TIP 24
PAY OFF YOUR DEBTS
So, if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?
It has become socially acceptable to have debts. It used to be that people saved money for what they wanted and then bought it; now it is the other way around. We want something now, so we charge it and then pay it off at exorbitant interest rates. The cost of our “gotta have it now” culture is high, and I’m not just talking about the interest. It goes much deeper than that. It is stressful to have debt. You may be so used to having debt and using credit cards to purchase things that you don’t even realize how stressful debt is. In fact, until you are completely debt-free, you won’t believe what a relief it is. Right now, it probably sounds like a nice fantasy.
When I started my first job after graduating, I was already making more money than my parents did, and, for the first time in my life, I felt rich. In less than a year I had tapped into five different credit cards and a line of credit. Every week a credit card bill would come for one or the other of them. I dreaded opening the bill, never knowing exactly how much it would be, and I was always a bit shocked because it was more than I thought. I had no idea how stressful all this was until I paid off my credit cards and student loan using the plan described by Jerrold Mundis in his book How to Get Out of Debt, Stay Out of Debt, and Live Prosperously. This is the best, most inspiring little book of its kind. It took me about two years to pay off over $10,000 of debt, and now whenever I use my credit card, I make sure to pay the balance in full each month.
Debt drains your energy, making it very difficult for you to be your best and attract the people and opportunities you want. When you are debt-free, it is natural to be carefree and light. However, it isn’t easy to be relaxed and fun-loving if you are burdened by the weight of debt. Of course, not everyone has the savings to instantly pay off their debts. I certainly didn’t. It may take some time, but stick with the debt payment schedule, and eventually you will be free and clear.
Let’s use my client, Josh, as an example. Josh is a very successful artist and earns over $300,000 a year, enabling him to send his three children to private schools, drive a collector car, live in a very posh neighborhood in a huge five-bedroom house, and support his wife so she could be a stay-at-home mother. Everything was going great until the Great Recession hit. All of a sudden, his clients couldn’t afford him and starting using cheaper alternatives. His income was halved, but his expenses remained the same. He kept thinking things would improve and was working harder, but the recession continued on, and he soon had maxed out all his credit cards just to make ends meet. Then he had to take out a business loan to keep things running. Kind friends noticed his stress and offered him personal loans so that he could keep the kids in private school. Despite all this help, Josh was struggling to keep up and found himself spending his time juggling payments between credit cards.
He hired me thinking I could help him grow his business, which I could, but I told him that instead of focusing on making more money, he first needed to focus on cutting his expenses. He said that he felt he had already cut expenses to the bone. He no longer had coffees out, and his family rarely went out to dinner. True, he had made small cuts but not the big cuts. I challenged him to make a list of all his expenses and then figure out how to cut them by 50 percent. This enabled Josh to see the unnecessary expenses. He was leasing a luxury car, and when I urged him to turn it in early just to be rid of the monthly payments, he discovered there was a little-known government plan that enabled him to lease a fuel-efficient car instead and get tax benefits as well. He would not only save money on fuel but on taxes too. He decided to sell his collector car and use that money to pay off the credit card with the highest interest rate. He found an excellent free public school for one child and negotiated lower fees at the private schools for the others.
His biggest expense was the mortgage. If he sold the house, he’d release a million dollars in equity and could pay off all of his debts by downsizing to a smaller house. The house was the sacred cow. His wife and kids were bent on keeping it. After much deliberation, he sold the house, bought a small city apartment and a three-bedroomed house in the country, paid off all his debts, and set aside enough money to pay for the rest of the kids’ education. His family was very reluctant to part with their beloved family home, but once the dust settled from the move and Josh was no longer constantly stressed, they realized they were all much happier having what they truly needed, not what they thought they wanted. Funny thing—now that he doesn’t need the money so desperately, the clients are flocking to him.
If Josh hadn’t taken the time to figure out what he really needed, he’d still be stressed and struggling. In fact, if he had held onto his house, he might well have lost all when the housing market collapsed. He would have been unable to make the payments and he would have lost his entire net worth. It isn’t worth trading your life for a lifestyle.
If you are in over your head, contact a nonprofit credit counseling service or the Debt Management Program run by the federal government (see Appendix D). The two great advantages of this service are (1) it will make all the arrangements with your creditors and you can tell any bill collectors to contact the service, and (2) you make a smaller monthly payment. This is a tremendous relief for many people and often is the only way they can dig themselves out of debt and still keep a roof over their heads. The disadvantage is that you may not learn from the experience. Some people need to feel the pain in order to make the necessary changes in their spending habits.
Paying off your debts is the foundation for building a financial cushion. The skills and habits you develop to pay off your debts are the same ones you will need to build financial freedom. Don’t be discouraged. If you feel buried under debt, get Mundis’s book. The more closely you stick to his plan, the sooner you’ll be out of debt and the easier it will be to attract the things you want.