Common Sense Living

The 4-Letter word that starts with ‘D’….

Not all 4-Letter words start with ‘F’!  The worst one begins with ‘D’ …. DEBT!

There is nothing more vulgar, nasty, disgusting, destructive, or debilitating than a pile of consumer debt that hangs over your well-being for years, or decades.  You begin paying it off, then the car or washing machine goes on the blink, and you load the credit cards back up.  It’s a depressing treadmill, that eventually saps even the will to change out of you.

Of course, the best way to resolve the debt treadmill is to simply not borrow.  Live a simple lifestyle, and put aside 10% to 50% of your income each month.  In just a few months, you will have constructed a “moat” around your financial well-being such that when calamity does hit your castle, you have good defenses and can take the storm.

Suggesting that one avoid debt though is cold comfort to those who already sit on a pile of debt.  What should they do?

When in debt, there is a tendency to want to pay it all off as soon as possible.  I think this is a mistake.  Instead, a better financial move is to play defense, as well as offense.

Aggressively paying down debt is like playing offense, moving you more quickly to the goal of being debt free.  Devoting all your resources to paying off debt though leaves you fully exposed to setbacks.  The car breaks down.  The stove stops working.  A medical bill or copay comes up.

Alternatively, adding a good defense to your financial game by building a “moat” around your financial well-being, will allow you to absorb normal shocks to your finances.  When you have enough money to handle an unanticipated event without disrupting your ability to also chip away at your debt, there is a feeling of continual progress that is quite encouraging.

So instead of handing all your money back to the lender, hand over a little less, reserving some for yourself.  Put this extra amount aside……in a bank account, a savings account, or even a brokerage money market account.  DO NOT TOUCH IT unless a true emergency occurs.  And in case you are wondering, a vacation is NOT a true emergency.  Nor is your adult child’s broken car, your small remodeling project, or some fancy new clothes or shoes!  Even if those things are on sale!

So now your moat is being built.  What else can you do?  You have two choices.  You can lower your spending, or you can increase your income.  The easiest thing to control, and it’s not so easy, is your spending.  Stop ALL fast food and dining out.  This is probably the largest discretionary expense that saps your finances in several small amounts that add up.  Go to the grocery store, buy your food, and cook it yourself.  You will pay far less for food this way.  Look at your entertainment habits.  Are you constantly driving your friends around?  Do they constantly suggest activities that cost money?  If so, stand up and suggest another activity, perhaps a movie at home instead of in the theater.  There are thousands of ways to cut your expenses when you put your mind to it, including even moving to a smaller home.

Increasing income is more difficult than cutting spending, and for multiple reasons.  First, cash flow derived from savings is all yours tax free, whereas new income is taxed.  So all the gain is not yours.  Second, another source of income will take more away from your time.  If you have young children, this extra time may not be affordable.  If a spouse or partner is in your life, more time away from that person will strain the relationship.  On the other hand, extra time in a job may keep you from activities that cause spending!  Extra work will often also increase gas expenses, clothing expenses, and possibly health expenses if you find yourself being exhausted.  So you should weigh all these factors for you situation.

Extra income may also be derived from a self-employed home-based business, depending on your skills and ability to effectively market a product or service.  More often than not, such businesses will fail.  If you decide to pursue this path, keep the costs under control, at least until the income is there to support additional costs.

As a practical person, I like to keep things simple and sure.  The simplest things in life are often the best, as well as dull and boring.  So if you need to get out of debt, the first step is to downscale your lifestyle.  Second, develop a plan to pay back the debt, while retaining funds to set aside.  And third, carefully evaluate the option to increase your income.  In spite of what some may sell you, there is no “easy” way.  But the skills you develop digging out of the hole will will be valuable when applied throughout the rest of your life.


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