Drowing in Debt?

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! If only it were 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.  Most 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—sometimes thousands—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.

If your debt load keeps climbing, you’re not alone. Total U.S. consumer debt (which includes credit-card debt and non-credit-card debt, but not mortgage debt) reached $2.55 trillion at the end of 2007, up from $2.42 trillion at the end of 2006, and nearly double what it was ten years before.1

More significantly: The average American with a credit file is responsible for $16,635 in debt, excluding mortgages, according to Experian credit bureau.2

Twenty-eight percent of those contacted in a recent survey say their ability to pay off their credit card balance has become more difficult.3

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:

1. Pinpoint your position. Excluding your mortgage, determine exactly how much you owe, and how much discretionary income you have available to begin whittling away at your debt load.
2. 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’ll be debt free in approximately two years, depending on interest.
3. 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.
4. 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 debt free you’ll have that much cash—every month—for lifestyle enhancement later.
5. At the same time, don’t make yourself miserable. If you do so, your plan will fail. Consider splitting discretionary cash in half: part for debt elimination, part for living (and playing) expenses.
6. Bite the bullet together if you’re married. Getting out of debt requires a sacrifice, one that will affect all members of your household. Enlist your partner’s support…or risk defeat.
7. 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.
8. Learn how to put money to work making more money. This means develop at least a basic understanding of wealth building.
9. Use life insurance as a tool to make sure your debts are retired if you should die prematurely … and to make sure that your family can avoid the need for future debt. This is especially pertinent 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 and/or 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 easy to follow. Becoming debt free takes a determined commitment and a strong dose of self-discipline, but the end result is well worth the effort. Now’s your chance to gain control of your financial destiny, reduce money worries, and achieve a better, more stable standard of living for the long run.

1. The Nilson Report, 2008.
2. U.S. News and World Report, “The End of Credit Card Consumerism,” August 2008.
3. Javelin Strategy & Research, “Credit Card Issuer Profitability in a Difficult Economy,” July 2008