credit card debt – Beyond Dave

The Monster under the Bed

Whatever sneaky, creepy, grow in the dead of night, problem you have, there is there’s a way to solve it and keep it from ever coming back.

Some problems seem to just sneak up on you; that little bit of credit card debt that quietly over months or years somehow becomes $10,000. Those papers that you just can’t find a minute to deal with that take over your desk and then the credenza and then the multiply creating several baby piles on the floor. Maybe your sneaky problem is that 5 extra lbs that is now approaching 50.

These types of problems grow because when they are small they don’t really command our attention. “It’s no big deal, I’ll handle it next month” is what we think about the $300 credit card balance we don’t pay off. And then, next month rolls around and something else seems more fun or more important and that $300 becomes $360. Before we know it, that little non-problem has become something big and daunting. Now it’s an unruly monster that is going to take a lot of time and effort to tame. Our issue that was once too little to worry with has now become a problem too big to tackle – so we continue to ignore it and it continues to grow.

Awareness and Your Accountability Partner

To avoid being blindsided, regularly take stock. In our house, we have a budget meeting the last day of every month. Sometimes I’m lazy or disinterested and don’t want to attend. My accountability partner makes me. We spend 10 minutes and look to next month’s spending, deciding on any unusual or large purchases. We also record the current balance of all our accounts and calculate our net worth. It is quickly clear if we are headed in the direction we want to go. I also use Mint.com – who’s annoying little emails tell me in real time if I’ve exceed a budget amount; allowing me to get back on track before the next budget meeting.

Your accountability partner can be your spouse or a friend or family member. Just someone you can trust that will help make sure that you actually do the necessary regular measurement.

Cut the Monster down to Size

“That’s great!” you might say, “I’ll measure weekly from now on to be sure my monster doesn’t grow. But what am I supposed to do with the 500lb beast I have right now?”

My advice is to shave – don’t chop. Drastic changes in diet or lifestyle rarely work. It doesn’t take long before you think, “I’d rather be broke and happy”. So start small. Make a few cuts this month, see how they feel and make a few more next month.

Some of my spending that was cut first in the first round:

Books – I had a book-or-two-a-week habit, usually on impulse. I still read a lot and I still buy some books, but most of the time I read library books – Savings $50 per month.

Cleaners – I like my shirts crisp. I used to have five shirts a week laundered and pressed. I wash and iron my own shirts now, frequently hanging them on the clothesline when the weather is nice. Not only do I save the money not taking them to the cleaners, but my shirts last longer – Savings $35 per month.

Phone – We dumped the home phone for our cells and the real fax line for an internet fax service and bundled our business line in with the cable – Savings about $100 per month.

We went through several rounds of cuts and what works for us is: If something really matters to you, be OK with spending money on it – but cut sharply on those things that aren’t crucial to your happiness.

No matter what you issue is; whittle away at it, charting your progress as you go. Regular measurement insures that monsters don’t quietly grow under the bed.

Charting your progress makes it much easier to stick with your plan. A little success is very motivating.

Don’t Save for Retirement

One of the big mistakes we all make when considering making a change is trying to do too much at one time. We decide we need to eat better so we plan to eat less meat and more vegetables – better make those organic, and even though I don’t cook, I’ll make it all from scratch. On and on, our plan gets bigger and better and as a result, less likely to be executed.

What we should do is plan in baby steps. Start small and celebrate your successes.

Today while listening to a coach advise one of his clients, I just wanted to yell, “Baby Steps”.

The client was a 28-year-old living in Chicago making 45K a year. She has a student loan balance of 30K, a $1000 emergency fund and a very generous employer who monthly pays an amount equal to 15% of her gross into a 403b. The coach was harping on and on about getting this student loan paid off so she could save more for retirement.

Really? Come on; she’s trying to live in Chicago on 45K. First thing we need to do is throw this girl a party; she is a rock star – 28 with 37K in retirement and no credit card debt. Who does that? The answer is very few.

The coach was right when he said that she needs to focus on paying off those student loans. But let’s not try to inspire her by tempting her with calculations of how much she could be worth when she’s 67. She has a lot a life to live before 67. Maybe a really cool vacation, a wedding, a condo? Live a little, girl.

We need to give this young woman a chance to learn that saving is not a bitter pill; it is not a diet devoid of chocolate. Once she sees herself as a saver, her financial future will be much more secure.

The way to learn to be a saver is to start small. In the beginning, it is a lot easier to save for a want rather than a need. So what do you want that we can get in three paychecks? How much can you set aside out of each check?

Swim with Manatees – $35 plus lunch and gas, $35 out of each check

Take your mom to Julio Iglesias – 2 tickets at $60, $40 from each check

4 night Cruise with your friends – $300, $100 out of each check

Try it. Pick a three paycheck goal, something fun and get going.

Once you can successfully do the three paycheck goal, try a six paycheck objective.

Visualization helps a lot; so draw a thermometer, post it on the fridge, and color it in after every check. Get the kids involved and they will naturally grow into savers.

It is easy-peasy to learn to be a saver:

1) Pick a little goal

2) Set the time period and the amount from each check

3) Record each increment as you save it – in color on the fridge door.

4) Party! You are a saver!

Of course you know that we do need to save for cars and retirement and less fun things like roofs and medical needs, but once you become a saver the rest is easy.

Turning a Dream into a Nightmare

My kid rode home from the hospital in a car seat – an approved, properly anchored car seat. The electrical outlets in our home were carefully covered with plastic safety plugs. I read him books and checked his homework and made sure he held my hand when crossing a street. I tried to limit his soda and french-fries and I encouraged him to drink his milk and eat his vegetables.

I bet you did the same with your kids.

As parents, we do everything we can to ensure the safety, success and happiness of our children. We want to give them every possible advantage.

Yet most of us stand by and do nothing when the financial aid officer offers them a student loan. It’s not that the parents or the students are stupid, they are just sucked in. We’ve been taught that it is normal to go to college on a student loan. If NYU is your child’s dream, it seems that at the time it’s worth anything to make that dream come true.

It is not. The four year dream can become the 10, 15 or 30 year nightmare.

Do you remember you first debt?

What if it was a student loan in the amount $97,000 for a degree in Religion and Women’s Studies?

Let’s think about this a minute. Cortney Munna, the Religion and Women’s Studies graduate, will be making payments of over $700 for 15 years. How many recent college graduates do you know that have $700 a month available in their budget?

She will have to make these payments no matter what. Unlike credit card debt, student loans normally are not discharged with bankruptcy. And unlike a car or a house there is no asset to repossess. It is nearly impossible to have a student loan forgiven. It does not matter if Cortney should face a spell of unemployment or if her spouse or child should become ill, the payments are due and if she doesn’t make them her loan will be in default. Defaulted loans continue to accrue interest and collection charges.

Defaulting on a student loan can have very serious consequences. Garnishment of wages is one probable result. Additionally, the government can intercept your tax refund and/or take a portion of your Social Security disability or retirement benefit. Another crippling consequence of a defaulted federal loan may be the inability to renew a professional license. View the excellent graphic The Student Loan Scheme.

Even if Cortney is never late on a payment, she has started her life as an adult in a huge hole with tremendous risk.

So how could this have turned out different?

We have to love our children enough to say NO. NO you cannot cross the street alone when your 5, NO you cannot drink and drive and NO you absolutely will not go $97,000 in debt for a degree in Religion and Women’s Studies.

Would she have listened? If it were life or death, you could make your adult child listen.

This is life or no life; find a way to get through. Get her to talk to 5 recent grads in her field; look up starting salaries; make a budget of what life will be like after graduation. Work together and explore ways of getting the same results without the debt.

Bad Dog

Quick, you’re in a dark alley in an unfamiliar part of town. Which would you rather meet up with, five yapping Chihuahuas or one big, mean pit bull?

Me? I know I can deal with the yappers. They definitely can aggravate with their incessant barking and they might even nip; but they can’t eat me.

Welcome to debt consolidation. This is where you take all your little aggravating debts and create one big monster. You might even put the big vicious thing on steroids by consolidating all your debts into your home equity line.

DON’T DO IT.

This is what people do when they can’t stand to listen to the yappers one more second. If you’re here, unplug the phone and find a way to get a quiet moment to think.

You cannot borrow your way out of debt. No way, no how, it will not happen. If a consolidation lowers your monthly payment, it does it by stretching out the term. You will be in debt LONGER and it will cost you MORE- even if the interest rate is lower.

I have read many articles by so-called money experts that advise taking out a home equity loan to pay off credit card debt. YIKES! This advice is so bad I have to believe they are getting kickbacks from the credit card companies. Thankfully, these loans have become much harder to get. Can you think of anything more stupid than to risk your home for the shoes, TV, or dinners that you bought with your Visa?

If you are so sick and tired of carrying your debt; that the late-night TV promises of the debt consolidators are starting to sound tempting, what should you do?

1. Know you are not alone. I can’t say it was smart to get into this position but at least you are in good company.

2. STOP borrowing. Cut up the cards; freeze them in a block of ice; do NOT carry them in your wallet under any circumstances.

3. Make a rational and reasonable plan to live on less than you make and start paying off the debt.

You knew all along that it would take discipline, commitment and hard work to get out of debt. It was only when you were tired and alone and ashamed that you wanted to believe the to0-good-to-be-true promises of the debt consolidators.

Even Snake Charmers get Bit

I’m a Dave Ramsey follower, a fan, a true believer. I have no doubt that his simple personal financial process changes lives. I know it has changed mine.

It works whether you make 24K or 240K a year. It works if you are deep in credit card debt or if you’ve never borrowed a dime.

But even I can occasionally get the But Dave’s. If you’ve ever listened to his radio show, you’ve heard the But Dave’s. People call in and say I get the process and I agree – BUT. They think their situation, intelligence or self-control is so different than everyone else’s; they should be given a pass on some Dave principal.

One of the most common But Dave questions involves the use of credit cards. Dave is very clear–you should NEVER use a credit card. He refers to credit cards as snakes and warns if you play with snakes you’re going to get bit.

But Dave, I pay it off every month.

This is where I was when we started Dave’s program. We had debt but not credit card debt. I was however, always living on next month’s paycheck. I lived on my American Express, put most of my recurring bills on it and then sent them a huge piece of my paycheck the 1^st of every month.

Getting off this cycle was not easy but it helped a lot.

Once I quit using the card, I had control again of my check. I could plan what to do with the money rather than react to what I had already done.

I spent less. It’s a proven fact you spend more when using a credit card.

While I quit using my cards for personal use, I continued using my American Express for reimbursable business expenses. From software, to continuing education classes for the employees, to computers and client gifts; as a key decision maker at a very busy insurance agency, my card got used a lot. It was convenient, it was easy, and above all it was stupid.

When the owners of the agency and I agreed to part ways, it was not easy or comfortable. They were angry and insulted that I had refused their new contract and yet, they asked me to stay through the end of the year. I agreed not wanting to hurt the agency or the employees. For six weeks, our relationship deteriorated. On my last day, having completed all I promised, I left without a reimbursement check.

My reimbursement was paid. But it wasn’t be until my blood pressure maxed out and the “boys” demonstrated to their own satisfaction their absolute power.

What did I learn?

It is stupid, expensive, risky and unnecessary to use credit cards. If you can’t pay for it, wait until you can.

It is light-years beyond stupid to use your credit card for someone else’s stuff. If your employer can’t find a way to pay for their own stuff AND your travel expense without using your credit – start looking for a new job.

An Attitude for Change

Changing your money behavior so that you can win long term may not be as difficult as you think.

It requires accepting a few basic premises:

I can give up something I want now in order to achieve a more important goal later.

Many of us have allowed the marketers of the world to weaken our self-discipline muscle. Some poor souls among us have never been forced to exercise it, not even as children. We have to find this muscle and strengthen it. The same “I want it and I want it NOW” thinking that has caused us not to win with our finances in the past, will undermine our transformation if we allow it. “Later” is a word we need to embrace.

Lots of little victories can add up to a big win.

Most people are far less successful financially than they could be, simply because they are unintentional with their money. We can achieve our goals by making lots of small changes in our lifestyle. Quit hoping for the one big win and start collecting small victories.

Most people (not you!) are financial losers.

Once you’re on a plan you may find “everyone” around you goes out to eat anytime they want. They also drive cool cars and take great vacations. You’ll have to remind yourself that despite their appearance, most of these people are broke. They are deep in credit card debt; they don’t have an adequate emergency fund; they aren’t saving for their children’s education or for their own retirement. In other words they are not who you want to be.

If you can accept these premises, there is no reason for your financial transformation to be painful.