Hans Kasper, MS-CPA, PS

How Do I Get Out Of Debt?
 

“I remember the day like it was yesterday” said Chuck.  “It was a hot Sunday afternoon; the second debt collector had just left and another one had called in the phone.  On Saturday, the mail brought four past-due notices and a letter from the IRS demanding payment on last year’s income taxes.  On Friday, I received a notice that one creditor was proceeding to court for a wage garnishment about which my employer would not be very happy.  The Monday before, my wife left with the kids for a “vacation” to her family’s home because the collectors, the notices and the bills finally got to her.  The only thing I could think of was having another tall cool one to help me forget my problems.  I just prayed and prayed the bank wouldn’t repossess my car so that I would have a way to get to work”.

As I sat beneath a shade tree in the backyard to avoid answering the front door or hearing the phone’s ring, I began to wonder how all these problems came to haunt me.  This was when I realized my first mistake:  I DIDN’T KNOW WHY DEBT WASN’T GOOD FOR ME.

Just look at what was happening to me because of my inability to meet my obligations. I was:

• Using cash advances on credit cards to pay for groceries.

• Having to borrow money to take a vacation.

• Trying to borrow money from my friends and relatives to pay insistent creditors.

• Avoiding communication with my wife prior to buying major consumer items – like my new car.

• Receiving repeated notices to pay bills, which was getting on my nerves.

• Receiving embarrassing calls from collection agencies when my friends were around.

• Asking for longer and longer time periods in which to pay off my debts.

• Being threatened with court action.

• Fearful that I would lose my job because of a wage garnishment.

• Worrying about money most of the time.

• Wondering where the money was going to come from to pay the bills that kept arriving.

• Drinking excessively to forget my debt worries.

• Literally borrowing the happiness from my life.

• Losing my positive attitude and all of my hope. 

• Always talking about debt.  It pervaded my consciousness and it took away from me a life I could call my own.

• Living in fear that my neighbors would see my cars being repossessed.  Losing my family.

However, as I began to assemble this list, I saw with a clearer perspective what had happened to me: 

 I HAD BECOME A SLAVE TO DEBT

That evening I began to wonder what ever possessed me to get into debt in the first place.  Was it:

• My compulsive buying caused by my inability to control myself from purchasing my every want or desire?  Was I addicted to spending?  Did I need to seek counseling from a professional psychologist?

• My great expectations caused by my inability to be happy with myself and, therefore, my desire to live the life of the Jones’s?

• My poor judgment caused by my lack of knowledge concerning what was and was not good for me?

• My trying to control my wife or her trying to control me through the way we spent money?

• The fact that both of us were spenders and neither of us savers?

• The fact that I grew up in a home where my parents were frugal which led me to spend wildly the minute I had an income and got out of their home?

• The fact that my wife grew up in a home where her parents had plenty of money providing her with the best of everything which she continued to expect after she married someone with a smaller income?

• The fact that even as newlyweds we expected to live the same lifestyle as our parents were living which they had worked over thirty years to achieve?

• The fact that she used credit cards to impress her friends?

• Our problem concerning the use of money which we used as a handy excuse to mask other complaints?  Did it exhibit an immaturity in our personal relationship to each other?

• Our underlying and competing attitudes toward money that created the missing team effort which is required to define specific jointly-agreed-upon family goals?

Whatever the reason for the debt, the suffering and anxiety brought on my by excesses far exceeded my enjoyment of what I had acquired. 

Now I knew through experience why debt wasn’t good for me.  Also, I realized some of the reasons why I was so far in debt.  But, how was I going to get out of debt?

I had learned in business that when a problem has anything to do with money, you should get out a pencil and paper and add it up, which is precisely what I began to do.

• Mistake #1 – Not Knowing Why Debt Wasn’t Good For Me

• Mistake #2 – Not Knowing How Much Debt I Owed (Create a Schedule or Listing of Your Debts)

• Mistake #3 – Not Knowing How Much I Had (Create a Schedule or Listing of How Much You Have In Your Bank Accounts)

• Mistake #4 – Not Knowing How Much I Could Afford (Create a Budget of Monthly Expenses)

• Mistake #5 – Not Knowing Where I Stood (Figure Out How Much More Your Expenses Are Than Your Income) Go out and earn more income--I don't care if you have to deliver pizzas or clean windows and gutters--just do it.  If you can't just do it--the save yourself a lot of character building by filing bankruptcy.

• Mistake #6 – Not Knowing What to Do or What I Should Do  (Put Together A Plan Of Action On How To Pay Off The Debts)  SEE BELOW

• Mistake #7 - Not Knowing That I Should Have Consulted My Wife (Work Together So The Debt Does Not Pull You Apart--Otherwise File Bankruptcy)

• Mistake #8 – Not Knowing How to Control My Spending or How I Learned to Dislike Bookkeeping More Than I Disliked Being In Debt (Click here to link to Budgeting)

• Mistake #9 – Not Knowing That Having Too Much Money in My Checkbook Would Compel Me to Spend It (Get The Money Out Of Your Checkbook And Into A Savings Account So That You Do Not Spend It)

Once you have completed the “Schedule of Debts” as shown in Mistake #2, then you will want to determine in what order the debt should be paid. 

To get a better view of what particular order would be best for you, you will want to reschedule the debts in three different ways:

• In descending order of the most important to pay off first to the least important.  Usually the past-due is first.

• In ascending order of the shortest remaining term first to the longest.

• In descending order of the highest annual interest rate first to the lowest.

Once you have rescheduled the debts, you will be able to see things which were not apparent before.  In my case:

• First, I could see that I had to pay off the past-due debt first.

• Second, I could see that I had to bring down the balances due on my major credit cards to 50% or less of their credit limit in case I had to use them for an emergency.

• Third, I could see that I could quickly bring down the total of the monthly payments on my debt if I paid off those debts with the shortest remaining terms.

• Fourth, I could see that it was to my advantage to pay off the remaining debt in the order of the highest interest rate first. 

There are no hard and fast rules in this process.  Your debt is different from everyone else’s debt, and you are going to have to make decisions different from everyone else concerning what you should pay off first.  Some will be past due and may wish to use the plan as stated above.  Those with tight budgets, high debt with nothing past due, might want to jump directly to steps three and four to start.  Those with loose budgets and low debt with plenty of room in their budget, might want to jump directly to step four to start.  By rescheduling the debt as explained above, you will have the information which will point you in the direction you should proceed with your choices.  

1. Choose a goal of being debt free.

2. Don't take on any more debt unless it is an emergency.

3. Develop a do-able written plan and timetable.

4. Adjust your lifestyle which implies budgeting and living within a budget.

5. Buy life insurance on both spouses to protect your assets and to pay off your debt in case one of the spouses dies.

6. Work your plan for the rest of your life which implies revising your budget annually.

7. Begin saving for an emergency fund.

8. Begin saving for an asset (auto and etc) replacement fund.

9. Begin saving for retirement.