We don’t need any studies (although there are plenty) to show us we’re on the wrong path. Most our societies are now built on credit and we think it’s OK to buy NOW the things we’d like to, just so that we don’t postpone our ‘gratification’ until we actually have the money. The majority of us had or still have debt, whether it’s a mortgage, a student loan, a car credit or the infamous credit card debt. Some of these people are currently debt free, some are pushing hard to clear off their loans while others still don’t think it’s a huge deal and they have a live to enjoy after all.
I personally don’t think there’s good debt. At the end of the day you owe money and will lose quite a lot in interest to the lender. Sure, there’s a difference between paying off for a fancy vacation or for your family’s home, but at the end of the month you still HAVE TO PAY MONEY. I was in this situation for 4 years and had some good and some horrible months. I was fortunate enough that my business really picked off speed, otherwise I’d probably be in a deep mess right now. You cannot rely on miracles (or on bad things not to happen), this is why having an emergency fund is really important and there’s still life to be enjoyed, even if you don’t squander your money anymore.
But let’s get back to our debt and see which habits have kept some of us from becoming debt free faster or are keeping you from achieving your goals as soon as possible:
Paying off debt is not a priority for you
Sure, you have a family, you have a life, maybe you want to enjoy something from it. This shouldn’t mean it’s OK to keep on postponing paying off debt just because each month brings with it more ‘needs’ (which are mostly ‘wants’, but that’s another story).
If you borrowed money from friends/relatives, make paying them back your priority: don’t mess with them or have them wait for more than it’s normal, they helped you get out of a bad situation, make sure you pay back in time (or even faster). If you promised them you’d repay them in 2 weeks, make it 2 weeks. If you said 6 months, make sure you at least do it in 6 months, though it’s great to be even faster. This will show them you are responsible and that they haven’t made a mistake by helping you in the first place.
If it’s ‘regular’ debt, focus on paying it off as soon as it’s humanly possible. What I really liked about The Total Money Makeover, was the idea that paying off debt should be a top priority (after having a small emergency fund). Whether you pay off the smallest balance debt or the highest interest debt, it doesn’t matter. PAY IT OFF and stop looking for excuses. Each time you pay ‘minimums’ you’re actually losing a truckload of money on the long term.
Why you’d want to give your hard worked money ‘for free’ just so that you can still ‘enjoy’ life, it’s beyond me. But there’s still life to be enjoyed, if you get more aggressive with your debt payment. And believe me, when the day will come to be debt free, life will be better just because of this.
You’re not paying on time
When having my fixed monthly payments for my car, I’d sometimes make the payment few days later. As you can guess, the bank would immediately charge me some late fees. Sure, it wasn’t a huge deal, but I was still losing money just by not being on time with my payments.
Almost at the end of the 4 year contract (I think I had something like 5-6 months to pay), I was abroad and, instead of making my payment I said to myself ‘screw the bank, I want to buy this camera instead’. And I did, since I didn’t think the bank would mind me skipping 2 month payments (especially since in my country a lot of the people who bought cars couldn’t pay for them, so the banks had a lot of repossessed cars and not too much cash at hand). The stupid me thought they won’t come ‘after me’ this quickly, since they were more interested in keeping a paying ‘customer’, than getting a car they can’t sell.
Guess who was wrong and almost lost the contract? Yes, genius me. Fortunately for me I could get in touch with my bank (let’s talk about how much a long distance call cost me from the US to Romania – and having to wait for half an hour to get my mess solved) and save my contract (and thus my car). I almost paid it entirely and could lose it just because I was an idiot who thought the bank will accept me skipping 2 payments.
Putting aside the stress of losing the car and all the money I already paid for it, I had to pay some pretty nasty late fees. For the weeks I skipped my payment, the bank charged me around 300 dollars, when my regular monthly payment was about 350. Yes, I almost paid for an extra-month just because I didn’t get my priorities straight.
Let’s say it’s a mistake I never repeated (even when it comes to paying my regular bills or taxes) and I can recommend you to take your debt seriously and try to keep up with the payments as much as it’s humanly possible. You won’t risk any sleepless nights or late payments. Even if you lose 5 bucks, it’s money you shouldn’t lose.
You still believe that getting a loan is the best way to solve your problems
For me, having to pay for my car for 4 years was what we call ‘rock bottom’. I hated the stress of the payments (especially after losing my main job 16 months into the loan contract), I hated how the bank treated me, how I had to pay for all kinds of crap I never signed for (we’re not talking late fees I paid out of my ‘stupidity’) etc.
It’s true, I got a new car in 2008 for which I had to pay in 4 years. It’s also true that, if I was more responsible with my money I’d have gotten the same car in 2-3 years (it would cost less if I went with the cash to the dealership), with just some effort to save. But I wanted it ‘now’ and I got it, with all the ‘perks’ of having a loan.
There are big ‘items’, such a house, for which is harder to save. But you can surely save for a car, even to get your kids through college. You just need to start saving NOW and stop buying on credit.
Our lives are not that filled with riches that we can get a new car tomorrow. But both me and husband are saving and purchasing what we’d like to own, when it’s the right time (we have the cash for it). One of our biggest dreams is to get a small van to travel. We’ll need him to get a bigger car than mine (so that we can actually ‘drag’ the thing around) and the van. We’re talking 10-20K dollars for both (used car and van), which we could borrow tomorrow. Instead, we’re slowly saving the money for it and maybe in few years we’ll get our dream.
Overdraft? That’s MY money!
Many accounts come with the possibility for us to use more money than we actually own in the bank. My first (and last) encounter with overdraft was in 2004. Few companies in my city started paying our salaries via bank accounts and the radio station I was working in was one of those. We got our new debit cards and an overdraft equal to 60% of our salary. From hundreds of people who were working at the station (the cable company and the TV station which all were under the exact owner), only few never touched their overdraft.
The rest did.
I felt so good when I could get more money from my card. Since the system was still new in my country, we didn’t pay interest for this, so it wasn’t like I’d have to pay up to 39% for taking the bank’s money. And yet it came to bite me one day, when I changed stations and had to close the account (the new employer used another bank). Guess who had to ‘lose’ 60% of her salary that month? You guessed it right, I had a very ‘poor’ month. The good thing was that I didn’t have a family to depend on my money or any debt, so it just meant less money to spend on crap.
Let’s say that was my first and LAST time I carried any overdraft on any of my accounts. I got shocked looks from the bank employees, when I made it sure they don’t give me the ‘feature’. ‘But maybe you’ll need it’. No, I don’t need it. I’m using your services to be able to use the darn card, I’m not using it to get money that’s not mine. Sure, I might lose a lot of perks and cash-back opportunities, but I also know way too many people whose ‘perks’ don’t cover all the money they’re losing in interest each year, just because they can’t be perfectly responsible with the money. I’ll say it honestly to you: if my account had any overdraft, I’d probably find a ‘need’ to cover with it. I’m weak, why bother tempt my weak mind? 🙂
You buy on impulse, not because you really need that
I think it’s one of our biggest issues are consumerists: we go to the store, see something ‘nice’ and we ‘got’ to have it. I think this is one of the things people have in mind when they complain that paying off debt will take any joy in the lives. You don’t need to squander money to feel good, start carrying a list with you and buy when you really need something. Take a look at your house, closets etc. I doubt you needed all that stuff, then why go and purchase more?
You try to keep up with the Joneses
I’m sure each of you know people who love to brag about their nice car and wonderful exotic vacation. It makes you feel bad and some of these idiots might actually rub it in your face that you couldn’t ‘afford’ it. Many of us got into debt because we tried to show we can ‘do’ more than we could actually pay for. I got a new car because the thought of driving an old one and even waiting for 2-3 years to get it was unfathomable. Yep, my colleagues were all driving new cars (with loans, of course) and I didn’t want to be the ugly duck in the company. I wasn’t, but I really paid through my nose.
This helped me realize that even if you can sometimes keep up, it doesn’t make such a big difference. I wasn’t more respected because of my car and I surely wasn’t more financially stable for having taken the loan. Let’s say that, if my business didn’t work out well (as fast as it did), I’d be now still in debt, with my car repossessed and over 10K down the drain.
Buy what you can afford and when you can. By saving money and having a little more patience, you can get some amazing deals in time and also keep debt away as much as possible.
You still refuse to budget and track your expenses
I’ve started tracking my expenses last year (for few months) and this year more seriously (since January). I’m also starting to keep a budget now, to try and optimize our cash-flow and savings some more. Back, when I was in debt, I never cared for this. Had no emergency fund, didn’t bother save for pension, I’d pay my bills and then squander the remains.
Sure, just by keeping the budget you might not start becoming more responsible, but chances are it will allow you to really see where your money is going. Say you notice that a big chunk of your monthly check goes to eating out. I’d say that, even if you don’t turn into a personal finance guru, you’ll probably consider doing something to waste less money with eating out.
Since keeping track of our expenses, I also changed a lot of how I shop and handle the money. I’m far from being perfect or overly frugal, but there have been some big changes in our money, which allows us to save more and accomplish better things each month.
You keep on finding excuses to not save
Many people who are in debt, if asked if they do save money, will reply “I don’t have money to save, I have debt”. Not having an emergency fund means that whatever life throws at them, will have them totally losing any financial ‘balance’.
As you can guess (or I’ve already told you), when I had my car payments, I didn’t bother save money. I had no emergency fund, so, when I lost my job, I had to pay for my taxes and debt, and zero income. Pretty sour situation. When I got the darn DSLR camera, I ‘had’ to have, and almost lost my car, instead of me using some money from my emergency fund (well, if it was that big of emergency), I stopped my payments to the bank.
Anything that happens (health issues, losing a job, having to deal with some serious money problems outside your current debt) will mean you can’t make the payments (I doubt anyone would consider starving or sit in the dark for a month) and you’ll get into a deeper hole.
Even if you save 50 bucks/month, SAVE IT. At the end of the year, you’ll have some money you can use if the car breaks or anything bad happens.
Shopping makes you feel better
If you have a bad day, shopping can be really uplifting. Sure the stores are doing anything they can to part you from your money and make you feel good about it, but you shouldn’t treat your ‘depression’ by shopping. Go to the store when you really need it (with a a list) and find other ways to enjoy life: sex, a nice long walk, fun with the family etc.
You keep on blaming others for the mess you got yourself in
When I was in debt anyone else was to blame but me: the bank was mean and dishonest (well, tell me something new), my employers were crappy for giving me a smaller wage than I deserved, the State was a thief, taking my money each month etc. Anyone was to blame but me, even if I was the one who signed the dotted line and wanted a car NOW and not in 3 years. I was the one who didn’t save, I was the one who squandered each and every cent she got, even if there were no real reasons to do it.
Stop placing blame and start looking for solutions. If you’re just thinking about the ‘why’ and not the ‘how’ you’ll never make it. No matter who’s to blame (the crappy economy, the Government, my dog) you are in a certain situation and need to get out of it. Find solutions, make plans, start doing something.
You don’t want to try to make any extra money
When it comes to what we’re left with each month, the calculation is easy: subtract expenses (bills, debt, food, entertainment etc.) from your income. That’s what you’re left with. Sure, being more careful with your spending and having a budget are wonderful ways to keep the expenses to a smaller amount, allowing you to redirect more money to you debt payment and savings. But there’s only this much you can do, so another good solution would be to make the income ‘part’ a little bigger.
I personally know people who refused for years to do anything but go to work, even if said work meant few hours/day and not such a great pay. Years after, when we met, I found out they started taking on my advice and found some ‘side jobs’. They hit rock-bottom months ago and realized they won’t make it, unless they try something extra. This allowed them to earn some money and pay the bills.
Freelancing is not that difficult, even if it’s an adjustment at first. Any extra buck you can earn, can be directed to your debt or savings, so, if you think it’s possible, don’t miss the opportunity.
Life with debt is not the end of the world, but being debt free is always better. It allows you to take on more opportunities, to be more relaxed, to dream ‘higher’. I hope these ideas will help you get into the right mindset and get you closer to ‘freedom’. What other habits do you think are bad for people who have to pay off debt?