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Yesterday, MSN’s Smart Spending blog posted a version of my recent article about the dirty secrets of debt reduction (and what to do about them). “You make it sound so easy,” one commenter wrote. But it’s not, and I know that. Here is a reprint of a post from June 2007 that acknowledges this fact.
Last fall I wrote an article describing how to get out of debt. Debt elimination involves three steps, I said:
- Stop acquiring new debt
- Establish an emergency fund
- Implement a debt snowball
A visitor named ST recently left this comment about that article:
Seems that this post is about putting “overcoming your faults” over good financial sense. If you cannot equate credit cards with cash, that’s your problem.
If you think the advice here is good financially, it seems that you should go into therapy instead. Go into more debt in order to figure out how to live within your means by dealing with what’s making you act irrationally. A good friend of mine did that: therapy, then got a new job, then went to the bank and got a 6% loan to cover all her debts and paid off all her credit cards, starting with the highest interest (like any one with sense would do).
If, on the other hand, you’re in debt because of extenuating circumstances or college is just too darn expensive, then do what all the books say. Make a budget, consolidate debt, use 0% offers, use the one credit card with a 0 balance as it is cheaper than cash. You’ll get out of debt years faster than with this tripe. Come on, that bit about the “lowest balance,” is just inane. Why not do a balance transfer?
I get comments like this from time-to-time. “This stuff is easy,” some complain. “Why do you people have such a hard time with it?” These people are right — personal finance is easy — but I think they’re missing an important point. While the concepts are easy, their implementations are not.
Human beings are complex creatures. Some of us are highly logical. Some of us are emotional. Most of us fall someplace in between. We rarely make decisions based on optimal paths; more often, we choose what makes us happy in the short term. I’m not saying that this is the right thing to do — it’s just what happens. For those who routinely make financial decisions based on emotion, it can be difficult to turn things around.
Complaining that personal finance is easy and “why doesn’t everyone do what they ought” is like saying that running a marathon is easy so why can’t everybody run one? Most of us understand how to prepare for a marathon — eat right and run a hell of a lot — but few of us have the dedication and mental fortitude to complete one. However, with a little discipline and some hard work, most people can complete a 10k race.
It’s the same with personal finance. It’s easy to say, “To build wealth, you must spend less than you earn”, but it’s another thing to do it, especially over the long term. In some ways, building wealth is more difficult than running a marathon. Training for and completing a marathon takes months. Dedicating yourself to a sensible financial plan is a lifetime process.
If personal finance were really as simple as understanding the math, we would all be rich. But it’s not. And we’re not. That’s why I think any small financial victory is important. That’s why I run this web site, and why I share whatever tips I can find.
I always say “do what works for you”. Some people are able to succeed by paying high-interest debt first. But some people — myself included — have only been able to succeed by trying another approach. The approach may not be best from a mathematical viewpoint, but I believe that any method that actually helps you meet your goals is better than one that doesn’t.
I still believe this. Personal finance concepts might be simple, but that doesn’t mean they’re easy. I don’t mean to imply that they are. It took a lot of hard work (and a little luck) for me to get out of debt. It didn’t happen quickly, and it wasn’t easy.
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August 6th, 2008 at 11:13 am
I completely agree with you!
In a Psychology class I taught I spent a whole lecture on why people know what they should do and why they still don’t do it.
The lesson boiled down to the fact that implementing things that are good for you in the long run have less hedonic value for you in the short term. Since we are built to react to short term rewards, it is much harder for us to choose to make the decision that will benefit us less in the immediate future, but more in the long term.
Personal finance has some basic rules that are easy to understand, but hard in the short term to give up the immediate short term rewards (real shopping is sooo much more fun than window shopping).
However, if we can set up a system that mitigates the feelings of the loss of these short term rewards, we will reap a much larger reward in the future.
August 6th, 2008 at 11:31 am
@JD
It’s funny, everyone interprets things the way that they fit, and not always the way a message is intended. Many people also feel that everyone should be able to live by the same set of standards and practices that they live by, and condemn those that do not (as evidenced by some of the responses to your own postings unfortunately).
Yesterday, after reading some blogs and heading over to the bookstore to peruse for some new material, I got so frustrated by those exact sentiments I didn’t know what to do with myself. I ended up just writing to get my mind clear:
http://letsblogmoney.com/2008/08/05/financial-advice-is-not-a-one-size-fits-all-proposition/
It baffles me that some people can take a message and twist it just so that they can argue the point, as ST did.
August 6th, 2008 at 11:41 am
Great post today, JD. It really is easy to say that if you don’t want to be in debt don’t spend. While it is common sense, some people just turn their lives around to follow the steps needed to get into a better financial situation. It is analogous telling someone who wants to lose weight, to stop eating. When put that way it just sounds ridiculous.
August 6th, 2008 at 12:06 pm
I see pf the same as juggling. Concept is easy (throw balls from one hand to the other), yet the execution is difficult. Just as with all the failures in juggling (dropping the balls), the same feeling with pf (emotional spending and building debt): The failures are the steps on the path to success. Keep trying and you will see that soon you can balance your budget and juggle 3 balls at the same time!
August 6th, 2008 at 12:27 pm
I agree that we have to fight human nature to win such as paying down the lowest balance first. I do the same thing with a To-Do list. I tackle the easiest ones first instead of the most important (but would take longer) to get quick victories. It keeps me motivated.
August 6th, 2008 at 12:29 pm
A lot of life’s problems could be eliminated with common sense.
Eat right. Work out. (I just solved the problem of obesity.)
Save more, spend less. (I just solved the problem of debt.)
Marry a kind, honest person and be the same way in return. (I just solved the issue of divorce.)
I can solve problems all day long, apparently. I wonder what issues in the negative commentors’ lives could have just been solved with common sense, since I presume they aren’t perfect beings.
August 6th, 2008 at 12:30 pm
Currency’s value is relative. If everyone is “rich” then no one is rich. For every dollar you gain, other people must lose a dollar.
To be well off yourself, you require people making bad financial decisions.
August 6th, 2008 at 12:33 pm
If dieting were as simple as understanding math, we’d all be thin. Hmm…parallels abound.
August 6th, 2008 at 12:42 pm
This is a Saturday Night Live skit on debt.
http://consumerist.com/consumer/clips/snl-skit-dont-buy-stuff-you-cant-afford-252491.php
August 6th, 2008 at 12:44 pm
Thanks for the great post. There is such a huge emotional aspect to finance that a lot of people don’t understand. I for one grew up financially illiterate in a family that always lived paycheck to paycheck going slowly into more debt. So, I inherited those habits. It took a lot of hard work to get myself right financially and distance myself from those habits. Sure, it seems simple now–don’t spend more than you earn and save some money–but it was a hard road to get there.
August 6th, 2008 at 12:45 pm
Another thing commentators like the one you posted ignore is the MASSIVE pressure being put on us all to behave in a financially irresponsible fashion.
Advertisers, banks, lenders, credit card companies and even people who make products we really want or need spend BILLIONS of dollars to research and then implement what amounts to psychological warfare to get us to spend, borrow, spend, borrow, spend.
Even a healthy, well-adjusted, strong-willed person would struggle under that barrage. That’s why blogs (and communities) like this are helpful; they provide reminders that there is another way to live.
August 6th, 2008 at 12:48 pm
I don’t own a TV, nor do I read magazines. They are nothing but mindless trash. Amazingly enough, I don’t feel any of this soul-crushing pressure you refer to. I wonder if there is a correlation?
August 6th, 2008 at 12:49 pm
One issue with why simple doesn’t mean easy is that personal circumstances differ (which is why JD points out that personal finance is personal.
And it’s not all frivolous. If I’m earning $500/mo. and rent costs $475, it’s simple to say I have $25 left. It’s not easy to cover everything left over after rent is paid. In fact, it is probably downright impossible.
Likewise, if I’m making $10,000/mo. but I’ve got a $4500 mortgage and a $700 car payment, plus the gamut of regular expenses, I may not actually be able to come out ahead despite the advantage of a tremendous personal salary.
Making choices and prioritizing is never easy — it involves knowing ourselves enough to make choices motivated by our own best interest, even if that means choosing the harder choice. The person making $500 might need to work another job or find a cheaper way to live, or a roommate. The person making $10000 might need to evaluate whether they really are serving their needs with a lot of high-dollar expenses.
Either way, choosing is hard. (and it’s not all about choice either — the $500 person might not be able to find cheaper housing or work for more pay. The $10000 person might not be able to easily cut expenses like a mortgage or loan.)
August 6th, 2008 at 12:50 pm
Adam: You are an idiot. Imagine that there is no cash, but we are a couple of cavemen. If I work really hard, and grow a crop, now I am marginally richer.
If you go out and yourself a crop also am I poorer? No of course not.
Compare that to the modern world: If I go to my job and create something of value to my employer, I get a paycheck, and my employer has my creation (whatever that is). And now I am (slightly) richer that I was before. Again, how does that make you poorer?
August 6th, 2008 at 12:59 pm
Please watch the personal attacks, friend.
A crop has intrinsic value. People need food to live. Fiat currency has no such value. What makes one million dollars a lot of money, is that so few people have that much. If all the wealth in the US was evenly distributed to every citizen do you think one million dollars would have the same purchasing power?
Supply and demand principles in action.
August 6th, 2008 at 1:07 pm
It’s tough to make that transition into long-term thinking. When the rest of the world–often including our parents–don’t, then it’s a fundamental change in how our lives are run. I find myself thinking in completely new ways and asking questions I never would have asked before. Long-term planning can’t be emphasized enough. I can’t remember who it was, but a VERY wise man said something along the lines of “Short-term planning leads to long-term failure.” I think that about sums it up.
August 6th, 2008 at 1:11 pm
I think you missed the main point of the comment, which was to point out that there’s a large cause behind being in debt: a psychological one. It seems like in your blog today that you completely overlooked that point.
The simple truth is that if you were able to get over the psychological barriers that put you into debt in the first place (primarily the lack of ability to delay happiness), then getting out of debt and building wealth is very much so simple. I hate using the word easy, simple is a much better description of the process.
Whoever made the correlation to weight loss is spot on. Losing weight and being fit is very simple: Eat better, exercise more, sleep more.
Again, easy is a horrible word. Life happens, people have weak moments, which can turn into much bigger things if not kept under control. But PF is indeed simple for those who are healthy and able to work. Increase you incoming, decrease your outgoing, make a budget and a plan to attack debt. Simple.
Actually doing it without addressing your mental weaknesses: next to impossible.
August 6th, 2008 at 1:22 pm
“Losing weight and being fit is very simple: Eat better, exercise more, sleep more.”
It is irrational to over-simplify either personal finances or weight loss in such a manner. What about the person with diabetes or other health condition (such as glandular) who is required to maintain a certain diet or regimen of medication that causes weight gain? Or the person who is unable to exercise due to prior injury or other medical condition? Or even the people who cannot sleep regularly due to sleep apnia or other medical condition? Most of those cannot be controlled by the individual as many are hereditary or genetic in nature, so simply saying “Eat better, exercise more, sleep more.” is just wrong.
As I referenced in post #2, try reading the last paragraph in my blog posting from yesterday for the correlation:
http://letsblogmoney.com/2008/08/05/financial-advice-is-not-a-one-size-fits-all-proposition/
August 6th, 2008 at 1:32 pm
Adam:
Econ 101, Day 1: The economy is not a zero-sum game. True, not everybody can have the penthouse apartment, but other forms of wealth are not limited in the same way -me buying a cellphone does nothing to prevent someone else from buying a cellphone. And besides, many of us really don’t care whether or not we have the best of everything — money and the things they buy are the means, not the end.
August 6th, 2008 at 1:37 pm
I sort of agree with Derek, you couldn’t have done all this without changing your mindset. That’s probably a bigger achievement than finally getting out of debt because it’s the hardest step.
The psychology of personal finance is a lot more than just using tricks to get ahead (although the tricks are useful).
For example if someone is self-medicating their unhappiness by spending they would to well to look at the route causes of their unhappiness as well as forcing themselves to stop spending.
August 6th, 2008 at 1:39 pm
Great post. I’m a lot like the poster in your story. For me, this stuff is so easy. For my GF it can be very tough and its hard for me to understand why she can’t just follow my lead. So, I’ve lived this.
August 6th, 2008 at 1:43 pm
JD (and anyone else interested in the psychology of decision-making)- You should read “Sway: The Irresistible Pull of Irrational Behavior” by Ori and Rom Brafman. It’s a really interesting book (in the vein of The Tipping Point by Malcolm Gladwell) about why we make decisions to do something even when armed with evidence and rational thought that we should do the opposite.
It’s really relevant when it comes to things we know we should do, like save money, or eating less, or doing the right thing. Some people are really naive (ie: this commenter) about the things that affect our decision making at a deeper level. Just because something is obvious doesn’t mean it’s easy.
It also talks about how external factors like group dynamics or the context of a situation can affect decision making too… I highly recommend it. It’s a quick read as well.
August 6th, 2008 at 1:46 pm
I have to agree with this, all personal finance sights all say, pay down debt highest interest to lowest, live within your means, spend less than you make, have an emergency fund ect….. We all know we should do it but everyday there are people and messages all around us saying spend, spend, spend. So if it was all about math and we just went by the math no one would be in debt, but it is not. That is what is so great about these blogs, there real people and sometimes we do dumb things after we really sit down and think about it we can say, hey that was really dumb!! But by having sights like these you can connect to people going down the same path, share stories and hopefully learn from each other, what works for one does not work for all, you personally have to find what works for you, there is no one size fits all concept.
August 6th, 2008 at 2:33 pm
It’s not in the nature of the current US economy to make everyone rich. Everyone can’t be rich. That’s ridiculous. There isn’t enough money for that.
But if you follow the advice you read here, you can improve your financial standing.
August 6th, 2008 at 2:38 pm
@ Jeff and Adam
There are some who operate within a paradigm of scarcity and there are some that operate within a pardigm of abundance. A paradigm of scarcity is usually the source of such statements as “since Bill Gates has $30Billion, then the rest of the world is $30Billion poorer.” This statement assumes that wealth is a zero-sum game.
The paradigm of abundance says, “Gates created an industry that has injected trillions into the world economy; it only makes sense that he has $30B.” The logic is that Gates didn’t take $30B from others; he created trillions and benefitted from his creation to the tune of $30B.
I personally operate within a paradigm of abundance. It’s depressing to live otherwise (in my opinion).
August 6th, 2008 at 3:28 pm
I agree with those talking about discipline and changing behaviour.
This is one reason I don’t really understand the debt snowball trick (size over interest). The problem isn’t in finding the “right” solution - we know the solution - but in finding the discipline. I suppose there is an argument over picking a sub-optimal way just because it has a higher success rate, but I think this sidesteps the real issue - we have an inherent bias that makes us not achieve what we want to achieve in the long term. That’s the root cause and learning it won’t just solve the immediate problem, but pay off as you gain a new way to approach life’s problems.
I see picking a sub-optimal solution as bypassing the important lesson to be learnt.
Once you have the discipline and subscribe to following “the right way”, most things become academic… as was said, be it for weight loss, finances… even things like relationships, and incredibly complex and personal issue, tend to do better when we don’t impulsively let our wiring decide. Same with anger and all sorts of reactions as well. Work on our time preference, understand the real costs including opportunity costs and the outcome is your own optimized financial situation.
There is no golden rule as to how much we should save - we can see how saving can be negative when a miserly old person dies without ever enjoying life, too afraid to spend. There is a balance to be had. You only put off spending for so long, but this should be line with your life goals. It’s a very important concept, IMO, and the foundation of good financial advice will start with the concept of balancing future goals compared to the present ones (the “save save” and “spend spend” messages aren’t holistic enough for me.)
August 6th, 2008 at 4:14 pm
“The logic is that Gates didn’t take $30B from others; he created trillions and benefitted [sic] from his creation to the tune of $30B.”
From where did those trillions come? Bill Gates may be rich, but he doesn’t print money.
August 6th, 2008 at 4:49 pm
“From where did those trillions come? Bill Gates may be rich, but he doesn’t print money.”
Consumers - they made the choice to exchage their hard earned money for his product. If you don’t want his product, keep your money. Captialism in action. Obviously you are using this forum to spread your socialistic view.
August 6th, 2008 at 4:54 pm
Adam @27: Where did the trillions come from? Two places. First, the earth has inherent wealth. Each person has a portion of that intrinsic wealth; some more than others. But that is not everything. IF that were everything, the total wealth of the world would never increase, and productivity gains through technology would NOT result in greater standard of living; further, the world economy would never beat inflation.
It is not a zero sum game. There IS a relationship between people gaining wealth and others losing it, but it’s just not that black & white.
August 6th, 2008 at 5:49 pm
All I can say is that for 10 years I stayed a slave to debt by trying to do the “rational” thing of paying off the highest interest debt first. I then read a book in 1996 by Mary Hunt teaching the principles basic to what you discuss. After I began paying the smallest debt first and applying that paid off amount to my next smallest debt I became obsessed with the positive feelings I felt from accomplishing something so wonderful. 2 1/2 years later I was completely debt-free and we went on a cash paid vacation too. I don’t care what logic or learning to do things “right” is - I have been debt free for 12 years and I feel wonderful every single day I wake up. I know that it “didn’t make sense” to some, but for me it allowed me to get rid of the debt and finally be free!
August 6th, 2008 at 6:11 pm
The same thing could be said for weight loss, fitness, relationships. If understanding the concepts was the hard part we’d all be perfect, but the concepts are the easy part!
August 6th, 2008 at 6:53 pm
This is why I use the term Stupid Brain Tricks.
August 6th, 2008 at 8:33 pm
My teachings are very easy to understand
and very easy to practice,
But no one can understand them and
no one can practice them.
- Lao Tse
August 6th, 2008 at 8:38 pm
My personal finance skills have no doubt played a huge role in getting me where I am. But I have to admit that our household income — the combination of two strong salaries — has played a significant role. Part of the reason not everybody is rich is that not every body has the cash flow to make triple mortgage payments or what-have-you. Not everybody was able to save for a downpayment when we did. Sure, many people were better off than us and still others made the choice to spend their money. But the fact is that the bulk of the population struggles to get by. And that’s in the “First World”. The rest of the world is not rich because $2 a day puts you in the top quintiles. Seriously.
Habits are important. But people who make a lot of money can do a lot of dumb things and still sometimes end up being comfortable, as long as they save some of it. I’m hoping that habits and a decent income will continue to hold us in good stead.
(Now, before somebody comes and robs me, I just want to say that I’m not the kind of rich you’re thinking!!!)
August 6th, 2008 at 8:50 pm
Agree. Personal Finance is so easy however, the most challenging part is the implementation. I still get lots of emails asking me for personal finance advice. You’ll be shocked some of my email senders have Phd and graduates from good schools.
It all boils down to your will. You can have the knowledge, but if you don’t have the will to do it, your knowledge will be worthless.
Sam
Fix My Personal Finance
http://fixmypersonalfinance.com
August 6th, 2008 at 8:59 pm
I think a compromise between a snowball method and the mathematically optimal method might be the best. Starting out with the snowball gives you a boost of confidence that it is possible to pay off debt, then once you are in the habit of paying off your debt, move to the more optimal path.
August 6th, 2008 at 9:21 pm
I’d disagree to an extent. As a whole Americans are doing much better than Brazilians or Mexicans or many other people in other national economies.
I think the nature of the US economy is such that virtually everyone can live at the level that they really truly want to.
Some people are struck by misfortue beyond their control, but I think that most people decide that either a) they would rather have a truck/bigger house/vacation/etc. than chase money or b) that they would rather not go to school and work that job they might not like as much.
August 7th, 2008 at 6:16 am
Personal finance is easy to understand, just like eating right and getting exercise are easy to understand, its the actual doing that is hard.
I think most people know and understand that to get rich slowly you need to spend less than you earn. But its hard to actually spend less when you have bad habits, you are keeping up with the Joneses, using your credit card and going deeper into debt, buying/leasing new cars, buying flat screen t.v.s, etc.
I’d like to be in better shape, I know what I need to do, but the actual doing - getting up early and running is hard for me.
We used the snow ball method to pay down $55,500 in debt, although Mr. Sam with his MBA wanted top go with higher interest first. But, our biggest debt, Mr. Sam’s MBA student loan of $27,000 was at a pretty low interest rate.
August 7th, 2008 at 7:12 am
@Finn Please consider your own words, “Once you have the discipline…”.
The issue folks focusing on the optimal financial solution continously discount is that many people in serious debt are struggling to *gain* that discipline and *do not have it* when starting these types of programs. On the path to gaining that discipline they may have to follow a sub-optimal mathematical option because it allows them short term wins, which So Cal Savvy points out so well in the first comment above, can be crucial in demonstrating the benefit of something you’re doing, especially if it’s something new to you.
Also, let face it, no one wants to be a loser or be considered a loser. We all have egos and most folks have tied their self worth to their social status and material things. Getting something “smaller” (be it a house, car, apartment, etc.) or doing with “less” (can’t go out more than once a month now) screams “loser”. And they have lost! These folks cannot support the lifestyle they’re portraying! This is hard for many people to admit, both to themselves and others. So needing those “wins” to demostrate they aren’t so much losing at life as they are gaining control in their lives can be a big deal emotionally.
As they gain the discipline by seeing that they’re moving forward and the program is working, they can gain confidence and hopefully move to make better financial choices, similar to what Luke S. mentions above.
August 7th, 2008 at 7:22 am
Personal finance should be easy. The challenge is that most people are not very disciplined. Getting out of debt does not happen over night for most people. It will take time, patience, and discipline.
People need to see something positive happening as they are on there debt reduction plan. I have always advised that along with their debt reduction plan they build up assets as they go along.
As their debt load decreases and they watch their assets (maybe a savings account) grow sometimes it will give them hope and they can continue on their path.
August 7th, 2008 at 7:50 am
I think it is interesting that the comments so far haven’t included a conideration of what JD wrote at the end: “It took a lot of hard work (and a little luck) for me to get out of debt.”
My situation at the moment is very good — but it could so easily have been otherwise. It was luck as well as preparation that I had great health insurance at the time I developed cancer; we have been lucky to have good cars that lasted years and years and not been involved in accidents; we’ve been lucky that our parents had good health and savings so we haven’t had to support them as they age. And so on! Yes, we’ve done a lot of things right, but we’d never take all the credit, we’ve also been lucky.
August 7th, 2008 at 8:22 am
Are you sure that the “lowest balance first” is mathematically worse? It does have the feature of giving you more margin in your monthly budget. As soon as you pay off that lowest balance debt, you don’t have that payment any more, and now you have a little more breathing room in your budget, which will help you avoid going back into debt.
There is a family that was in my last Financial Peace University class that can’t even pay their minimum payments on their debts. So this man took an extra job working evenings and weekends. When that smallest debt is paid off, they can make the payments and he can quit that extra job. If he instead paid on the low interest student loans, it might be 3 years before he could quit his part time job.
August 7th, 2008 at 8:36 am
I understand the concept of the 0% balance transfer idea but many of those deals tie to a card that has a higher rate after that introductory period. When people are already burdened by debt and costs higher than they can afford, they are not likley to have it all paid off in that 6 month period and will have a higher interest rate to deal with in the long run. It is also important to note that dealing with banks is a tricky matter that you might think. They aren’t always heppy to grant you the transfers or cancelations you want and relentlessly try to offer you alternatives to stay with them when you call. The plusses and minuses of these (marketing) deals offered isn’t always evident from the pitch they give you. It is hard to defend your territory with banks and credit card companies and it takes a lot of time, follow ups and dilligence to get things fixed. Some people have a hard time standing up to them and aren’t always informed of their options.
That said, I do believe the lowest debt amount and the highest rate methods both work and your personality kind of determines which one would work better for you.
Personally I have never had large amounts of debt to worry about but I have watched people all around me try and deal with it for years. It is very easy to slip into debt and very difficult to get out of debt because it is designed that way.
August 7th, 2008 at 8:43 am
Jeremy @42: Yes. It is very simple to verify this, too. Consider cash advances in credit cards. When you take a cash advance, it is charged at a higher rate of interest (usually). When you send in a payment to your account, the credit card company applies your payment to your purchase balance and NOT your cash advance, until your purchase balance is completely paid off. This is because the purchase balance has a much lower interest rate, so it is better off for the company to use your payment to pay off that low interest debt first.
You of course want that to pay off your high interest debt first. In this way, your $1 would pay off $1.25 worth of debt vs. $1.16 worth of debt (difference in 25% and 16% interest).
The same applies to different accounts.
August 7th, 2008 at 2:02 pm
Sure, some people’s spending is not in their control.
I thought my mom’s alimony was decent, until she got sick and needed nursing home care for the last 7 years of her life.
Without any prior family history, no one in their 40s (as mom was when she became ill) thinks about buying long-term care insurance.
Most of those in trouble I meet, however, are indeed the “$10,000/month income, $4,500/month mortgage, $700/month car payment” type of people.
There is substantial opportunity for savings (and a rapid reduction in debt) for the latter group, with only a modest decrease in their spending habits.
August 7th, 2008 at 2:24 pm
I might add that while one can devise a plan for getting out of debt, a whole other plan might be needed for STAYING out of debt. That’s just as important. I can pay off my cards easily, but if I overdo the process I’ll be back to needing them again in two months. So this is where the emergency fund comes in. But then you need to do the same process in reverse for the emergency fund. You need to keep replenishing it.
So what might the answer be for both processes? Spend less than you’ve got, at all times… it’s the only solution.
August 8th, 2008 at 9:13 am
To those who don’t like the debt snowball and would rather pay debt off in the “right” order, highest interest rate first: The difference between paying them off in the best order and random order is at worst a couple of months, including the mortgage (so we’re talking at least a couple of hundred thousand dollars of debt).
So if a person chooses to snowball their debts in a less than optimal order, that’s still much better than getting frustrated and giving up and then paying them off when they come due.
I purchased my home in 2002. Today my wife and I own it and the two cars parked in the driveway outright. There are a lot of things we could have done differently, and perhaps gotten where we are a little bit faster. But any time I start to feel any regret, I just look at the $100,000+ we saved by not carrying that mortgage a full 30 years.
August 8th, 2008 at 10:16 am
While there’s no doubt self-discipline and moral fortitude are necessary if you want to get richer than you are, there are also always things outside our control. Not everyone has legs to train for a 10k run, after all.
August 9th, 2008 at 7:18 am
For the past year I have followed this plan. My wife and I put our heads together and decided we needed a positive financial direction; spending everything we earn (and then some) is not a positive direction, but rather a very negative one. Our debts were all current (several credit cards, an auto loan and student loans). We paid the minimums and put together an emergency fund. We then began working on our debt snowball, attacking the smallest debt. We now ONLY have a little credit card and student loans left.
This DEFINATELY required a change of mindset on our parts. We had to spend less than we made. We put forth a budget each month and stick to it the best that we can. Yes, emergencies come up. To this point our emergency fund has covered them.
If this plan does not work for you, you have one of two issues: (1) you spend to much or (2) you don’t make enough. A lot of people spend all their money, but don’t know where it all goes! Do a budget then - spend your money on paper before you get it in-hand and try to not stray from it! If you just don’t make enough to cover your bills, you need to first prioritize them. Then you need to address your income problem. Perhaps you need another job! Perhaps you need to sell some things to knock off some debt!
Jen @ 48: “Not everyone has legs to train for a 10k run” - if you approach personal finance with that attitude, you’ve failed before you even began. Succeeding at personal finance is not a matter of aptitude; you need to WORK at conditioning your “personal finance muscle”, especially with respect to self-restraint and discipline, to succeed.
One last note: since I began reading personal finance books (especially Thou Shall Prosper - Rabbi Daniel Lapin), I have found that my mind is working differently. I have become more optimistic with respect to life in general. I control my money, not the other way around. That, along with the opened communication with my wife with respect to our personal finance, has made waking up each day much easier. I’m not always worried about the bills. I’m not worried about the dishwasher breaking. I don’t worry as much about anything.
August 9th, 2008 at 1:06 pm
I disagree that personal finance is at all easy without having studied it. It’s not. It’s hard.
1. The fact that certain debt is better than other debt is not a simple concept.
For example, when one person has a $20k car payment and the other has a $10k credit card payment, and they are paying them back at the same rate, how do you convince the person with $10k in credit card they are worse off?
A 3rd person has a $40k college debt. Which of the 3 is best off?
2. ’spend less than you make’ is not as simple as it sounds.
Example: Which person is spending less than they make? The person who pays $300 for a car repair out of cash, or the person who puts the repair on their credit card, and only pays $50 for it that month? $50 is less than $300 right, which is spending less?
3. Large expenses that lead to greater future opportunities are difficult to comprehend.
For example:
For a person who is not wealthy but has an OK job, how do you convince them to spend $20k for schooling when their new starting salary will only be $2 or 3 more per hour than their current salary?
And these questions are just off the top of my head. Personal finance is tough.
August 9th, 2008 at 10:22 pm
Spend less than what you earn is a simple statement, yet hard to follow. By cutting expenses you cannot even live properly. The only solution gets there is somehow to earn more to pay more.
This year everything in life has gone up and the incomes have dried up for most Americans. Its this Kangaroo economics of a failed country that is bearing fruit on its citizens. There is not enough done to improve what this economy can can do, as a results we are pushed into a corner and spitting at the walls. How much can you cut?
August 10th, 2008 at 9:44 pm
April: for a lot of people, it’s partly not understanding that what comes easily to them does not come easily to others, and seeing that gap as a moral failing (”I can save 35% of my salary, why can’t you?”), and partly defensive attribution.