For me, real life stories are often a lot more effective in showing us “how to” than a regular old how-to article. Plus, hopefully they can help us gain more confidence that this seemingly undoable thing can actually be done — by us. And that includes finally getting a handle on debt!
In this case, I want to tell the story of someone – I’ll call her Jennie — for whom debt had become a way of life. Owing $10,000 – $20,000 at any given time was not unusual for her. And for a long time, it didn’t even worry her. After all, she was making decent money.
Why Jennie decided to do something about her debt
Living the life of debt pretty much meant that Jennie got to do whatever she wanted, whenever she wanted. Broadway shows. Dinner out night after night. Vacations in the sun every few months. Presents for friends. That’s a hard act to follow with what she saw as self denial!
But then a friend — ok me — showed her how much money she was throwing down the drain every month and over time. And I explained what that would mean when she’s ready to retire, which for her always included a picture of easy living. Not the way she was going!
Here’s are some basics of what her life of debt was costing her:
- With $15,000 total for her five (!!!) credit cards, her monthly minimum payments totaled $450. (Avg 3% monthly payment of outstanding debt at 18.5% interest.)
- She didn’t really think about whether that was a lot, since she was always able to cover the minimum with the salary she was making. And so it was easy adding even more debt to her pile of credit IOUs.
- What she didn’t understand was how much she was paying for that “convenience” since interest kept being charged her as she dragged the payments out for years and years (over 20 years !!! for that particular amount and terms if she kept paying only the minimum).
While exact terms of individual credit cards can vary, by the time she was done paying off just that initial amount under her terms, she would wind up paying almost exactly that original amount in interest — on top of repaying the original amount.
- For convenience, let’s say she winds up paying another $15,000 on top of the original $15,000. If she had paid on time and instead invested that money, in 20 years — around when she wants to retire — she could have an extra $40,000+!
But instead of extra savings, if she keeps going as is, she’d not only have some of that same old debt still hanging around, but also any new debt she acquires — with both eating away at every retirement dollar she has. Cat food anyone?
Yet more to her debt-defying story
Besides the money she was losing to interest payments over an extended period of time, she had developed spending habits way beyond her means. Both her savings and retirement plan suffered from lack of contribution love.
When you get used to spending without thought, even if your income increases (and just imagine if it doesn’t increase or even decreases), money continues to disappear. And with those habits, it’s far too easy to get into trouble one day where your only choice is even more debt, such as if you lose your job or have a personal health or other emergency.
Yet another thing living on the edge of debt can cost us? It can trap you in a job or relationship you desperately want out of. And it can also cost you more for certain things you might want to buy on credit, like a house or car:
So what did Jennie do and how did it turn out?
It wasn’t easy, but Jennie decided it was time for a major change, and she turned to me for help. Here are the steps we came up with that she followed through on. Not saying it was always easy, but she stuck to her promise to me … and more importantly to herself:
- First, she agreed to stop using all but one credit card for anything new – and to pay off those new charges on her card each month
- She also got someone she knows well to give her a consolidated “secured” loan for all her currently outstanding credit card debt.
- Not wanting to become another sad “don’t ever do business with a friend” story, they drew up a formal contract carefully detailing the repayment schedule — with a fair market interest rate (still much lower than her credit cards) plus penalties as incentive to stick to the plan, which she did:
- They decided to make it a “secured” loan, meaning something would act as guarantee for the amount. In this case, Jennie allocated a percentage of her employer-provided life insurance to the lender. She could also have done that with her 401-K.
- She set up regular payments and kept them up until the entire loan was paid off, three years later.
- Jenny did the work I asked, which included creating two cash flow plans and two budgets — one of each to show what things looked like at that moment and the second of each after figuring out where to make cuts.
- She also took a few extra freelance jobs to help increase the income side of the equation.
- And, though it took some effort — and she fell off the credit wagon a few times — she made it. She now has actual savings, pays her debt off EACH MONTH, and feels a huge weight lifted off of her debt-free shoulders.
A few more thoughts
While this plan worked for Jenny, I know her story may not be yours. You may have a different income situation. You may have more places that absolutely require money than places you can cut. And you may not have a bank or private lender who can step in and help with a much lower cost consolidated loan — without all kinds of things going wrong.
But no matter what your situation, getting a handle on your cash in and cash out numbers is a good starting place. And so is taking a long hard look at your credit situation — and then looking for places where you can cut back. Yes, even HBO and daily trips to Starbucks. And also for any extra income you can find, even if it’s just working in a local store part-time. All the pieces add up.
And, if your debt is just so out of control you can’t see the light, please consider finding a legitimate local non-profit that provides free counseling services. Since there are a lot of scam places out there, don’t just trust anyone — even if they say they are a non-profit. You might try calling your Congressperson’s office or even your bank or credit union and see if they can suggest a reputable place.
Federal Trade Commission article that offers some useful suggestions:
Remember: There is no shame in asking for help — but there is indeed great pride in feeling ownership of your own finances at last!
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