“Forgive us our debts… and lead us not into temptation….”
– Matthew 6: 12a, 13a, NIV
This week, wealth coach Kate Phillips about discusses why people get stuck in debt, and how to get out of debt permanently!
Do you STILL have Nagging Consumer Debt?
You’re not alone. Over 43% of Americans spend more than they make, according to a May 13 article in Investopedia, “Stop Keeping Up with the Joneses – They’re Broke.”
While consumer debt has slightly declined in recent years (partially offset by the trend of borrowing from retirement accounts instead of credit cards), it still remains a plague that affects millions of Americans. Financial planning to pay off debt is a hot button in many circles. (Read our Ultimate Guide to Financial Planning Myths for more financial strategies.)
One financial journalist estimated that more than two million American homes carry credit card balances of more than $20,000. Another financial journalist estimated that people making minimum payments (without taking on new debts) won’t pay off their credit cards for 24 years.
Why Don’t People Pay Off Debt?
Here are some common reasons:
Debt is viewed as normal. Overspending is the American Way.
We want what we don’t have. We want what other people have. We don’t prepare for emergencies. And we’re not very good at delaying gratification.
Often, a series of small acceptable compromises leads to large unacceptable debt. We go out with friends, fix the car, get the flat screen TV, take the trip, and before we know it…. we’re trapped with payments we can’t shake (even if we don’t admit it.)
We get trapped into debt. We don’t make enough to pay it off. Ever.
Many feel their debt payments are “manageable.” But debts can grow, and incomes can change. What seemed like “responsible management of credit” can become unmanageable.
Consider that “paying off” debt is not the only way to get out of it. If you have tried to pay off debt incrementally for years – or decades – with no success, it may be time to explore other options.
We’re too ashamed of our debt to deal with it. So we don’t.
We avoid the things that make us feel uncomfortable, unworthy, or that trigger mental and emotional overwhelm. One key to reducing financial stress is to first address how you handle emotional, mental, and physical stress. Prioritize self-care and stress reduction, then, the financial issues won’t seem as overwhelming.
We get used to being in debt. Or… too paralyzed to get out of it.
Perhaps the extra $1k a month in debt payments seems “normal.” Remind yourself – it’s not! People can become accustomed to even intolerable situations. Never forget that you always have choices.
Debt: Easy Come, Not-So-Easy Go
People get into debt in various ways. It could be the result of habits, emergencies, or even an intentional financial strategy. How people get into debt can affect how – and how quickly – they get OUT of debt. See if you recognize your situation:
Habitual Debtors. Habitual debtors use credit cards and payment plans as a way of life. They might live quite simply or they may look like they’re trying to keep up with the Joneses, but either way, they consider debt a necessity to make ends meet. they don’t live within their means, however humble or extravagant those means might be.
The solution is simple, but it isn’t necessarily easy. To exit the debt trap, income must increase, and/or expenses must decrease, or something else must change. Until it does, debtors who spend more than they may make can add “debt” to the list of sure things, along with death and taxes.
Emergency debtors. These people “typically” live within their means. But not all months or years are “typical.” Their credit cards are “just for emergencies,” but they lack the savings to handle substantial emergencies. Unemployment, divorce, or medical emergencies can leave them drowning in debt with surprising swiftness.
If the emergency subsides (for instance, a medical emergency that eventually resolves), then emergency debtors are likely to get back on track, one way or another. The means may differ, from having debt negotiated or declaring bankruptcy to liquidating an asset or increasing income to pay off debts. As living beyond their means is not in their comfort zone, they will look for ways to resolve the debt. And when they do, they may save aggressively so they will be ready for the next emergency.
However, sometimes an emergency (perhaps a divorce or disability) is not so easily resolved, and the debt may linger. If emergency debtors do not find a way out of debt, they can turn into habitual debtors who use debt to make ends meet.
How Do You Get Out of Debt – Permanently?
The acronym M.A.P.S. gives us the keys:
M — A Positive New MINDSET
You must believe you CAN get out of debt. It must become real in your mind to become a reality in your life. If you can envision a debt-free life (and are disciplined to envision it regularly), you will find a way to create that life.
You must decide that you WILL get out of debt. It must become a priority. Being debt-free isn’t an accident, it is a commitment you must make consciously. And those who are most likely to succeed don’t simply see being “debt free” as the goal; they view reducing debt as just one step towards financial freedom.
A — Consistent ACTION
You won’t get out of debt with the same habits that got you into debt, or by simply hoping the debt goes away. You must make it a priority and follow through with concrete action steps. Those who look for magic wands to erase their debts find themselves in debt again.
Regardless of what debt relief plan you choose, something must change. It may require earning more, spending less, or employing another strategy to eliminate debt, but you cannot get out of debt the same way you got into it. You have to be willing to examine your own behaviors as well as your mindset.
Chances are, you didn’t get into debt overnight, and it could take many months of consistent action, perhaps years, until you are debt free. You can’t quit when it gets challenging, or you will never reach your goals.
P — A Workable PLAN
You must have an effective strategy to get rid of your debt. Even though it may take many months, you do NOT want a debt relief plan that makes it any longer and harder than necessary! (Although “pain-free” plans generally aren’t. How many consumers refinanced consumer debt into larger and larger mortgages, only to eventually lose their over-mortgaged homes when the economy took a dive?)
Too many people follow debt relief strategies that DON’T help them solve the problem, or don’t solve it efficiently. Some debt relief plans even make the problem worse!
The great majority of people who begin Consumer Credit Counseling and even Chapter 13 bankruptcies fail, due to inflexible and often unmanageably high payments.
Prior to newer federal regulations, some debt settlement companies collected big upfront fees from consumers (too often, consumers who did not have enough income to even settle their debts), and provided no help in return. Consumers were left in deeper debt then before.
Ads for “debt consolidation loans” abound on the internet, but you have to read the fine print to realize that you’ll end up with MORE debt than you started with if you take one of these loans! (A consolidation loan is equal to all of your smaller debts, with fees – and sometimes years of extra payments – added on.)
“Debt snowballs” can work well when consumers have the income to pay off debt aggressively. (A debt snowball is when consumers commit extra funds to pay off their smallest debt first, then roll that extra money into a larger payment to tackle the next debt, and so forth, until all debts are gone.) However, other consumers attempt this and are still struggling with debt 5 or 10 years later.
What’s the Best Debt Relief Plan for You?
It depends on your situation. You might be able to increase your income, decrease your spending, and pay your debt off quickly while preserving your good credit. In other situations, a chapter 7 bankruptcy might make sense. Or the best plan could be to work out solutions with creditors that may include lowered interest, even lowered balances on your debt so that you can pay it off quickly.
If you’re not sure how to get your debt paid off, always speak to a manager at your creditor’s company, sometimes they can offer you a solution such as a hardship plan with reduced payments and interest.
Whatever plan you choose, aim to be consumer debt free as soon as possible so that you can accelerate your saving and build your asset base. Your ultimate aim should not be to simply eliminate debt, but to build wealth!
S — The Necessary SUPPORT
Support is essential to:
- maintain a powerful Mindset
- take consistent Action, and
- choose an effective Plan that suits your situation.
Few people succeed in a vacuum. The media bombards us with advertisements to “buy more,” and people get trapped in such financial shame that they continue spending beyond their means, unsure of how to exit the debt trap.
Get the support you need TODAY and find your best path to a consumer-debt-free future!
If you want to talk to a debt relief specialist about your specific situation, send us an email letting us know you need debt advice, and we will connect you with an experienced debt reduction expert who will help you evaluate your options at no cost to you.
Kate Phillips is the founder of Total Wealth Coaching and an expert in helping people reduce financial stress.