The dirty secrets of debt reduction
You can learn a thing or two from this blogger's mistakes.
I was a sophomore in college, I got my first credit card. I thought it
was awesome -- it was like free money. Soon I got another credit card,
and before long I'd maxed them both out. I entered the work force with
a handicap. I had the start of a nasty credit habit.
had never been good with money, and as a result I had no notion of
proper financial skills. I made some bad decisions, which were in turn
compounded by some rotten luck. Just five years after graduation, I had
about $20,000 in credit card debt. For the next decade I tried to kick
the habit. Sometimes I'd make progress, but then I'd find other ways to
Here are some of the mistakes I made along the way and the steps I took to correct them.
I had no goals. When I was young, retirement seemed like something for old people. I did not understand the power of compound interest, that starting to save for retirement when I was 24 was far better than starting when I was 39. But more than that, I failed to set financial goals. I didn't dream of taking a trip to Europe. I didn't plan big purchases. If I wanted something, I bought it. On credit.
I set a goal: to be out of debt within five years. The very act of
setting this goal made a huge difference in my life. Suddenly, my money
had a purpose. I focused my efforts on debt reduction. I didn't get my debt paid off in five years -- I paid it off in three.
I didn't establish an emergency fund. Many financial experts recommend starting an emergency savings account before
you begin to pay off debt. I was cocky. I didn't believe this advice
applied to me. But then my car broke down and I needed to make $800 in
Because I didn't have an emergency reserve, I was
forced to open a credit account at the dealership to pay for the
repairs. This debt felt terrible. (It would have felt even worse if I'd
put it on an existing credit card.) I paid it off as soon as possible,
and then paused my debt-elimination plans for a few months in order to
stash $1,000 in the bank.
I didn't track my spending. One
reason I was able to get so deep into debt was that I didn't track
where my money went. It was like a black box. I just spent to my credit
limit. Once I started tracking my spending in Quicken, problem spots
became obvious. By tracking every penny I spent, I had a clear idea of
how much I was actually earning and spending, not just vague guesses.
(If I were starting now, I might use a web-based tool like Wesabe or Mint or Yodlee.)
I tried to pay high-interest debt first.
Most of the financial gurus give the same advice about debt reduction:
Eliminate your debts starting with the highest-interest rate obligation
first. This makes sense mathematically, of course, but what these
experts fail to understand is that debt isn't about math -- it's about mental mistakes. If debt were about math, nobody would have it.
years I tried to pay off my high-interest debts first, but I'd always
give up. My high-interest debt had high balances, and it felt like I
was never getting anywhere. Then I read about Dave Ramsey's debt snowball. Using this method, you pay off your lowest balances first.
This allows you to knock out a few debts right away, which gives you a
tremendous psychological boost. Once I learned about the debt snowball,
I was able to kick debt to the curb.
(Another valid approach is
to first pay off the debt that bugs you the most. Have a loan from your
brother-in-law that you feel guilty about? Pay that off before anything
I led myself into temptation. I like comic books. I've collected them since I was a boy. As an adult, I discovered I could pay $20 or $30 or $50 each for bound volumes that allowed me to collect many comic books at once. I have a weakness for these books.
I started to pay off my debt, I kept going to comic-book stores. "I'll
just look," I'd tell myself. But the thing is, I didn't just look. I
bought. Every time I set foot inside a comic- book store, I'd leave
with a book or two. Comic books were my kryptonite.
Your kryptonite might be bicycling gear or yarn or shoes. Whatever it is, avoid it. If you know you have a weakness, steer clear of situations likely to make you spend. Remind yourself of your goals.
I treated mistakes as if they were the end of the world.
Nobody's perfect. I made mistakes all the time as I was paying off my
debt. As I mentioned, I'd sometimes find myself buying comic books, or
spending $80 on expensive bottles of Scotch whisky. When I was starting
out, I'd let these mistakes get me down. I felt like they derailed all
the work I'd done. But that's not true.
Paying off debt is like
playing baseball. You go out there and do your best every single day.
You follow the fundamentals. If you make an error, you don't give up --
you make the play next time. If you strike out, you forget about it and
step to the plate for your next at-bat.
I spent raises and windfalls.
I used to view raises and tax refunds as a license to spend more money.
Get $1,200 back from the government? I'd use it to buy a new bike. A
raise at work? Time to subscribe to more magazines. Or maybe I can
afford that deluxe cable package. I was succumbing to lifestyle inflation -- as my income went up, so did my spending.
After reading "Your Money or Your Life,"
I realized that the smart move wasn't to increase my spending, but to
decrease it. I cut magazine subscriptions and cable television. Instead
of spending my tax refund, I applied it directly to debt. Sure, it
would have felt nice to buy a new television, but it felt even better
to say goodbye to another credit card.
I didn't seek help. Like an alcoholic, I hid my habit. Maybe "hid" is too strong a word, but because my wife and I keep separate finances,
I was able to hide my debt problem from her. (This is one of the
drawbacks to such a system -- there are drawbacks to joint finances,
I knew I had a spending problem. I knew it
intellectually, and I could feel it in my gut every time I bought
something with a credit card. But knowing you have a problem and doing
something about it are two very different things.
years ago, a friend heard me complaining about my situation. He didn't
scold me. He didn't moralize. He just gave me a book (the
aforementioned "Your Money or Your Life") and suggested I read it. I
was lucky. Though I didn't seek help, help eventually found me. I could
have saved thousands -- tens of thousands! -- by admitting I had a
problem early on. (Debtors Anonymous was made for people like me.)
The final secret
The biggest secret of debt reduction? Getting rid of it feels awesome.
After living in debt for 20 years, I've spent about eight months
debt-free. The sense of freedom is euphoric at times. Psychologically,
I'm a new man.
The thing is, most advice about getting rid of debt is purely theoretical. It's written by pros in suits who think that debt is all about crunching numbers. It's not. If smart money management were just about math, everyone would be rich.
But smart money management is mostly mental.
It took me a long time to learn that. Once I figured that out, I felt
OK ignoring the advice from the "experts." I learned to play mental
tricks on myself. That's what helped me get out of debt.
Other articles of interest at Get Rich Slowly:
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