Advice on Debt Elimination Sounds Good on the Surface but Doesn't Quite Hit the Mark on All Points...
Okay, this is going to be thorough, but for anyone out there who keeps getting ridiculous advice about how to get out of debt (including just throwing in the towel and declaring bankruptcy without doing your homework on that front) you need to read this:
After reading a recent blog posting on how to eliminate debt, I was struck, once again, by the amount of advice out there that is so woefully inadequate. While the blogger makes some good suggestions, many of his 50 tips for paying off debt don’t hit the mark.
Following are the items from his/her list about which I take issue, along with my comments (in italic), as well as those tips that are sound and on which I have commented further:
#2: Stop using your credit cards. As I have commented in previous blogs, over and over, simply advising people to stop using cards is worthless advice. That’s like telling a person on a diet to stop eating candy, cake and icecream that’s being constantly put in front of them. The only way to control credit card debt is to understand your emotions behind spending by examining what you really value, make a spending plan to spend according to those values, and track that spending so you can see if your actual spending is line with those values. So to use the diet analogy, decide what you like to eat, realizing that it can't be candy and cookies for breakfast, lunch, and dinner, and make a plan for how you want and need to eat so you can mix in some of those treats with sensible food, i.e., spend wisely. Debt elimination efforts without a spending plan are as worthless as a person trying to lose weight without a diet and exercise plan.
#3. Decide on a debt repayment method that makes sense for you while understanding the pros and cons of each. The only debt repayment (or what I like to call total debt elimination) method is a Power Down approach to paying off debt. Nothing else works...period. (Find out more about Power Down at www.moneymastery.com).
#4. Plan a party for each milestone, but don’t go into debt in order to celebrate. I agree with this…using a debt amortization report, you can see exactly when a debt will be paid in full and can plan something fun to reward yourself. A clear goal to work towards, along with a reward for accomplishing it are important because without them we get discouraged and do not want to continue.
#5. Pay cash. This advice is worthless without a spending plan. Yes, cash prevents you from pulling out the credit card to pay for purchases, but it can be easily frittered away. With a spending plan that you track, you write down every cent you spend, even the cash items, in the category in which you spent. Without this technique, even if you pay with cash, you won’t know where it all goes and will eventually turn back to cards to cover the losses.
#8. Make a second mortgage payment or car payment each month if you’re not penalized for doing so. I think the author means make an “additional” mortgage or car payment each month… Without running a Get Out of Debt report on all debts that includes Power Down amounts and an accelerator payment applied to all debts that will affect overall payoff, you may be dumping extra money on a mortgage or car that could be better applied elsewhere. A Power Down report with accelerator payment will show you exactly which debt to pay off first. When that debt is paid off, its monthly payment will be applied to the next debt on your list along with the accelerator.
#9. Cancel magazine subscriptions and divert that money towards your debt. Finding money to put on an accelerator payment that will be applied to all debt is always a good idea. Those in debt might also want to get a whole lot more serious than just a magazine subscription and consider selling off collectibles, instruments you or your children no longer play, recreational vehicles, etc. What about looking into your insurance deductibles? Are they lower than they need to be? Could you raise them and thus lower your monthly premiums, taking the difference and applying this as an accelerator? Your spending plan will also reveal “lost” money that could be applied to an accelerator.
#10. Postpone your vacation until you are out of debt. I don’t agree with this because it discourages people right out of the chute. I teach my clients to create a spending plan which includes a monthly spending category for an annual family vacation, where money is put aside each month for this purpose if possible. In addition, tracking spending will reveal at least 1% of your monthly income that you have been wasting which can be applied to what I call “emotional savings.” Having emotional savings is planning for times when you just need a break, reward, or an indulgence. This is fun money and can be spent on vacations if needed. Trying to get out of debt without spending some money from time to time for emotional reasons is like dieting without indulging in an occasional cookie or brownie. Sometimes we all need a little something to look forward to so we can stay on track.
#21. Put your credit cards in a cup of water in the freezer. I think this works for some people, but many people laugh when they hear this advice…if you are really intent on spending (remember, spending is an emotional thing), you will thaw out the cards in a hurry! This advice is just about as sound as a dieter buying cookies and snacks and hiding them from himself/herself. If they want a cookie bad enough, they will find those items. What’s better advice is to understand our emotions behind spending in the first place and make a plan to systematically control that spending instead of trying to trick ourselves into not using the card at all. Besides, if you’re going to freeze cards to avoid using them, at least freeze them in a big bucket of water that will be much more time consuming and harder to thaw than a cup of water!
#22. Call the credit card issuers to selectively cancel your credit cards. This advice is a bit reckless and just limited enough to be dangerous. Canceling credit can hurt your credit reports and scores, depending on the circumstances. Of course you want to pay off your credit card debt, but most likely leave that line of credit open, so long as you don’t have too many lines of credit. Playing games with credit card companies can be scary, especially right now when card companies are jittery and nervous and could change the rules on you without warning. Seeking the advice of a financial coach when deciding how to finagle credit card debt is best.
#34. Remove the temptation to spend on things you like rather than the things you need. Again, this absolute approach doesn’t work. Yes, people in debt need to curb their spending, but trying to completely remove the temptation to spend on wants is absurd. We all have to spend for purely emotional reasons at times. That’s why you need an emotional savings category in your spending plan, to pay for these events when they happen and be prepared for them in advance, since like emergencies, they are bound to occur!!!
#41. Eliminate expensive hobbies that do not provide a return on your investment. I have to take some issue with this; if you are in serious debt, you may have to sell off all kinds of things you value in order to pay your bills — sacrifice may need to be Rule 1. However, I also teach my clients that they can have anything they want, just not everything they want. What this means is that if you value an expensive hobby you may have to sacrifice somewhere else in order to pay off debt and still have that hobby (you can have anything you want [the expensive hobby] but you just can’t have everything you want [the expensive hobby and lots of new clothes, and trips to the Caribbean every year, and a new cell phone every six months, etc.]) We have to make a choice. If that hobby is important to you, then choose to eliminate other areas of spending that aren’t as important so you can get out of debt while still maintaining something that you highly value and that makes you happy.
#42. Stop trying to time the market and invest in individual stocks, and use that money to pay off your debt. There’s a lot that could be said about this piece of advice, depending on your individual situation. Let me just say that my happiest clients right now are those who have invested their money in fixed guaranteed returns. If you are in debt, you probably shouldn’t be playing the stock market (even with a 401(k) where your employer is not matching funds). Anything you could make in the market right now will not keep up with debt interest.
#49. Don’t acquire more debt. This is only possible if you have a spending plan and are tracking your spending according to this plan.