Buried in Debt? There’s a Way Out

How do you get out of debt?  How do you escape the stress, worry and uncertainty caused by owing your paychecks to others? You can do just that – get out of debt, but it’s not a simple fix.  If you’re like most, it took a long time – years and maybe even decades – to sink so deeply into debt. 

And, it will take time to climb out.

Climbing out may seem as simple as earning more or spending less.  In reality, it’s not that simple.  Freeing yourself from debt requires changing attitudes, habits and lifestyles.  Your relationship with money (and things obtained with it) formed your habits and lifestyle choices that cause you to spend your money before you actually earned it.  The bad news – it can be a long and uncomfortable process.  The good news – people do it every day and you can too—using the suggestions offered here.

Characteristics of Debt:  Owing money is nothing new.  Recorded debt systems date back to at least 3,500BC.  However, the depth into which the American consumer (and government) has sunk into debt in recent history is unprecedented.  As my regular readers may recall, in my earlier column, Sixteen Tons of Debt, I discussed the increasing debt of American consumers since 1980 and compared it to the scrip-system faced by early-20th century miners.  The characteristics are:

  1. Inflated Prices: Consumers pay more for the things they buy on credit because of the interest they must pay on the purchase.
  2. Future Sacrifice: Future earnings must be used to pay debt obtained to have things now.  This future sacrifice drastically increases the likelihood that more debt will be needed later when emergencies arise.
  3. Indentured Servitude: Individuals become enslaved by the circumstances they have created for themselves through debt.  Major life choices become bound to the ability to make loan or credit card payments.  As the bumper sticker says “I owe, I owe, I owe, so off to work I go.”  Proverbs 22:7 states this dilemma a little more directly: “….the borrower is slave to the lender.”  Enough said.

Free Yourself From Debt: Although there is no simple way out, it is possible.  Like any worthwhile project, knowledge is crucial.  The knowledge required here is self- knowledge – facing the habits and beliefs that created your debt in the first place. 

Knowing Thyself and Thy Reality requires a serious and honest look at your beliefs and attitudes toward stuff and money.  It also requires you to understand your financial limits: how much money you realistically have to spend. 

Debt Formula:  The formula for creating debt is simple and similar to the formula for gaining weight.  Habitually consume more calories than your body will burn and you will gain weight.  It’s simple, yet as anyone who has attempted to lose weight knows, it’s easier said than done.  Losing weight requires reducing the amount of calories consumed and/or burning more calories through exercise.  Similarly, spend more money than you actually have and you will go into debt.  Getting out of debt requires reducing one’s consumption of stuff and/or increasing ones income. 

Caution: There is one caution, however, with regard to income’s importance in this formula.  Whereas exercise is good for the body, giving more income to someone who has a debtor-relationship to money may not be beneficial, because it often becomes the justification for obtaining more debt.

Lifestyle Challenge:  Why is it so difficult to change the debt formula in our lives?  Because it requires changing our lifestyles – changing the very way we live from day-to-day.  Changing your feelings and associations with stuff and money is essential to freeing yourself from debt and and requires: (1) A serious waking-up to the financial reality your lifestyle choices have created, and (2) A commitment to changing this lifestyle.  To face this reality and commit yourself to change, take the following steps:

Step One: Beware of the Bandwagon:  The Bandwagon Effect occurs when individuals believe, do, or buy something solely because others do.  The bandwagon (and its close cousin, the testimonial) effect works by either twisting your emotional need to socially conform (or to socially compete) or by manipulating your envious heart-strings to buy what others have – that you don’t really need.   

Just because a neighbor or colleague put in a swimming pool, got a new car, diamond ring, boat, RV, … does not mean you need one too.  When you feel you need to have something simply because someone else has it or because it is some sort of status symbol, take a breath, regroup and ask yourself:  What purpose will the item serve?  You might want the thing they have, but you don’t need their payment.

Step Two: Know the Marketer’s Motive:  Advertising exists with one ultimate goal – to get you to buy things which you often do not need and may not be able to afford.

To protect your wallet be aware of the fact, that on an average day, you will be bombarded by somewhere between 2,000 – 5,000 commercial messages seeking to convince you that you need the item each sells.  Your best defense is to know the difference between your needs and your wants. 

Step Three: Separate Needs from Wants:  This, for most, will be the most difficult and important step necessary to stop sinking further into debt.  Why? Two reasons:
First, each commercial message you hear, see, touch or smell has had one ultimate goal – to get you to buy something.  And the easiest way to get you to buy their thing is to make you think you need it.  Needs are necessities you cannot do without such as basic clothing, food and shelter.  Needs must be obtained.  Wants, on the other hand, are things you can save for, or simply do without. 

The second reason that differentiating between our wants and needs is so difficult is more culturally-based, and more troubling:  It is difficult to pinpoint exactly when it happened, but at some point along the way the reward of pride-generating struggle and self-reliance slowly gave way to convenience, leisure, and entertainment. 

Over time, as the work-world changed from a production to service-based economy, appreciation for hard-earned necessities was slowly replaced by a commercially-driven sense of entitlement.  It is this sense of entitlement that makes it difficult to differentiate between needs and wants, between necessities and luxuries.  Entitlement makes us feel like we deserve (need) something even though we have not yet earned the money to pay for it.  It is the fuel advertisers and creditors mix with credit to lure us into debt – “You can have it now; after all you deserve it.” 

To stop sinking deeper into debt you must face the reality of need verses want.  Here’s how to look at it: 

Need: A need is a necessity.  It is basic food, shelter, clothing, and transportation.  That is it.  It is canned tuna fish, not grilled salmon; an apartment or small home that keeps you and your family safe, not your brother-in-laws mc-mansion; it is off the rack, not designer clothes.  It is public transportation, if available, or a paid-for car that consistently gets you from point A to Point B.  It is also access to some minimum level of basic health care.

Wants:  Wants are everything that is not a need.  These are luxuries –lifestyle items: a lifestyle you must be willing to change or sink further into debt.  Chances are, it includes many items we have been taught to believe are absolute necessities.  For instance, no one needs a $175 monthly bill for premium cable.  The same is true for cell phones – we’ll never know which commercial tipped the scale and made the $150 per month family plan an absolute necessity, but it’s important that we wake up to the reality that the sky will not fall without them.  A car may be a necessity for many of us.  However, the average $400+ per month payment is not.   

This is not to say you must get rid of any or all of these luxuries.  But, you must be able to discern them from items you actually need.  You must also be willing to put them on the table if you wish to become financially free.  Cable and cell phone fees alone cost the average, debt-ridden family, nearly $4,000 dollars per year.  Add one average car payment, and its closer to $9,000.  Simply working to cut these costs in half could change your entire financial outlook!

Step Four: “No” Thyself:  Understand that the ability to delay gratification, to give up something now for a larger reward later, is a major sign of maturity.  Entitlement and delayed gratification, however, are at polar opposites on the maturity scale.  The phrase; “NO,” is largely unfamiliar to those who are entitled, in-debt, and unable separate their needs from their wants.  Once you have committed to stop getting yourself further into debt and recognized the difference between needs and wants, learn to just say “NO”.  Practice saying “No.”  “No” yourself in the shopping malls, convenience stores and showrooms. 

Step Five: Understand How Costs Add Up:  Just as pennies become dollars, dollars quickly add up to hundreds of dollars.  For example, that $2.50 cappuccino (or whatever) you buy on the way to work each day will cost you over $600 this year.  Spending $30 each Friday ordering pizza will cost you over $1,500 annually.  Where your pennies go, your dollars follow.  Become conscious of where you leave your pennies each day, week, and month, and do the math; you will simply be astounded.  With a little self-discipline, it is possible to start reducing your debt.

Step Six: Look at the Price, Not the Payment:  Why do individuals become slaves to debt in modern times?  The vast majority of us have willfully chosen our debt life-style because we look at the monthly payment instead of the item’s true cost.  As soon as we agree to the payment, we give up that portion of our income until the debt is paid. 

Interest makes the price higher and worse yet, when you need that money –when you get laid off, have an accident, or need to repair the air conditioner – you will not have it.  When financial problems arise, the financially-strapped have little choice but to sink deeper into debt. 

Step Seven:  Get the Team on Board: The first six steps involved facing your personal relationship with money, debt, and things.  Step seven, however, involves your partner and family.  It is essential that all are on the same page when it comes to changing the lifestyle that has you in debt.  It is often said that money is a major cause of domestic friction.  Therefore, it is important to get on the same page. 
Knowing yourself and your money relationship is essential to freeing yourself from debt.  Now that you have examined your relationship with money and made a commitment to change, you are ready to start the actually process of freeing yourself from debt.  This process will the topic of our next column.

Brett Hersh's avatar
  • Author: Brett Hersh
  • Bio: Brett Hersh, EA, MBA, is the owner of HBS TAX & Small Business Experts. He is an Enrolled Agent (EA) with the IRS and licensed by the US Treasury Department to prepare all tax returns and represent taxpayers before the IRS for audits, collections and appeals. He is also Dave Ramsey’s ELP for Tax and Accounting, a continuing education instructor for tax professionals through Lorman Education, and a local speaker/presenter on the topics of tax and business growth. He can be reached at (304) 267-2594.