Just like W.C. Fields' common sense cure for insomnia (get lots of sleep), many people offer equally simplistic advice about getting out of debt — just pay off your bills! Were it only that simple. Getting into debt is easy. Getting out can be a bear.
We get into debt innocently enough — by design (to buy a new house or car or fund a college education); by accident (the transmission in the car fell out, the roof on the house fell in); or by mismanagement of our finances (because we live beyond our means or just can't resist taking advantage of every cent of available credit).
However, we often stay in debt because we're not sure how to get out...or even if we really want to. Some people have a comfort zone of acceptable debt. When the amount rises above some arbitrary figure, they cut back temporarily, only to resume normal spending later. As a result, some people have been carrying around thousands of dollars of credit card debt for years — paying hundreds of dollars in interest each year — because it never occurs to them to pay it off, put away the plastic and start using cash. Additionally, it's never been easier to get into debt, with the boom in special offer credit card deals arriving every day in the mail.
So, if your debt load keeps climbing, you're not alone. Personal consumer debt in this country topped $1.33 trillion in 1998, according to the Federal Reserve. Debt is up more than $120 billion in two years. More significant:("Consumer Credit Outstanding, 1996-1998," Federal Reserve Board. Information obtained from The World Almanac 2000.)
- Average credit card balances grew to $7,564 per American household with at least one credit card, compared to an average balance of $2,985 in 1990.("1999 Credit Card Facts," The National Foundation for Consumer Credit. URL: http://www.nfcc.org)
- American households pay an average of 13.5% of their disposable personal income to debt repayment, a figure that has remained fairly constant since 1985.("Household Debt-Service Burden." The Federal Reserve Board URL: http://www.federalreserve.gov/Releases/housedebt)
Nonetheless, the bottom line is that we live in debt only because we choose to do so. We even pick the amount with which we are comfortable.
How to get out of debt: Whether your debt load is $1,000 or $100,000, you can bring it down to zero. Here are the steps to help make it happen:
- Pinpoint your position. Excluding mortgage, determine exactly how much you owe...and how much discretionary income you have to begin whittling away at your debt load.
- Map out your debt-elimination game plan ...complete with a Zero Debt Day to celebrate your freedom from debt. Base your plan on three factors: time, discretionary dollars and total debt. Example: If you owe $6,000 and can allocate $300 a month exclusively to debt reduction, you can be debt free in approximately two years in many cases, depending on the amount of interest you owe.
- Stop adding new debt. Typically, we tend to pay off one bill, but pick up new debt in the process. Put away the credit cards and institute a cash-and-carry policy in your house.
- Don't be too easy on yourself. Be willing to do what it takes to get out of debt ASAP. Maybe you simply cannot afford to vacation in Colorado this summer AND New York City this winter. Allocate that extra money to reduce debt. Consider this: If you budget $200 a month for debt reduction, when you're finally free and clear you'll have that much cash, every month, for lifestyle enhancement later.
- At the same time, avoid bread-and-water austerity. If you make yourself miserable, your plan will fail. Consider splitting discretionary cash in half — part for debt elimination; part for living (and playing) expenses.
- Bite the bullet together if you're married. Getting out of debt requires a sacrifice, one which will affect all members of your household. Enlist your partner's support... or risk defeat.
- Gradually build up a cash cushion for emergencies and regular expenditures. This allows you to pay cash in the future, while actually earning interest rather than paying it.
- Use life insurance as a tool to make sure that funds are available to help pay your debts if you should die prematurely...and to help make sure that your family can avoid the need for future debt if something happens to you. This is especially apropos if you have a home mortgage or high amounts of consumer debt. Life insurance on your life can provide proceeds to repay your consumer debts, as well as pay off a mortgage, helping assure that your family can maintain their standard of living if anything should happen to you.
The above recommendations may not be all that easy to follow. It may take a determined commitment and a strong dose of self-discipline. Still, it's well worth the effort to get on a debt-free standard, because it puts you in control of your financial destiny, reduces money worries and, in the long run, leads to a better, more stable standard of living.
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