Many people use credit cards for convenience when shopping. However, if you find yourself carrying a credit card balance from month to month, you may have developed a debt habit.
Becoming financially dependent on credit cards or other consumer debt will undermine your wealth and reduce your freedom. The sooner you break your habit, the sooner you will regain your financial independence and start building your wealth.
Bad habits die hard. If you want to break a debt habit, you will find it easier if you involve a trusted friend or a family member – someone you can count on for support and encouragement. This person can help you be accountable for your goal to get out of debt and stay out.
The hardest step in breaking a debt habit is admitting you have a problem. People often find it easier to blame excessive debt on circumstances beyond their control. However, you can only overcome your debt habit after you take personal responsibility for it. Once you do, you will have greater energy, drive and focus to tackle it.
You need to understand why you are in debt. Was your debt from discretionary spending (like Christmas gifts, a new car, or a luxury vacation), or was it from large medical bills or necessary, but unexpected, home or auto repairs? Spending too much on discretionary items is a very different problem to solve than getting caught with unexpected emergency expenses. A workable budget will often bring discretionary spending in line. Debt related to emergency spending may indicate the need for larger emergency reserves.
Many people cringe when I talk about budgeting because old-school budgets always focused on doing without or doing with less. Think instead about building a budget focused on the things that are most important to you. This kind of a values-based budget will leave you feeling empowered and energized, not impoverished. Where would freedom from debt rank on that list? If it ranks high enough, you will have no problem devoting the necessary resources to eliminate your debt. As you make progress on your budget you will feel a deep and growing sense of satisfaction.
Your values-based budget is one key to breaking your debt habit. Another key is your debt-elimination calendar. Across the top of a piece of paper, list the liabilities you wish to eliminate, rank ordered from left to right based on which you want to pay down first, second, third and so forth. Down the side of the paper, list the next twelve months of the year.
Starting on the far right and working left, enter the minimum monthly payment for that liability. When you get to the column furthest to the left that still has a remaining balance in it, put all the remaining money you have budgeted for debt elimination that month toward that liability. As the year progresses and you successfully pay off liabilities, the amount available to pay off the remaining liabilities increases. When you successfully eliminate a liability, give yourself room to celebrate your accomplishment—but not too much room.
The final key to breaking your debt habit is your ongoing resolve. You need to prevent overspending on discretionary items and your resolve to keep an adequate reserve for emergency expense. A values-based budget can help with both of these items. By valuing your financial freedom you will resist the urge to splurge. By building your reserves, you will be ready for whatever life throws at you.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.