James Sweeney No Comments

Does it seem like every time you pay off one loan, you find yourself saddled with some new debt? Or maybe you have student loans or a mortgage that seems like will never be paid off? You’re not alone.

Many of my clients have been taught their entire lives to avoid debt. Still, the financial demands of going to school, buying a home, raising kids, etc., often leave even the best-intentioned struggling with debt.

The Wrong Question

A common question I get from new clients is, “How can I get out of debt?” Some are even considering drastic measures like selling their house or cashing out their 401(k) just so they can finally feel debt free.

The truth is, many people are asking the wrong question. Focusing only on getting out of debt can lead to unnecessary stress and poor financial decisions. For example, cashing out a 401(k) to pay off debt would result in huge tax bills and penalties. Likewise, selling an asset, like a house, that not only provides many financial benefits, but also emotional benefits, could be a big mistake.

Another reason why the focus shouldn’t simply be on getting out of debt is that many people with debt issues really have spending issues. In fact, often the whole motivation to get out of debt is to eliminate monthly debt payments, thus freeing up cash flow for more spending! A mindset that is entirely focused on maximizing current spending is unlikely to ever achieve financial freedom.

If your goal is to not just temporarily get out of debt but stay out of debt, then the right question is, “How can I create peace of mind and long-term financial stability?” This requires a change in mindset and following one simple step.

Is Debt Really the Culprit?

I believe that the anti-debt culture that we live in places too much focus on the actual debt and not enough focus on the spending that leads to debt. Let me explain.

I once met with a couple who had recently purchased a large, beautiful home. As we discussed options for retirement savings, they indicated that they planned to use most of their discretionary income to pay off their house as quickly as possible. While I think paying off a home is a worthy goal, I couldn’t help but wonder how much easier it would have been to pay off a more modest home, thus freeing up some cash flow for retirement savings.

I’ve seen similar situations with car purchases, boats, vacations, and many others. For some reason, we have a way of talking ourselves into buying the things we want, then we feel the weight of the debt and we want to be rid of it as quickly as possible.

The first principle to understand is that the spending is the real culprit, the debt is just a bi-product. The truth is, certain types of debt, when used prudently, can actually be financially beneficial. Where we get into trouble is when we allow easy debt financing to alter our spending decision. Thus, the focus needs to shift from the debt itself to the spending that leads to debt.

Start Saving Now

Regardless of how much debt you have or what types of debts you have, starting a savings program is essential if you want to create a sustainable financial future.

This goes against most people’s intuition. They might think, “Why should I put money into savings when I’m paying 16% interest on my Visa?” or “These student loans are crushing me. I just want to be rid of them!” The reality is, if you don’t start a habit of savings you will continue on the hamster wheel of debt forever.

As soon as one debt is paid off, another is bound to crop up to take its place. The A/C will need replacing. The kids will need braces. Cars will break down. Weddings will need to be paid for. Retirement will call. Being debt-free for the long-run depends on you establishing a savings plan to fund these future purchases. There’s no other way around it.

Simple, but Not Easy

Okay, spend less, save more. Simple enough. Here are some ideas to help put these concepts into practice:

  1. Commit to No New Consumer Debt – More important than paying off your current debt as fast as possible is committing to not going into more debt in the future. Commit to using savings to fund future purchases.
  2. Automate Savings – let’s be honest, if you leave savings to the end of the month – to whatever’s leftover – it will never happen. Decide how much you need to set aside each month and have it either withheld from your paycheck (like in a 401k) or set up automatic drafts at your bank. I recommend the following categories, but make it work for you:
    • Long-term – this is for retirement. Have it withheld in a 401(k) or send automatic contributions to an IRA or investment account.
    • Emergency Fund – this is for truly unforeseen emergencies, like a car breaking down or hospital visit. This should be in a liquid, accessible place like a savings account.
    • Short-term – set up some sort of fund for future family trips, new cars or other important goals.
  3. Create Accountability – Creating new habits and eliminating old ones isn’t easy. Having someone to be accountable to can give you the motivation you need to be successful. If you are married, at a minimum commit to being accountable to your spouse, but consider enlisting the support of a financial advisor or trusted friend.

Stop the Guilt Trip

Don’t get caught up in the conflicting cultures of keeping up with the Joneses and being debt-free. If you want to be debt-free for good, stop beating yourself up about your current debts. Instead, focus on your spending decisions and start a consistent savings program.

Do those two things, and now when you pay off your debts you can step off the hamster wheel and breathe a sigh of relief.

If you’d like help creating a cash-flow plan or need some additional accountability, schedule a complimentary, no-obligation introduction. Just click here.

To learn more, visit my website at switchpointfinancial.com, email me at james@switchpointfinancial.com or call 801-753-8538.