Diggin’ Out of Debt

Feeling the stress of debt? Join the nearly 300 million people who are struggling with high interest rate nightmares

hat’s the biggest challenge faced by individuals who find themselves up to their eyeballs in debt? Take a guess. Is it the difficulty of attaining credit? Those annoying calls from collectors?  The mental anguish that comes every month when unpaid bills are piling up and there’s little to no money in the bank?  No, none of those.

The greatest challenge debtors face is that even if they’re able to reduce their debt, the behavior that got them there in the first place seldom changes. Dave Ramsey, a money management expert, trusted voice on financial management, and popular national radio talk show host, puts it this way: “Most of the time, after someone consolidates their debt, the debt grows back. Why? They don’t have a game plan to pay cash and spend less. In other words, they haven’t established good money habits for staying out of debt and building wealth. Their behavior hasn’t changed, so it’s extremely likely they will go right back into debt.”

Let’s back up a bit.  If you’re carrying what you feel is too much debt, you’re not alone. According to Experian’s 2019 Consumer Debt Study, Americans carry an average personal debt of $90,460. “Personal debt” is comprised of revolving debt, such as retail cards and credit cards, housing-related debt, such as mortgage loans and home equity lines of credit (HELOCs), and consumer loans, such as personal loans and student loans. The debt numbers vary with age, as well.  Gen Zers, ages 18 to 23, carry the least amount of debt with an average of $9,600. Millennials, those between the ages of 24 and 39, carry an average personal debt of nearly $79,000. Gen Xers, ages 40 to 55, carry an average of $136,000. Baby Boomers, ages 56 to 74, carry just under $100,000 and seniors ages 75 and above, carry an average of $41,000. All of which, as a nation, puts us at about $17 trillion.

Okay, now that we know just how big a problem this is for many Americans, what do we do about it? First, we need to recognize that there’s a critical psychological component to money management. Spending feels good, there’s no doubt. Saving feels, well, not so good. In order to manage your money wisely, you need to take an unemotional, disciplined approach to it.  Easier said than done, for sure, but that’s what it takes to stay debt free… a change in the way you look at spending.

Suzanne W. Himes, lead financial planner at Asset Planning Corporation of Knoxville, stresses the importance of understanding and acknowledging the reasons for one’s debt situation. “Knowledge is empowering,” she tells her clients. Health events, spending habits, family dynamics, personal money history… all contribute to an individual’s debt situation. Her advice? “Create a detailed inventory of assets and liabilities. Reduce the cost of the debt as much as possible. Refinance, transfer to another creditor, negotiate, etc. Track three months of spending at a very detailed level; there are several good apps out there that can make quick work of this. Create a ‘last dollar’ spending plan and funnel everything possible to debt payoff. Be willing to make short term sacrifices for long term success and, lastly, enlist the help of a support/accountability partner who can help you stay on track if needed.”

Dave Ramsey agrees. In order to overcome the psychological challenge of reducing debt, he suggests what he calls the “snowball” method. Counter to what seems to make the most sense, the debt snowball method is a debt reduction strategy in which you pay off bills in order from smallest to largest, regardless of interest rate.

Shouldn’t I pay off my higher interest debts first, you ask.  The answer is mathematically, yes, but psychologically (which we talked about earlier), no. That’s because the debt snowball is designed to help bring about that much-needed change in how those in debt behave with their money so that, ideally, they never go into debt again. “It forces you to stay intentional about paying one bill at a time until you are debt-free,” says Ramsey, who advises clients to start with the smallest debt first, pay it off, then take the payment you’d applied to that debt and start applying it to your “new” smallest debt. Why? The psychological benefit. Paying off a debt is both freeing and motivating. With larger debts, “you won’t see traction for a long time,” Ramsey says. “You might think you’re not making fast enough progress and then lose steam and quit before you even get close to finishing. It’s important to pay your debts in a way that keeps you motivated until you’ve wiped them out.”

Roger Kiger, life coach and financial planner with Knoxville-based Visionary Horizons, says that when it comes to debt relief, “the main issue is always a scenario of folks not understanding where their money goes on a monthly basis. That analysis is the first part of understanding what the options are.”

Once that understanding is reached, says Kiger, “basically, the next steps would be to, first, address discretionary spending (things you can eliminate or reduce) and, second, the indebtedness and things you can negotiate. In regard to debt in particular, financial institutions aren’t usually very helpful when someone is having financial trouble. But they get interested when they think they may not get paid back.” It’s worth a phone call to a creditor to find out if they’re willing to offer some type of relief… a reduced monthly payment or partial forgiveness. “Their options are usually fairly limited,” says Kiger, “but it’s worth reaching out when you’re having trouble.”

Kiger takes a different view of debt reduction strategies.  While Ramsey advises paying off the smallest debts first, Kiger recommends the first attack be on the debt with the highest interest rate. “Even if you can refinance some of it, the cash flow can improve greatly,” he says. “With a longer-term note, like a HELOC (home equity line of credit) or refinancing a mortgage, the cash flow immediately improves.”  Again, we’re talking psychological benefit; an improved cash flow can be a tremendous stress reliever.

While you may be tempted to take some shortcuts, don’t. The shortcut most often taken is debt consolidation by using other unsecured creditors that tempt with short-term low rates. Consolidation companies and banks market this service with a vengeance, tempting debt-stressed individuals with tens of thousands in savings, temporary low interest rates, low monthly payments, and more. The truth is that, in short, there’s not much truth to the benefits they claim. Be wary of companies offering 0% balance transfer opportunities; before you know it, you’re back at 28.9% interest.  Be wary, too, of debt consolidation firms that offer reduced payments at low interest rates.  More often than not, your loan term is stretched out by 12-18 months.  The result?  Even at the lower interest rate, with the lengthened term — which yields the lower monthly payment — you’re paying for a longer period of time and, subsequently, paying more in the end.  Dave Ramsey, in his blog entitled The Truth about Debt Consolidation, sums it up succinctly: “Debt sucks. But the truth is that debt consolidation loans and debt settlement companies suck even more.”

So, what are some tried-and-true, sensible ways to tackle indebtedness?  Here are a few tips:

One, make a plan based on what you bring in, what’s most important to you. Your goal? To manage your expenses in such a way that you can live debt free and, ideally, have an emergency savings fund of three to six months of expenses in the bank.  Two, speak to your creditors about your debt. “Ask and you shall receive,” as the Bible says. Maybe not always, but sometimes.  It’s worth asking! Three, investigate a HELOC, which allows you to take out credit against the available equity in your home and you don’t need to have paid off your home to be eligible. A HELOC offers a revolving line of credit similar to a credit card, which means you can borrow money, pay it back, and borrow again… usually at attractive rates. Four, get the advice of a professional, a support partner who will help you stay on track…” a Ramsey, a Himes or a Kiger. Lastly, make more money if possible!   

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