, supplies and even food.
- Buy clothes at garage sales, thrift and discount stores such as Ross and Marshall’s (but ask yourself first if you really need more clothes).
- Cut out cable. With streaming online so inexpensive, you don’t need it. (Who needs to watch that much TV, anyway?)
- Call up your internet provider and ask what discounts they can give you for the foreseeable future. Tell them you’re cutting expenses and you’ll need to switch providers if they can’t lower your bill. I do this all the time and it’s saved me over $300 so far. Each year, I call up the internet provider I’ve had for 5 years and give them that same line. They always comply with a $5 discount every month for a year. As soon as the discount expires, I call them up and ask them for a discount again and I’ll keep doing this as long as they fall for it.
- Shop cheaper cell phone plans. I’m sure you see the same deals I see being advertised on TV and online. There’s always some major cell phone company running a special and it’s probably cheaper than what you’re paying now.
- Trade in your expensive phone for a cheaper one. I’ve had the same $60 HTC phone for 5 years now and it’s always worked perfectly. It even takes good photos and video. (I once had an expensive, $900 Samsung Galaxy. It blew up after one year. )
- Do a “staycation.” Who says you have to go to Venice or Niagra Falls to have fun? Play tourist in your town or a nearby city and make a day or two out of it. It’s much cheaper than paying for airfare and multiple nights in a hotel.
- Skip eating out except for the odd pizza delivery or taco stand. Eating at home really is a money saver.
- Move to a smaller place. (I know—ouch!) But the bigger the place, the more you pay in heating and cooling it.
- Skip social events or find cheap work-arounds. When I was first starting out my education business, I didn’t want to spend a lot of money on social events. So I would go out, but while my friends were ordering expensive cocktails and dinners, I would order club soda and lime and either not eat at all or order the cheapest item on the menu.
Increase Your Income (Quickly)
Besides cutting back expenses, it’s always a tremendous help to any of us to have a larger income. I wrote an article called 5 Steps to a More Exciting and Lucrative Career that can help you boost your income without taking years and years to do it. If your debt is large and it’s going to take you more than a year to pay it off, consider reading this article. Right now, you’re probably not getting paid enough and there are ways to increase your value so that you can earn top dollar. Once more money comes in, you can apply directly to the debt.
HOW TO STAY DEBT-FREE
Once you pay off your debt, or at least get it to a minimum, you have to ensure it never gets out of control again. The best way to prevent a debt explosion is to live below your means and increase your income. There will, however, always be unexpected things in life that come up: a car needs a major repair, an unexpected illness occurs or any other number of things. It’s best to plan ahead. Here are some ideas to help you prepare just in case:
Prepare for medical bills that could occur:
First, get a good medical insurance plan. The older you are, the more coverage you’ll need. I didn’t carry health insurance for years. Then I got sick and had a medical bill for $1400. Luckily, I was able to negotiate my bill down by $400. Right after that, I signed up for health insurance. Also, I recommend saving enough to cover your max out-of-pocket for the year—even better if you can do more. That way, if the unexpected illness occurs, you have the money to pay your share of the medical bill. Unfortunately, your max out-of-pocket is something usually not included in the emergency fund calculation of 3 to 6 months of living expenses that other experts recommend—but it should be.
Take care of your possessions:
I see people throw around their phones, lapse on their regular oil changes for their cars and basically abuse just about everything in their possession. This is a spoiled brat mentality. We all need to cherish the items we worked so hard to earn. Even if your car isn’t fancy, treat it like it is. The same goes for everything else you own—your home, clothes, furniture…Take pride it what you already own and not only will you spend less, you may learn to be happy with what you have.
Keep those expenses low:
Remember what you did to get out of debt—those fewer nights out, trips to the discount stores and choosing a “staycation” over that trip abroad? You need to keep doing a lot of that so you don’t get into trouble again. I know this can suck—you’ll sometimes feel like you’re missing out on life. But really, you’re not. Owning more pricey things doesn’t equate to lasting happiness. And while creating memories is, you don’t always have to go someplace exotic to do it. The most important thing is that you spend time with the people you care about. Place this above spending and you’ll be more content on less.
Invest instead of just save:
Poor people save. Rich people invest. Learn all you can about stocks, bonds and even real estate. Don’t just park your money in a savings account where you’ll earn even less than the rate of inflation. Also, don’t forget to invest in yourself. Take the time to watch YouTube videos and read books and blogs (like mine) to educate yourself so you can earn more.
CHOOSE FREEDOM, FRIENDS AND FAMILY OVER THINGS
Sometimes debt can’t really be avoided—accidents and unexpected things happen. But a lot of times, debt comes from overspending. We are lucky enough to live in a country where we have a nearly endless amount of products available to us. The downside is that we often don’t think before we spend: We just copy what everyone else is doing. Also, it’s hard not to want a different car, home or cell phone when it seems like everyone else around us has something nicer. In the era of mass consumption, simple pleasures like eating a home-cooked meal or enjoying the scent of a burning candle are often ignored and overlooked.
Overspending—buying those things—can trap us mentally, physically and emotionally. It may feel good to upgrade a phone, buy another tablet, drive a nicer car, but it’s only worth it if we know for certain and without a doubt that our basic needs of food, shelter and basic comfort are taken care of. We forget that those things are optional, not necessary. But too often, we let our desires take over common sense in our quest to feel like we’re “living more” and sometimes even to impress other people.
Instead of buying a large home and filling it up with stuff, we need to focus on finding peace within. While this can be slightly different for each person, most of us value our friends and family over anything we can buy in a store. On top of that, we have to find work that fulfills us and at least some basic sense of spirituality.
Being more grateful for the simple things that you might take for granted can help prevent debt from reappearing: love, friendship, a lazy morning, a comfortable bed…Instead of working like crazy just so you can buy more things, choose freedom. Instead of always wanting more, choose gratitude. The next time you want to buy the latest and greatest thing, practice mindful spending. Your life will actually become richer if you do.
In one of my favorite books, Simple Abundance, author Sarah Ban Breathnach writes, “When I surrendered my desire for security and sought serenity instead, I looked at my life with open eyes. I saw that I had much for which to be grateful. I felt humbled by my riches and regretted that I took for granted the abundance that already existed in my life.”
If you want to stop debt from reappearing, be grateful—and never forget what truly matters in life:)