How do you know when enough is enough and it’s time to get out of debt?

Did you know the average American can only go 17 days without a paycheck?

One out of five people have $10,000 credit card debt alone.  In addition to that 45% pay the minimum not the principle on their credit cards.  46% of families spend more than they earn each year and sadly the personal bankruptcy numbers reported has doubled in the past couple of years.

Schools are not helping educate kids on finance, only 13% of college kids take a finance class.  Graduates between the age range of 20 and 29 have an average of credit card debt $2200 each month.  The average debt for twenty somethings is $45,000.

60% of the millentials aged 30-39 do not keep a budget.  Most people do not realize that education debt is the fastest growing debt in the United States, which makes us wonder how high tuition is getting at schools these days.  The average student loan debt coming out of stage colleges is $27,000 however the unemployment rate is 12.7%.

The good news is that you are on this blog and aware this is an issue. Question is how do you get out of it.  Like any revolving issue, as an engineer I like to look for the root of the problem.

How to get out of debt, facing denial

Most folks are in denial.  I’ve seen this with family and friends, they know they are not doing well financially, and they continue to swipe the credit card.  How they live with it without guilt?  They just don’t look at their credit card statement.  It’s easier to just setup the auto minimum payment and not think about it.

How do you know when enough is enough and you have too much debt?  Here are some symptoms you should be aware of

a) You have maxed out your credit card limit

b) You have debt that is not being reduced.  Even worse, your total debt is increasing.

c) Over 27% of your total income is being used for payments on your debts

d) You tend to argue with your spouse or partner a lot about debt

e) You are taking cash advances from one card to pay for another card.

f) You have NO IDEA exactly how much you owe

2. Instant gratification gets people into debt

The second reason a lot of people are having a difficult time getting out of debt is the fun of instant gratification.  People have very high expectations for instant gratification.  Most people are very shortsighted.  Everything is now, now, now. You can probably think of a recent business meeting or townhall meeeting where leadership says they want profits now. How do we get more sales now.  In a world that expectations to get something is today and tomorrow.  People are not willing to wait and don’t want to wait for the future, needless to say, they do not want to save and invest in the future. Thus most people want premature instant gratification.  This is caused by buying what they want, when they want it and not considering whether they need it.  I am guilty of this myself, any new workshop, course I wanted to dive into it right away. Yet by setting up my 3 auto save accounts, I have been able to get away from that challenge.

3. Need vs Want

Need is something you must have. A want is something you want to have but don’t absolutely need.  For example, you might need a car to get to work. But you don’t need a luxury car. You may need to eat, but you don’t need to eat out at pricey restaurants everyday. There are ways to satisfy that craving for tastier food, nicer clothes, to meet that need for new and taste, I found myself collecting more recipies, planning yummy food, and shopping more at TJMaxx and Marshalls.

The key thing to getting over needs over wants, is understanding that spending is an emotional.  Nothing gets people more emotional than money.  You see it at estate battles, people break ties with family and get all upset because of money.

Key thing is to learn how to become much more logical about money and less emotional.  Don’t be in denial, such as going shopping because you feel upset and need a new dress to cheer up.  Understanding this is the first step to recovery.  Have you heard of shopaholics? People shop to feel better about their lives or themselves.  Have you watched the show Hoarders?  100% of the time there’s a deep emotional gap of pain the hoarder experiences and masks it with buying items to feel better and ignores the house of piling stuff.

4. Unexpected Expenses accumulate into debt

The other reason we get into debt is dealing with unexpected large expenses.  This is also known as crisis spending.  Something breaks down, someone is hurt, there’s an expensive invoice that comes with fixing it.  If people do not have the money, they end up charging it to a credit card and incur consumer debt.  Big, unexpected medical bills and dental bills.  This is one of the reserve accounts I discuss later.

5. The Get Rich Quicker Mentality

A super common mentality but often not discussed after the fact is the “Get Rich Quicker” mentality.  That sounds about right, but why wold a get rich quicker mentality lead to over spending?

Well, have you noticed that many companies are now trying to monetize the savings you will receive from buying a product?  They note that the product will pay for itself.  If you buy a new hot water heater or furnace, it will pay for itself over the years.  You will break even in 12 years soon.  Folks reason that by buying these products they will save money in the long run and get rich quick.  In fact, there might even be coupons promising discounts from the normal pricing.  The issue with that thinking mind is that it leads to more purchases.  People are focused on the savings that they will get and do not consider prior spending.  As a result, they overspend on too many products.

6. Borrowing money for consumer goods is always a bad idea.  

When we are born on earth, we are born without debt.  Somewhere along the way, we get ourselves into all this debt and then stress out with frustration to get out of it.  I am a strong believer that God put us on earth to make it a better place and to be happy, not be miserable and stressing about credit card bills and mortgages.

Even large expenses such as weddings, big parties, we put them on a credit card and let it accumulate interest, we let it build up and these events are already over and add no more value.

It’s not recommended to borrow for consumer purchases that cannot be paid off immediately.  Money should be saved beforehand.  There is also a stronger sense of appreciation when you save for 5 months for a vacation trip you really wanted.  You treasure it more, you plan more, you anticipate it more.  Versus when you just swipe it on a credit card and plan to just credit card the rest of the trip and worry about paying it off later.

Equating Self Worth with Net Worth

The sixth reason people get into debt is equating their self worth with their net worth.  It is surprising how many people view their life by the number of things that they have or perceive their lifestyle at.  It’s not our fault, it’s the marketing message all around tv commercials, use a cologne, get all this attention, buy a luxury car, join the elite league, buy a large millionaire house, join the millionaire club.

  1. The Inability to Earn Enough Money

Some people blame their debt on simply not being able to earn enough money.  If you are spending more than you are making, its basic math that there will be debt incurring.

Here are some stats for where our hard earned money goes

28 to 45 percent in total taxes

20 to 25 percent in housing

15 to 20 percent for food clothing and dry cleaning

5 to 10 percent for transportation, vehicle expenses and gas

Does this sound about right?  This leaves between zero to 32% for everything else such as medical and dental needs, education for the kids, retirement, repairs, gifts, fun and entertainment.

You can have anything you want, you just cannot have everything you want.  Prioritizing what goes on your high ticket spending will help you tomorrow and months down the road.

This is why I setup a big purchase spending account in my checking account.  It auto debits an amount monthly to save up for that new Macbook, Vegas trip …etc.  When the time comes, I know exactly how much I have set aside for the trip.  And I can pay off my credit card with what I’ve already reserved versus feeling the pain for 6 months.

 

get out of debt for good
Get out of debt for good by understanding the traps and the root causes,
it’s never about the money