Wednesday, November 17, 2010

The Hardest Part of Getting Out of Debt...

 The hardest part of getting out of debt was making the decision to do so.

The hardest part of getting out of debt was making the decision to do so.  Once that hurdle is achieved, the rest is relatively simple.  I know that sounds moronic, but it is true.

In our society, we are taught from birth that debt is good.  Our parents were in debt - with a mortgage, credit cards, car loans, and the like.  We grew up thinking that debt was good, and we only despaired, as youth, that we could not get a loan for a car.  When I bought my first brand new car with my own money (borrowing heavily) I thought I was finally an adult!

It was only years later that I realized that I had paid far too much in interest and in collision insurance buying a new car back then.  I wasn't "lucky" to get a loan, GMAC was.

Of course, today, they hand out credit cards like candy to kids, so getting into debt is easier than ever - and more insidious than ever.  And we are nowhere trained on how to handle it.

Being in debt is not "normal" and it is the hardest thing to shake in our society.  Just as if you try to lose weight, your friends will pooh-pooh your efforts, or argue that your rational diet is "extreme" eating (hey, everyone likes to scarf down a plate of nachos, right?  Why are you being such a spoil sport?) they will also argue that your efforts at financial rationality are absurd.

From their point of view, being in debt is "normal" and having a lot of debt is just a way of life.  And the television reiterates this theme again and again, hyping low-interest loans, leases, and of course the almighty credit score.  According to the TeeVee, a salt-laden calorie-nightmare delivery pizza is a healthy meal.  According to the TeeVee, having a good credit score is the end-all to life.

And the TeeVee would be wrong, on both counts.

Many of us  are in debt up to our eyeballs, while at the same time, owning a lot of "things" and having savings.  Again, the tax code encourages us to mortgage our homes to the hilt, to get an interest deduction, while at the same time, locking up our savings in stocks through IRAs and other tax-deferred accounts.  It is a horrible strategy for investing, and other than the tax incentives involved, no rational human being would invest this way.

So in addition to the horribly normative social cues from television, our Federal Government has set up this system of incentives that basically encourages you to overeat and under-exercise, so to speak, from a financial perspective.  The tax code has the worst financial advice around, and yet most Americans chase after the tax code as some sort of rules for good living.

Shaking these normative cues and baiting attempts is not easy.  You have to sit down and think rationally about what makes sense in your own life.  Turning off the TeeVee and throwing it away is a good first step.  With cable television clattering in your head all day long, it is hard to think rationally.

Once you've made the decision to be debt-free, and by that I mean really, completely, and utterly debt-free, the rest is simple.  I started on this path a two years ago and finally reached my goal yesterday.  It was hard to do on several levels.  But the hardest thing was to swallow my pride and let go of "things" and realize what a false religion they were.

The first step was in cutting spending.  Learning to pay cash (or use a debit card) and live within a budget every month was not easy.  Getting out of debt would be hard.  Staying out of debt would be the ultimate goal.  If we were spending more than we were making, there would be no point in trying to get out of debt, if we merely got right back into it.

As I have documented in this blog, we examined nearly every aspect of our lives for spending cuts.  No area was considered a "sacred cow" and no item was too big or too small.  In fact, as it turns out, many small spending items, when added up, turned out to be significant.  As I realized, even small savings end up being huge percentages of your overall disposable income.  You might only have a few thousand dollars of discretionary spending a year.  Even $100 increases this amount by a significant percentage.

We made huge cuts in insurance costs, re-thinking our life, home, and auto policies.  We pay $36 a month for car insurance through GEICO now, by dropping collision and selling off cars.

The second step was making a plan to pay off debt.  We paid down our credit cards every month by an amount more than the minimum payment.  We charted our debt every month and made sure the total amount was decreasing, not increasing over time.  If your debt is going up, you are living beyond your means and actions need to be taken.

Combined, these two actions started chiseling away at the overall debt load.  Progress was slow, but steady.

The third, and hardest step, was getting rid of "things".  Like most middle-class Americans, we had a lot of toys to play with - cars, boats, a vacation home, etc.  If you own a hobby car or a motorcycle and also have $10,000 in credit card debt, something isn't right.  You are, in effect, financing that vehicle with the credit card.  So we sold off two boats, two cars, a pickup truck, a jeep, an antique tractor, and a number of other "things" we owned that we really were not using that much and were just depreciating assets and maintenance expenses.  This alone nearly paid off all non-mortgage debt.

The big decision for us was to sell the vacation home.  We sold it at a huge loss, but since it was "paid for" it was enough to pay off our remaining mortgage on our primary residence, leaving us entirely debt-free.

The obstacle to this was two-fold.  First, we were reluctant to "take a loss" on the house, as we had always made money on Real Estate.  In retrospect, we spend too much money improving that property (a valuable lesson!  Never over-improve a property!) and it would likely never be worth what we had invested into it, in our lifetime - or at least for a decade or more.  So instead of taking a big loss (on paper, anyway) all at once, we were opting instead to slowly bleed to death making mortgage payments for another decade.  It made no sense at all.

And yet, many folks in this economy are doing just that - hanging onto houses they want to sell, but have wildly overpriced, convinced the market will "turn around" in the next few months.  Some even dip into their retirement savings to make mortgage payments on white elephants, and that is sad, as historically, housing prices go up only a few percentage points a year, and for the next decade, that seems to be the outlook for American housing.

Making these decisions was hard - it went against the grain of American thinking and what "everybody else" is doing.  It also meant "giving up" on a lifestyle that I thought I wanted, but, as it turns out, was fun for only a few years.

So, without all the "toys" and homes and stuff, what is the advantage of being debt-free?  There are many.

First, I don't have to work as much.  I can work maybe a half-day at most, and spend the afternoon on the beach.  We can live on as little as $25,000 a year now, so our expenses are almost nil, and we can get by with far less.  In fact, we can live now on what we used to pay every year in interest expenses!

Second, if the economy worsens, I don't have to lie awake at night wondering where my next paycheck is coming from or what my home will be worth.  And given that a huge chunk of baby boomers are set to retire shortly, our economy will be headed for some interesting times in the next decade.

Third, I can afford to turn away work and fire clients that are a hassle to deal with.  This is power, plain and simple, and when you are heavily in debt, you HAVE to go to work or take on problem clients, in order to pay the bills.

Fourth, I can put more money into savings and position myself better for retirement.  This is self-explanatory.

Fifth, I am no longer chained to owning "things" and maintaining them.  This is a beautiful feeling.

I realize that for most folks, getting out of debt won't be as easy as it was for me.  I have set aside a lot of money over the years and had built up a lot of equity in Real Estate over the years.  But the overall process is the same - deciding to do it is the hardest part.

You'd be surprised how many "ordinary folks" I run into who are heavily in debt and unhappy, yet refuse to sell the Harley, because they "don't want to give up on their lifestyle" and "besides, the market for motorcycles is down".  And when you tell them they can save $100 a month by dumping cable TeeVee, they look at you like you are an alien from Mars.  "Everyone has cable!" they say.  They made a choice, and choose being in debt and consumerism over being debt-free.  The complain about being in debt, but refuse to take action to change their lives.

Like I said, deciding to be debt-free is the hardest part.  Once you REALLY make that decision (as opposed to merely whining about it) the rest is simple and falls into place over time.

Granted, for some folks, heavily in debt, the process may take longer.  For some folks, it may involve bankruptcy protection.  But getting out of debt and staying that way is vitally important to live a healthy and happy life.