Digging Out of Debt : Willeke Financial Group, LLC | Lincoln, NE

Digging Out of Debt

You want to hear a mind-boggling statistic? As of September 2021, American consumers have a combined debt of $14.96 trillion. The average American debt rate among consumers sits at about $92,000. Between college, homes, kids, cars, business expenses, credit cards, home improvements, you name it, Americans have accrued massive debt to pay for their bills, their lifestyles, their needs, and sometimes just their wants. It can decades to pay it all off.

Each year, American debt continues to rise. As the cost of living goes up, so does what we spend to afford the lifestyles that used to cost less. Homes and cars show marked appreciation in costs compared to even a few years ago. College costs have also steadily increased, growing to a whopping $1.59 trillion in outstanding student loan debt in the United States. It pays to be educated, but it comes at a real price.

All these giant stats are to hammer home one point: Americans have debt. As a matter of fact, Americans have a lot of debt. While there are many reasons for its accrual and its rising amounts, there is some good news: there are many, many ways to get out of debt. Not quite 14 trillion ways, but enough to make a difference in your standard of living.

I’ve said it before, and I’ll say it again: budgeting is key. No matter what you want to do with your life or what your goals are, there’s a place for a thought-out budget that gets you where you want to go while helping you pay for where you’ve already been. To get out of debt without winning the lottery, you’ll need to leverage some budgeting tips and tricks to pinch pennies and create your strategic roadmap. There’ll be plenty of room for creativity, and your patience and dedication to your goal will help deliver the results you want. Let’s dive in.

To start, make sure you know your total debt and financial obligations. Go through drawers of receipts or emails or any files you have to make sure you have a real number of total debt to aim for. Add in your credit cards, mortgages, car payments, student loans, and any other outstanding payments you’re scheduled to make. Have a total debt number; however, if that number frightens you away or discourages you from pursuing your goal, break the debt into categories. For instance, student debt in one column, car payments in the other, and so on. The debts with the highest interest rates should be paid off first to save yourself some money. Use your columns to determine which debt obligation that is and focus on paying that one off at a slightly higher rate than the others. If they’re all equal, then pay them across the board, or in any order you feel like.

Make sure you’re aware if you’re taking on potential new sources of debt and factor those into your calculations. If, for example, you’re about to start a business or input more cash into an existing one, then consider those future payments as past payments and add them to your total debt. If you’re also saving for your retirement or for your kids’ college education, factor in those monthly deposits as well. Make sure the money you’re setting aside for debt payments and personal or necessity costs is differentiated from your discretionary spending or your day-to-day monetary payments. Don’t forget to leave some aside in savings, especially for medical reasons. Health debt, especially from unplanned events, can derail any budgeting or debt roadmaps you may design.

The amount and types of debt varies from person to person. The interest rates vary from loan to loan, and from lender to lender. You’ll have to take accurate stock and measure of your personal debt as accurately as possible before you also factor in your spouse’s, for instance, if you’re married and seeking to make joint payments to pay down mutual debts. You’ll also have to determine if you’re better off pooling your funds to pay them off together or if a better choice is to maintain separate accounts to pay off personal debts individually.

Once you have your payment game plan (or plans), you’re ready to start making the changes that’ll help you out of your debt.

Many people plan their budgets using the 50/30/20 rule of thumb. This rule allocates your after-tax income to three categories: 50% to needs, 30% to wants, 20% to your financial goals. This is a common and useful breakdown that many people find helpful to realizing their debt-free future. It isn’t necessarily an exact science, but if it helps you break down what you’re doing then use it to your advantage.

While it can be hard to override our wants, doing so will only help us pay off our cards that much faster. Wants usually include things like going out to eat, cable, movie or theater tickets, new cars or appliances we don’t need, expensive hobbies, cars, boats, designer clothing and other such “fun” categories. It can be a real buzzkill to bring this up, I know, but it’s simply true. It’s much more fun to spend our money on these things, but it’s one of the biggest debt traps in existence. When we get sucked into paying for expensive wants, we take money from the 50% for our needs or the 20% for our financial goals, in this case paying off our debt. Turn the 30% into 50%-70% and before you know it, you’re on track to have debt following you for the rest of your life, right up into retirement.

A good way to speed up paying off your debt is to earn more income. That can seem a little obvious, but you’d be surprised how many people never even consider it. A second job or a side hustle is a common way to bring in more money. If you’re in a company or job where a raise or promotion might be possible, pursue it. If you can do things like garage sales or online selling to liquidate some ownership and turn it into funds to pay off debt, then go for it! You clear clutter while making money.

Here are some quick ideas to boost the amount of money you allocate to your debt plan:

  • Side job
  • Avoiding going out to eat (at least regularly)
  • Use the library instead of buying books
  • If you have cable, consider cutting it
  • If you have a gym membership you’re not using, cut it
  • Make your own coffee and avoid the expensive morning indulgence
  • Cook your own meals or meal plan to save on lunch during the week
  • If able, bike to work instead of driving
  • Use coupons, not only for store purchases but for online ones as well
  • Buy off-brand clothing or shop at consignment stores
  • Stores like Walmart have good deals on numerous household items—try them
  • If you have the space, rent out a room of your house

If you have excess credit cards leading you to more debt, pay them off and get rid of them, if able. Be aware: closing cards can negatively impact your credit rating. Weigh the pros and cons. Consider closely if the possible hit to your credit rating is worth the psychological and financial benefits of being rid of the card. It’s possible to recover your credit rating over time. If ditching the card(s) helps you stay out of further debt, then the positives outweigh the negatives. Having a financial advisor can help crystallize your decision on this.

If you’re spending excessively to keep up a certain lifestyle or an image you’re projecting, make sure your values are aligned with your financial plans. Many people find themselves trapped in a cycle of debt by keeping up appearances or buying flashy things to show people how accomplished they are. They might travel when they can’t afford it and buy a sports car that is several leagues beyond their reasonable buying power. If this is you, I have to tell you: end it. You don’t have anything to prove. A lifetime of debt isn’t worth a luxury lifestyle that you can’t afford and can’t maintain.

If you have several subscriptions to different streaming services (Netflix, Hulu, Disney+, Peacock, HBO Max, etc.), think about which ones you really use and which ones you can live without. You might end up saving $50+ a month doing this. If you have gourmet or higher-tier pricing plans for streaming services or cable, consider dropping them down to the next tier to save money. If going to movies in theaters is hampering your saving, consider waiting for home rental of the movie instead. A simple night out with the family at the movies can end up costing $50-$100 each time. Decide if this is worth it.

If you’re saving money and have more to pay off your debts, you’re in good shape! Making extra payments each month can help lower your credit utilization ratio, which can also help your credit score. Shortening your payoff time also has great psychological benefits and can help motivate you to stay on track in your goals. It can also help prevent you from paying more in excess interest—savings that can be applied to other areas of your debt. It’s a positive spillover that gains momentum the more you do it.

If you’re carrying around genuinely excessive debt that you can’t pay for, consider debt consolidation. A credit union can give you a low-rate loan to pay off your cards with excessive APRs. You can use the loan to pay off your high APR cards first and then focus on the lower rate ones next. This will save you money in interest accruals in the long run, though it does involve taking on another potential debt obligation. Consider the terms and conditions and rates very carefully before signing on to a debt consolidation plan.

As you can see, you have options. It can be intimidating to chart your course out of debt, but it is well worth it to do so. Making a budget and a plan is your first step. From there, getting creative, clever, and thrifty can help you achieve the things you want in your life without drowning in financial obligations that hamper your happiness. If you need advice on financial planning to make your roadmap, consider hiring a financial advisor. No matter what you decide to do, always focus on a life without debt and with more personal satisfaction.