Getting Out of Debt

Ignore the Numbers

We won’t bore you with the statistics that detail the extent of installment debt, e.g., the credit card debt that Americans hold.  The numbers themselves speak volumes of the unhealthy and precarious financial situation of many Americans, but the one fact that should give you concern if you are burdened by debt (or should keep you from going further into debt) is this: Debt limits your ability to make the financial decisions that would positively impact your quality of life.

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Too many Americans today live paycheck-to-paycheck, mired in debt.  They are challenged to pay for basic necessities. There’s no “emergency fund”: a car repair or a medical expense becomes a financial crisis.  Debt is too easy to acquire and way too difficult to shed. Debt leaves no ability to save for retirement. Too many of us run the risk we will become one of the tens of millions of Americans during retirement who depend solely on Social Security payments and the charity of others—a standard of living that is considered poverty.

How great would it be to be financially healthy?  You can pay your bills. You have savings that pay for emergencies and other major purchases. You have disposable income to treat yourself and family to positive experiences.  You can build up savings for retirement.  The lifestyle benefits of being financially fit should be as obvious as are the health benefits of being physically fit.

Sometimes unavoidable circumstances “can create” a financial crisis for you. In most instances, however, our behavior when spending money is the primary culprit for our poor financial health.  Poor choices are made when assigning priorities for spending the money we do have.

Just like weight loss, there is no “miracle pill” for getting financially fit.  Portion control and regular exercise are what it takes to lose weight.  Becoming financially fit requires much the same regimen: self-control and daily discipline. For some people, that’s a bitter pill to swallow.

Perhaps you are already in reasonably good financial shape, but you know that you could improve your financial management skills. No matter your circumstances, we have a strategy and some online resources (we call CapitalYOU™) that are designed to get you out of debt and on a path to financial fitness.

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If you are ready to make a commitment to achieve good financial health, we’ll support your efforts with Capital YOU™ Read on, and good luck!

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A Through C

How often do you buy lottery tickets, hoping that you will defy the 1-in-a-gazillion odds and win an incredible sum of money that will solve all your financial problems?  Be honest –  it will never happen.

Or do you sometimes wish that you had a long-lost rich uncle that will send you a big check? He doesn’t exist, does he?

You can only count on yourself.  It’s like weight loss. If you want to lose weight, you need to be the one exercising. You need to be eating healthier foods and smaller portions.  You need to commit to sticking with your budget.  Only by doing so can you get to a much healthier financial lifestyle.

Too often, people say, “I’ll start on a budget next year.”  And they say the same thing the following year.  Next year turns into two years, and then into three, and then into never.  Delay getting started living on a budget and your financial health will only get poorer, and the challenge to get better becomes much more difficult.

The Chinese philosopher Laozi said over 2,500 years ago, “A journey of a thousand miles begins with a single step.” The single most important step—the first step—in your journey to financial fitness is to commit to taking the second step, and then the third, and then the fourth, and so on.  Before you know it, you’ll be quite a long way down the road and closer to your better financial health!

Be relentless in sticking to your budget.  No doubt it will be difficult. But how tough is it now to be under the weight of debt? How hard will life be during retirement if you failed to adequately save while working?

Some people have made decisions they regret and are in debt as a result, while others are in debt they had no control over.  You have the ability to take control of your debt and end the hold it has on your life.  You will be proud of the financial future you can achieve.

The second step towards financial health begins with a word that can make the staunchest of us cringe: Budget. Very few financially healthy people do not have to follow a budget; for you, it’s mandatory.

During retirement, a budget will also be mandatory, so get used to it—even if you’re decades away from retirement.  There are stories aplenty about retirees having to choose between taking a full dosage of a prescription drug or buying food. Either budget now when you have greater flexibility and can positively impact the amount of income you have during retirement (which we’ll talk about later) –  or live on a restricted budget during retirement. You choose. It’s your life.

Budgeting is all about differentiating the essential expenses of your household from “discretionary” spending. (Discretionary expenditures are ones you don’t really have to make.)  Examples of essential expenses are rent, mortgage, utilities, food, and insurance.  Examples of discretionary spending are the daily non-fat mocha with a shot of vanilla, eating out several times at your favorite restaurant, buying the latest fashion, the 60” flat-screen TV, all the purchases you couldn’t account for when analyzing your checking account statements, and other things that define a lifestyle you can’t afford.

Certainly, your budget needs to pay for the essential expenses of life. Just as important, there needs to be room in your budget to “pay yourself first”. From each paycheck, set aside a specific dollar amount that will allow you to:

  1. Build an emergency fund;
  2. Make extra payments on your debts that are greater than the monthly account minimum; and
  3. Start making minimum contributions to your 401(k).

How can you set aside money in your budget to do all we listed in the paragraph above?  Reduce your discretionary spending! Yes, you will need to make some sacrifices. It’s not much different than being on a diet and not having a second helping of dessert.  It won’t be easy. We’ll explore in greater detail these three additional budget goals so that you can understand their importance—and thus have the motivation to fine-tune your budget (and later stick with it.)

Our strategy to get you to financial fitness involves a few steps. We say it’s as simple as ABC.

A is for Analyze, as in “analyze how you are spending your money”.  Just as A is the first letter in the alphabet, the first step to becoming financially fit is an analysis of your expenditures.

Look at your bank statements for the past 6 to 12 months.  Dig out your credit card bills.  Try to account for how you spent all of your take-home pay.

You should be able to easily account for rent or mortgage payments, insurance premiums, gas, electricity, cell phone bills, car payments and other debt payments.  But how did all those cash withdrawals get spent? Often there is insufficient detail on your credit and debit card statements to identify the businesses where you spent money, leaving you scratching your head over this or that charge.

Get as detailed as you possibly can with itemizing where all the money was spent.  (It will be important when we talk about the letter B.)

If you are like most consumers, there will be a big percentage of your expenditures you won’t be able to nail down. You have plenty of company wondering where all the money went.

D Through H

So far, our discussion has been about financial health, but it’s equally important to be physically healthy.

Let’s hope you have good health insurance and that you don’t get sick.  If you do, there are deductibles and co-pays that will come out of your pocket. Such medical expenses can negatively impact your financial health.

One of the biggest financial risks you will have in retirement is the cost of your health care.  Life happens. Even the most physically fit among us succumb to illnesses over which we have no control.  Luckily, we can practice preventive care by exercising, checking in with our doctors, and forming healthy habits.  Just as there is often too little time to make up for the missed opportunities to have saved during our working careers, reversing a preventable health problem in our older years may be impossible.

Most health professionals recommend that you exercise at least four times a week.  Your exercise regimen doesn’t have to be at a gym or with a trainer.  Walking for 30-45 minutes qualifies as exercise.  Just do something to become active! (If your current state of physical conditioning suggests it, see your doctor first.)

Getting financially fit could prove to be a challenging endeavor. You will be changing the behaviors that contribute to the financial difficulties you are currently facing.  Change will require commitment and determination.  Being in a good frame of mind will be critical—and regular exercise can help improve your mental attitude.

If you can avoid an extraordinary health cost in retirement by initiating a life-long practice of preventive care, the savings you can accumulate while working will last that much longer in retirement.

And let’s not forget you will enjoy life and retirement much more if you are healthy and active!

What gets you out of bed in the morning? Other than your need to keep a roof over your head and food in your belly.  What drives you each and every day?  Your career? Your family? Do you have a passion for the arts, sports, the outdoors?  Do you like to volunteer at your church or in the community? Are you hoping to travel? Looking forward to retirement?

Think a minute and ask yourself, “How many of my goals and dreams involve money?”  We bet, in one way or another, every one of them!

Would being financially fit improve the odds that you will achieve your goals?

To help you stay motivated to rid yourself of debt and become financially healthy, write down your goals.  Post them in a conspicuous place to remind you of why you are making the hard decisions every day to remain true to your budget.

Yes, it’s correctly spelled 401(k).  We just wanted to get a discussion about saving for retirement early on in our alphabet.

People ask us if they should hold off making contributions into a 401(k), and instead, divert that money to reducing debt. If your objective is to retire at a certain age, the amount you will need to fund a comfortable and secure retirement will be the same regardless of when you start saving for retirement.  The longer you delay investing for retirement, the greater the amount you will have to save each year to accumulate the necessary funds to retire.  Let’s repeat that: the longer you delay, the more you will have to save later on.

The challenge of accumulating enough money to retire comfortably is so great, we think it extremely important to make a 401(k) contribution.  Yes, we know it’s one more financial ball you will be juggling. We’re all about you acquiring good financial habits: 401(k) participation is one of them.

If your employer’s 401(k) plan offers a matching contribution, you MUST take advantage of it. (It’s part of your compensation package!) Until you have your debt and discretionary spending under control, you should contribute at least the minimum amount of your compensation that earns you the maximum match (generally somewhere between 3% and 8%).

If that’s too big a percentage, do what you can – even if it’s just $10 or $25 each paycheck. As your financial health improves, and as you learn first-hand about the unique advantages a 401(k) offers, we think you will find the motivation to increase your 401(k) contributions.

In a perfect world, your minimum target for contributions to a retirement plan should be 15% of your compensation from all sources.  Yes, this means counting towards that 15% the contributions your employer makes to the plan. However, the ideal contribution to your 401(k) from your paycheck is the maximum amount the IRS permits.

Saving for retirement is a big topic, one deserving of your attention.  We suggest you watch these videos from the CapitalYOU™ library.

Some people have credit card and installment debt because there was a financial emergency, like a car repair, medical bill, or a home appliance repair.  Without an emergency fund, how else do you cover those costs, other than taking on debt?

You must immediately (and that means today) find ways to cut down on discretionary spending.  Stop charging with your credit card. Pay cash for everything. Cancel the premium cable package. Bring your lunch to work.  Cook at home.  Invite friends to a potluck. Stay home for the weekend and visit a museum, a botanical garden, or explore your city as a tourist might. Make coffee at home and bring it to work in a thermos. Take the bus. Carpool. Consider getting a roommate, a part-time job.  Hold a garage sale. Do what it takes to put away $750 in a savings account that is difficult to access but available for an emergency.

From our experience as investment advisors, most people who cannot save any money are in that position because so much of their income goes to paying off debt.

Your budget needs to focus on paying off your consumer installment debt as quickly as possible (think debt with very high interest rates, like credit cards). Paying off other debt, like a home mortgage, can wait for later.

When building your budget, gather the following information about your consumer debt: current balance, minimum payment, and interest rate. Then order your debts by the amount of current balance, lowest to highest.

Let’s assume your lowest current account balance is a credit card debt of $1,000 with interest 19.9%.  Let’s further assume the minimum payment is $36.50—which has you paying off the balance in 36 months at a cost of $314.30 in interest. And one last assumption:  The dollar amount in your budget you have designated for “additional debt payments” is $150.

Pay the minimum payment on all of your debt except the one with the lowest current balance.  Pay the $36.50 plus the $150. Within 6 months, your $186.50 payments will have this $1,000 credit card balance paid in full!  And your interest payments will only total about $56.

Then, what is the installment debt with the lowest credit balance? Let’s say its minimum payment is $62.  Add to this $62 the $186.50 you previously had budgeted to pay off the other debt.  The resulting increased monthly payments of $248.50 will pay off this debt much quicker.  When it’s paid off, add $248.50 to the minimum payment of the third debt on your original debt and pay that off more quickly.  Continue this strategy until you have paid off all your consumer debt.

Once your consumer debt is all paid off, how much extra money do you think you will have in your budget each month? A lot!

Oh, and don’t take on any more installment debt!

I Through N

When you buy or sell shares of a mutual fund, their price is the fund’s net-asset value (or NAV, for short). The NAV is calculated by totaling up the value of all the mutual fund’s securities at the end of the trading day and dividing that value by the number of shares outstanding.  As the NAV rises and falls each day, you are gaining or losing value.

Mutual funds pay dividends, which almost always are reinvested in additional shares within the fund.  The NAV will be reduced by the amount of the dividend.  This doesn’t mean you lost money.  You now own more shares of the fund at a lower value.  Before the dividend was paid, you owned fewer shares of the fund at a higher price.  The math works out such that the value of your ownership in the fund is the same before and after the dividend payment. The lesson here?  Don’t track the performance of your investment by its share price.  Look at the total value of your shares.

Most of the investment options within your 401(k) are mutual funds.  For the novice investor, or for someone too busy to manage their own portfolios, mutual funds are great options for IRAs and other investment accounts.

A mutual fund is a portfolio of stocks and/or bonds, whose total value can be in the billions of dollars. Investors are “pooling” their money to hire a professional manager who will make the day-to-day decisions about the securities to buy or sell.  Investors own “shares” in the portfolio, each having an undivided interest in the portfolio. With a very small investment, you can own a portfolio that offers you important diversification in various asset classes and in numerous sectors of the economy here and around the world.

Shares of mutual funds are issued and redeemed by the mutual fund itself, at a price calculated at the close of the financial markets each day. Another investment that has gained popularity is the exchange traded fund, or ETF, which trades like a stock, meaning it can be bought or sold at any time during trading hours.  ETFs are also a good way to invest small sums of money.

Transportation is going to be an important part of your budget. The most budget-friendly way to get around is using public transportation (and the occasional Uber). Is this a possibility for you?  Can you move someplace closer to work and make this a reality? Ride share? How about a bike?  There are the ancillary benefits of being environmentally-friendly and being very inexpensive.

If not, then you need a car or truck. One way many Americans afford their cars and trucks is to lease them.  Leasing generally involves a smaller monthly payment and a shorter payment term than purchasing a vehicle, even if at a very low or no interest rate. Does it make sense to buy or lease?

A lease is a contract in which the leasing company agrees to purchase your vehicle back after the lease period for a guaranteed price and in a pre-agreed condition. If the car is not in that condition, e.g., more miles driven, dings, scratches, worn tires, poor mechanical condition, upholstery tears, you pay for those defects at the time you turn in your vehicle.  -Keep in mind that the leasing company needs to sell your vehicle, and anything that detracts from their ability to sell it at the price negotiated up front will have you paying them to restore it to that pre-agreed condition. If you are going to lease, take excellent care of that vehicle.  The affordability of the lease decision is not really known until the term of the lease expires!

Remember, your budget must allow for additional expenditures as gas, maintenance, insurance, and parking.

If you have to get a car or truck, consider buying a used vehicle.  Hey, maybe a car that came off a lease!  After all, you can be assured it’s in great condition.

Most people fail to dig themselves out from under the crushing weight of their debt because it’s too hard to do so. They can’t say “No!” to their spouse, partner, family, friends—even to themselves—when asked to buy this or that, to go out to dinner, to go away for the weekend, etc.

The Key to Success when it comes to living within a budget is to simply say, “No!”  You really can’t afford certain things YET.  We say “yet” because once you pay off your debt, you will have much more disposable income with which to say “Yes!” to certain things—so long as you are living within a budget. Once that time comes, you will need to shift the focus of your budget to other priorities, such as saving for retirement.  But it should leave you room to say, “Yes!” Have that as your goal.

You have a job that generates income for you. You might work in an office, a hospital, a factory, a school, or you’re on the road. The job’s income is important to you; and thus, the job is important.

You might also have the job of being a mother or a father, a spouse or a partner. People depend on you for much more than just a paycheck. You have a responsibility to yourself as well, single or otherwise.

You have a non-income job as well: getting yourself on track to becoming financially healthy.  No one else is going to do this job for you.  As many people as there are in your life who love you, the one person who can do this job is you.

Do what you can to invest in your career and ensure the future of your position.  Learn new skills, grow your network, check in with your company to see how else you can add value.  You’re aiming for job security and a raise to lighten your debt burden.

Yes, you will have an investment account! How should you invest it?

Your choice is either in cash, stocks, bonds or any combination thereof.

You probably are familiar with cash investments, both money market funds and certificates of deposit. You may be less familiar with stocks and bonds. We have some great videos on stocks and bonds. Please click here to view them.

O Through V

A decision to live on a budget is a great victory.  Many people in your situation do not have your resolve.  Once you pay off your debts, you can celebrate a tremendous victory!  You join the ranks of the small percentage of the American population that does not have debt.  Your life will have changed.  Free from the stress of debt, you now have significant disposable income that can be redirected in very positive ways.

When you have debt, it is said that you’re “underwater”.  How deep you are—and how potentially tenuous your situation is—depends on how much debt you have.  You can never come up for air and get a break from the stress that having debt involves until you pay it off.  You can never reach the beach, sit on the sand, warm yourself and enjoy the breeze.

Life is so much better when you are financially fit!  The only obstacle to keeping you from being debt-free is your decision not to do what is necessary to pay it off. That’s the simple truth.

Tenacious is what you need to be when following your budget: persistent, determined.  Having a budget means nothing unless you follow it.  And unless you follow it, you won’t get out from underneath that debt.  And if you don’t get out from underneath that debt, avenues you wish to pursue in life will be closed to you.  No one but you is going to pay off your debts.

This is your life.  Be a casualty, or be a winner.  Your choice.

Debt Stress is a barrier to success.  Anxiety over accruing interest, phone calls from creditors, and tough financial decisions can pile up.  Some people can handle this stress well and be motivated by it, but others turn to avoidance, guilt, or panic.

If your debt stress is causing you to avoid dealing with your debt, this is your reminder to take action.  Stop reading, call your creditor, check your balance, make or set up a future payment, or check out our financial calculators.  There are a lot of ways to deal with avoidance, but here are a few favorites:

  1. Set up a weekly or monthly appointment with yourself to check in with your creditors and bank. You’re more likely to follow through if you set time aside in advance, and you’re better equipped to deal with the stress if you have time to prepare.
  2. Download a mobile app that can show your account balances, and get in the habit of checking it when you check Facebook or email.
  3. Talk to someone you love and trust, ask them to sit with you while you make calls, or help you go over statements and plan payments. Remember that a burden shared is a burden halved.

Your debt stress might show up as guilt or panic.  It’s easy to feel guilty about spending money, especially when you’re living paycheck to paycheck or facing a large balance.  We recommend forgiving yourself: don’t forget your missteps, but be kind about mistakes.  You’re only human.  If you don’t forgive yourself you’re likely to associate handling debt with negative feelings, leading you down the avoidance road.  It’s important to remember that you deserve healthy food, a safe place to live, easy access to healthcare, and quality time with loved ones, even if they aren’t available to you because of your debt.

Our last piece of advice to help with Debt Stress is “Don’t panic!”.  Easier said than done, we know.  Take time for yourself to exercise, meditate, pray, or talk honestly with a loved one – you need to be well rested and confident to get financially fit.  We know you can do it, and we’re providing CapitalYOU as a resource to help you get there.

Sticking to a budget is very hard work.  Remember, life happens.  Things will come your way that will knock you for a loop and set you back on your budgeting.  Be resilient.  You can recover quickly if you believe in yourself and in what you are trying to accomplish.  Keep focusing on the goals you set out for yourself—goals that can only be accomplished once you are debt-free.

People often confuse quality of life with lifestyle. “I’ll be much happier if I have a nice car, a big house, fancy clothes, go on nice vacations, …”  That may be true if you can afford it, meaning you have an income large enough to spend all that you wish and still live within your means.

Too many people have a lifestyle which they cannot afford. They carry a large debt load that can compromise their longer-term financial health for the shorter-term enjoyment the debt burden affords. There’s a big tradeoff for lifestyle when risking quality of life over the long run.

Maybe it was through unfortunate circumstances like unemployment, medical bills or a divorce that you are in debt without the short-term gratification of the material goods which debt buys for other people.

Life is full of tradeoffs. Maybe your lifestyle suffers a short-term hit while you stick with your budget to get rid of debt.  Believe us when we say the tradeoff is worth an improved quality of life when you are debt-free, and your budget will then allow you to better achieve your goals and dreams.

Depending on how deep the hole you are in, e.g., how much debt you have, it may take some time—even years—for you to dig yourself out of a tough situation.  “Rome wasn’t built in a day.” With each passing month, you are getting closer to being debt-free and to having the greater ability to achieve your goals and dreams.

Debt affects the opportunities we are presented with, but it also presents us with its own opportunities.  Lost opportunities can vary from inconveniences – not being able to attend an event – to major setbacks – losing the ability to invest in real-estate.  These are all motivators to get out of debt, and to build skills to stay out of debt.  However, lost opportunities are a major contributor to debt stress.  If you’re a person who likes to solve problems and overcome obstacles, look at debt as an opportunity to challenge yourself and your community.  Start a competition to see how much you can reduce your utility bills (not only is this great for your wallet, it is better for the environment).  Teach yourself how to cook at home and contribute the money you save there to paying down debt.  There are lots of ways you can use debt as an opportunity to practice saving money and to learn new skills, and each way will help you tackle that debt even faster.

W Through Z

You’ve made it through the alphabet! How appropriate is it that the last letter is Z and stands for Zero-Debt—the result we hope will be your efforts from budgeting.

Wouldn’t it be great to be debt-free?  How would your world change? Imagine the possibilities if you had all that extra income to better enjoy life today and provide for your future.

So much of what we have written was intended to motivate you to do the heavy lifting required to dig yourself out of debt and become financially fit.  CapitalYOU™ can encourage you.  But we can’t do the hard work for you. Only you can. And once you are out of debt, only you can stay out of debt!

We at NWCM extend to you our best wishes and hopes that you do become and stay financially healthy.

If you have more questions about reducing your debt, feel free to Ask an Expert.

Once you are financially fit, you will have the ability to say “Yes” more often to so many of the things that you have had to deny yourself in your efforts to become financially healthy. A word of caution: newly, financially healthy people can slip back into old ways and lose that fitness in much the same way that people who lose weight after a rigorous diet gain it back.

Financial fitness is a life-long endeavor. It will always require commitment and discipline.  Just as maintaining an ideal physical weight is so much less than the effort of first having to lose it, so too is maintaining your financial fitness.  You no longer need to pay off debt.  You’re debt free!  Revel in it!

With only 400 words in the English language that start with the letter X, we really struggled coming up with something applicable to our discussions about debt reduction.

Xenia is an ancient Greek custom of hospitality, specifically the giving of presents to guests or strangers. CapitalYou™ is an example of Xenia. We created and maintain CapitalYou™ resources as a public resource, available to the “guests” who browse our website at no cost or obligation.  A gift, really.

NWCM is a for-profit business and a Certified B Corp®. Although we are shamelessly in business to make a profit, as a B Corp® we want to use our business to do good for the community in which we and our clients live. A strong, vibrant community has as its members financially fit people who can patronize the community’s businesses, support its churches and community-based organizations. The more financially fit the people in a community are, the better the community.

We want you to be financially fit—even if you aren’t our client. You’re our neighbor, or the neighbor of our client. We hope this instance of Xenia helps you to become financially fit.

Wishful thinking is that you win the lottery or get a financial windfall that pays off all your debt and leaves you with a large savings balance. It will never happen.  Plan accordingly!

What should that plan be? Analyze your expenses; create a Budget; and Commit to living within it. It’s as straightforward as ABC.

Yes, it’s hard work.  But is being under the yoke of debt payments easy?

Shift your focus. Do what it takes to become financially fit.  It’s well worth the effort!