debt free

Want to Win at Personal Finance? Start a Money Club

Toni Husbands — Mon, 18 Jun 2018 08:00:21 +0000

We will talk about anything. Sex. Politics. Religion. Most controversial topics are fair game in today's world of openness and authenticity, and Americans will bare our souls — as long as the topic doesn't venture into money. A 2017 report from the makers of micro-investing app Acorns found that 68 percent of respondents would rather discuss their weight than how much they had in savings.

But making progress on your money goals may require an open, honest approach to finances. And this may be as simple as starting a money club.

Money clubs are making a comeback. People are borrowing the idea of connecting with a group to improve their financial literacy. I started a money club in 2017 for that very reason. I wanted people to have a safe space to ask questions, share success stories, and find accountability to help them accomplish their financial goals. In just three months, a group of 33 women collectively paid off $35,000 of debt and added just over $7,000 in savings.

Starting a money club doesn't have to be difficult. You should, however, keep these aspects in mind to create a lasting club that serves all members well.

Identify club members

Look for people in your circle who have either expressed an interest in learning about finances, are already working toward a financial goal, or are generally open to self-improvement concepts. Keep an eye out for social media posts from friends with a personal finance focus. You might find a willing participant.

Start with your family, friends, or co-workers and then broaden your search from there. Join social media groups related to personal finance if you can't tap anyone in your immediate circle.

Remember, everyone approached may not be receptive. Money can be a very sensitive topic. A committed group of three to five people is a great starting point. Continue to reach out to those in your sphere of influence until you have a solid, yet manageable group.

Schedule meeting logistics

Everyone is busy, and adding a new activity to a packed day can be difficult for many. Consider options to host your money club in a way that doesn't complicate the members' lives. Conference calls or online video chats are a great way to fit in regular meetings. Co-workers can meet in a conference room during lunch.

You can also start a private social media group that will allow your members to stay connected between official meetings. You can check in on each other and offer quick advice or encouragement as a means to keep everyone on the straight and narrow.

Think through meeting options that will work best for everyone so it's easy to attend. Organizing the group in a way that minimizes scheduling conflicts will ensure more members stay committed for the long run.

Set group goals

Decide as a group on the desired outcomes. Are you working toward becoming better budgeters? Do you all have a debt-free finish date in mind? Outline areas that the group should focus on in addition to goals for individual members.

Establish an overall timeline, too. Limit your participation to a specific time frame and re-evaluate if the group should continue once that time frame has expired. This will force you to constantly review your progress to ensure members' needs are being met. (See also: 5-Minute Finance: Create Financial Goals)

Locate helpful resources

The internet is brimming with helpful resources on just about every financial topic imaginable. Some members may be familiar with specific books or approaches that they can bring to the table. Start with an assignment that requires each member to suggest a resource and review it together as a group. (See also: 9 Online Forums That'll Help You Reach Your Financial Goals)

Celebrate group wins

Remember to celebrate interim milestones. Encourage each member to succeed. Even a small recognition of a goal accomplished or interim good news can help keep the fuel of motivation burning. When individual members are doing well, the good news is contagious.

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This article is from Toni Husbands of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Money Moments That Should Be On Everyone's Bucket List

Paul Michael — Mon, 02 Jan 2017 10:00:07 +0000

The big house. The fancy car. The 'round-the-world vacation. When you think of a bucket list, and mention money, it's easy to start daydreaming about things that cost a fortune.

However, you don't have to have your head in the clouds to achieve a bucket list of money moments. Here are eight of the big ones. Many of them are already within your reach.

1. Becoming Debt Free

Let's start with the most obvious money moment we should all be striving for — eliminating our debt. It's certainly not easy, and it's not something that can be done quickly. This requires careful planning, a lot of willpower, and the willingness to forgo the little luxuries we all like to have in our daily lives. But, it can be done.

One way to do this is by snowballing your debt. You take the smallest debt you have, perhaps a store card or a loan, and you figure out a way to pay as much off that balance as you can each month. While you're doing this, you pay the minimum on your other debts. When that small debt has been paid off, you apply that to the next debt on your list, and just keep going. Eventually, you'll have everything paid off, including the car and the mortgage. What does "eventually" actually mean? It might be a few years, but if you stick to it, you'll achieve your goal.

2. Putting Work That You Love Ahead of Salary

All too often, we do work that doesn't really fulfill us, but gives us the money to pay the bills, save for a college fund, and go away on vacation every year. However, as we spend most of our lives working, it makes sense that the job should be one that really brings us happiness.

By following some of the advice mentioned earlier, it is possible to put salary and benefits second to job satisfaction. And when you don't need the money, the job market looks very different. Suddenly, your options are wide open. If you love working with animals, you can leave the rat race to care for dogs and cats. If you love working with children, or the elderly, you can find careers in those fields. They don't pay as much, but the rewards to your soul are much greater.

3. Building a Solid Emergency Fund

Some 50 years ago, you could start a job at a company in your youth, and with hard work and dedication, retire from that same company 40 years later. That time has passed. These days, corporations are constantly looking for ways to cut costs and give greater value to their shareholders. That means mergers, streamlining, and of course, layoffs.

When the worst happens (and it will probably happen more than once in your lifetime), you need to be adequately prepared. Experts say your emergency fund should have three to six months' living expenses in it. Some say more, especially when the economy tanks and jobs are scarce.

How do you do that, especially when you're trying to pay down debt? You need to first set a target — how much will be in the fund? Then, you need to take advantage of great interest rates, low or no-fee accounts, and apps like Acorns that invest the change from every transaction. Put a dedicated amount to one side each month, and stick to it. If that means no eating out, or no trips to the cinema, so be it. Once your fund is established, you can loosen the reins a little.

4. Creating a Last Will and Testament

Very few people like the idea of creating a will. The whole idea of planning for a life that does not have you in it is morbid to say the least. But, it's essential, especially if you have family and have specific ideas about who gets your possessions.

With a will, you can ensure that your last wishes are met. You can name an executor, who will take on the task of wrapping up your affairs. You can be very specific about who gets what, and how it is all divided. You can name a guardian for your children and pets, and a property manager. This is all very important. If you do die without a will in place, it can lead to a lot of infighting and malice. And in some cases, it can split families apart. The state will decide how to distribute your belongings, and it will not be done with the delicacy or care that you would like.

5. Earning Passive Income

Passive income is a way to earn money using little-to-no effort, usually from a business or venture you have set up yourself. Examples of passive income include earnings from rental properties, royalties from intellectual property (books, songs, software, etc.), investment portfolios, renting out tools and equipment, and even interest from lottery winnings. The latter is not something you have much control over, but everything else is achievable.

Look for ideas on ways to make lucrative money on the side without the need for a lot of regular work. It may take some serious elbow grease on the front end, but once that's established, you can sit back and watch the money come rolling in.

6. Buying Something Big With Cold, Hard Cash

This one is certainly not as important as the money moments preceding it, but it's worth aiming for. When you can buy something big (a car, a house, a boat, an RV) with cash, you have so much more power to negotiate. And you will save a staggering amount of money because you are not paying compound interest.

Let's look at a home. Cash buyers usually get a discount, and even if it's only 3%, that can mean $6,000 on a $200,000 home. So let's say the cash price is $194,000, versus the $200,000 mortgage price, and the mortgage buyer puts down 10%. Over 30 years at 4%, that $180,000 loan has become around $310,000! By paying cash up front, you are literally saving the cost of another smaller home. It's not easy, but once you pay off your debts, you can quickly accumulate income. With some savvy investing, you could one day feel the satisfaction of saying "And how much if I pay cash… right now?"

7. Negotiating a Higher Salary

Some people work hard, put in the hours, and accept the 3% raise they get each year, which barely covers the rising cost of living. Other people grab life by the throat, and get a bump in pay simply by asking for it. Before you do it, you'll need some good data on your side.

First, look at the position you are in on Salary.com and Glassdoor. What are people being paid at other companies in your area? Are you earning a competitive salary, or are you underpaid? (If you're overpaid, you may want to hold off on asking for even more…that could backfire).

Next, assemble all the reasons that you believe you are owed more money. Did you save the company a lot of money? Did you bring in new accounts? Did you work 70-hour weeks all year long? Just like buying a car, you want to do your homework. Then, call a meeting with the boss, and lay it all on the line, politely but assertively.

8. No Longer Living Paycheck to Paycheck

The number of people living paycheck-to-paycheck in America may surprise you. It's not one in four, or even half of us. No. Three out of every four Americans are struggling to make ends meet.

For many, it's a case of not being paid enough, or having crippling debt repayments. For others, it's more about bad budgeting and excessive spending. Whatever the reason, you should have a plan to get beyond living paycheck to paycheck. Have a big enough cushion in the bank to make life more comfortable. And, cut out the expenses that are dragging you down. With dedication, you could be one of those people who doesn't count the days to the next check going in the bank.

This article is from Paul Michael of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

5 Thoughts I Had After Paying Off My Credit Card Debt

Mikey Rox — Fri, 02 Sep 2016 10:00:08 +0000

I'm in my mid-30s now, financially stable, and I keep close tabs on my dough. But it wasn't always that way. It wasn't that long ago that I was reckless with my money, racking up credit card debt on a mountain of material possessions and teetering on zero in my bank account several times a month — and often overdrafting as a result. It was an awful way to live. I knew what I was doing was damaging my financial future, but I couldn't stop. After I while, I dug myself so much into debt that the only way I could afford necessary life items (like food and gas for my car) was to dig myself deeper into debt. The cycle was as vicious as they come.

Eventually, however, I was able to emerge from the quicksand of debt (many years after I maxed out my cards, mind you). My credit was completely obliterated, but at least I was able to start picking up the pieces. When I made the last payments that freed me from the chains of negative balances, I reflected on my journey. Here's what went through my mind.

1. I Did It — I Finally Did It!

Collections duped me into picking up the phone one fateful day, and, after giving me a lecture on what a terrible person I was, the lady on the line offered me a payoff deal. The deal was about half of what I owed — which was above and beyond what my spend balance was because of years of late fees and interest — but I was promised that the entire debt would be resolved if I could make the payment in full in less than 60 days.

I didn't have what I needed to pay off the debt then and there, but the offer was motivating, nonetheless. I had lived under that black cloud of debt long enough, and I wanted to take advantage of this opportunity to reboot my finances. So I saved: I cut out everything I didn't need for the next two months, picked up extra work, and I finally paid it off. I was proud of myself, and now I could look to the future without the guilt and stress of past debt holding me back.

2. I Royally Screwed My Credit Score

The celebration of being newly debt-free was short-lived. At the end of the day, even though the debt was gone, the effects of my irresponsibility lingered, namely in my very poor credit score. And I felt those effects for a long time afterward. Like when I wanted to purchase my first new car, for instance. My dad had to cosign for the car because I didn't qualify for the loan on my own — which wasn't a large one — despite having a decent-paying full-time job at the time. These ripples infiltrated many other parts of my life, too — like applying for apartments. These were hurdles I didn't anticipate, but I knew I had to do some swift thinking on how to reverse the damage.

3. How Do I Avoid Digging This Hole Again?

My number one rule post payoff was that everything gets paid on time; not a single payment will be processed late! That means that I need to have the money I need to cover these expenses in advance of the due date, and that check needs to be in the mail far enough ahead of time that it's deducted from my account before the due date. As such, I had to completely rearrange my budget and make cutbacks. I couldn't buy new clothes at the frequency at which I previously bought them, I skipped drinks with my friends, I ate out less and took my lunch to work more, I started carpooling with a friend to work, and I picked up a part-time job. These tactics combined helped me build enough reserve cash that I could be proactive about payments moving forward to avoid another dangerous situation, and it was a small step in the right direction toward an improved credit outlook.

4. No More Credit Cards for a While — Cash Only

I cut up my credit cards long before I paid them off. They were maxed out and essentially useless, and I stayed that course after the debt was paid, and even when new credit card offers were coming in, too. I would have been bonkers to take those new deals. Given my poor credit score, the interest rate on those offers were sky high, which only served as an additional warning that creditors see irresponsible people coming a mile away, and they prey on them — and I didn't want to play the willing victim anymore.

So, I committed myself to a life of cash only for about five years. I decided that if I couldn't pay for it in cash, I didn't need it. Was that self-imposed plan difficult to uphold? Absolutely it was. But — it also was arguably the single best decision I've ever made for myself.

Moving to a cash-only system helped me get a solid handle on my money, it helped me develop financial discipline, it taught me the value of being frugal, and I learned how to save for purchases that would enhance my life (and increase my income) over the long term instead of spending it on things that gave me instant gratification in the short term. Without the temptation of credit sitting idly in my wallet, I could see the bigger picture much clearer. If I couldn't afford it with the real money I had, I couldn't afford it — end of story.

5. How Can I Keep My Finances on the Straight and Narrow?

After my five-year credit card hiatus, I opened one new account to further improve my credit score. But this wasn't like the last time. I was a decade older and wiser, and I used that card for emergencies only. I also paid the bill off in full (nine times out of 10, anyway) each billing cycle. In fact, it wasn't until recently (I'd say in the last three years) that I've taken on additional cards, but not for frivolous reasons. Each card I've accepted has served a purpose, like helping to furnish an income property that I own. It comes with perks and rewards, and I have a plan in place to pay for the anticipated and purposeful purchases in advance. If I don't already have the money in the bank to pay that debt — or at least earmarked income to settle it — I don't put anything on the cards.

Credit can be beneficial if you use it the right way, but it's easy to get off track. Which is why after I've used the cards for their intended purpose, I remove them from my wallet and put them in a safe. I typically only have one card on me at any given time: The first one I accepted after my cash-only experiment, and that's enough to get me through an emergency should I need to use it.

If you've paid off significant debt, how did you feel?

This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

6 Ways Life is Wonderful When You're Debt-Free

Mikey Rox — Tue, 19 Apr 2016 10:30:10 +0000

Some people think debt is the norm rather than the exception. To each his own. Just know that this type of mindset can become dangerous, especially if you develop the habit of financing anything and everything.

Credit cards and other loans can put what you want within financial reach, but a life without debt can be rewarding. Here are six ways life is frickin' awesome when you're not burdened by a negative net worth.

1. You Have the Freedom to Work Less

The more debt you have, the more you have to work to keep up with monthly payments. Whether it's a house payment, a car payment, or credit cards, debt holds your freedom hostage and keeps you stuck in a career or job you don't like. Think of how great life could be if you had fewer bills. Rather than working a 40- or 50-hour week, you might get by working only 20 or 30 hours a week. With fewer financial pressures, you can quit a high-stress job and find satisfying work, although you might earn less.

2. You Can Retire While You're Still Young

Even if you know the importance of early retirement planning, debt can limit how much you stash for the future. Eliminating needless debt and reducing monthly expenses frees up disposable cash, allowing you to grow your retirement account faster. A sizable account might be the difference between working into your 60s and retiring young while you're still healthy and energetic. And that's not even considering how good the "everybody envies me" factor is gonna feel.

3. You Can Finally Have a "Real" Savings Account

Not only can debt-free living boost your retirement account, there's also an opportunity to grow your personal fund. Imagine what you could do with a "real" savings account. I'm not talking about $500 or $1,000, but rather tens of thousands of dollars. This is money that can be used for an emergency, home improvements, investments, or a good time. You can take a much-needed (and deserved; do you, boo!) vacation or deal with home repairs without relying on a credit card.

If you're struggling to build your personal account, be honest and consider whether your lack of savings has anything to do with debt payments eating up your extra cash. If you could eliminate $1,000 a month in debt payments (between credit cards, student loans, and automobile loans), you could save $12,000 in just one year.

4. You Will Become a Smarter Spender

I've learned something from my own experience with debt: It is easier to accumulate new debt when I already have debt. Whenever I have a zero balance on my credit card, I'm more cautious and conscious of how I spend my money and use the card. I'll second-guess or rethink the smallest purchases. It doesn't matter if it's only $5 or $10, I'll wait until I have cash to avoid using the card. But the moment I give in and use the card, I stop second-guessing myself and I continue using the card.

I've had debt discussions with others and found that some people feel the same. Maybe it's just our experiences, or maybe there's a connection between existing debt and new debt. Either way, getting rid of debt can make you more aware of your spending habits. Debt elimination can be a long process. Reflecting on the effort it took to become debt free (and the benefits) is motivation to remain debt free.

5. You Will Experience Less Financial Anxiety

Debt keeps you enslaved to a bank. And sometimes, the amount you owe can heighten your anxiety level. This might be the case if payments stretch your budget beyond a comfortable limit. If you get into hot water, you could lie awake worrying about late payments, a damaged credit score, or collection calls. On the other hand, when you live within your means and don't rely on financing, you enjoy an inner calm and better financial security. When you own your stuff outright, you don't have to worry about anybody taking your items, unless, of course, you fail to pay taxes on your home or car. Then, well, you better hide.

6. You Don't Have to Pay to Borrow

One of the best things about avoiding debt is that you avoid interest. Interest is the cost of borrowing, and most banks charge some form of interest when you take out a loan or use a credit card. The longer you carry the balance, the more interest you pay, which can add up to hundreds or thousands of dollars depending on the amount financed.

Borrowers with superb credit may qualify for 0% financing for furniture, credit cards, or automobiles. But these promotions are short-lived and only beneficial if you pay off the balance during the introductory rate period. If not, interest kicks in. In the case of financing furniture, if you miss a payment or don't pay off the balance during the promotion period, you could end up paying retroactive interest. All this equates to extra money you're spending for which you have nothing to show. A fool's game, for sure. (See also: When to Use a 0% Balance Transfer to Pay Off Credit Card Debt)

What would you do if you were debt free? Travel? Retire? Throw the party to end all parties? Let's talk about it in the comments below.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Best Money Tips: Becoming Debt Free

Ashley Jacobs — Thu, 03 Oct 2013 10:00:03 +0000

Welcome to Wise Bread's Best Money Tips Roundup! Today we found some fantastic articles on becoming debt free, the ten commandments of personal finance, and your guide to Obamacare.

Is Building an Emergency Fund Always a Good Idea?

Kentin Waits — Wed, 27 Feb 2013 11:40:22 +0000

The Great Recession of 2007 drove home the common-sense notion of being prepared. Specifically, it gave a lot of traction to the idea of having a 6-8 month emergency fund. Today, nearly every financial advisor parrots the same call — everyone everywhere should have months and months of living expenses socked away in an easily accessible account.

But is building an emergency fund always a good idea? And does the wisdom behind the advice translate to every financial situation? I don't think so. (See also: Put Off Saving for Retirement)

At the risk of sounding heretical, I humbly assert that every financial circumstance is unique and creating a hefty, low-interest, immediately-accessible emergency fund might not be the smartest way to manage your money. Here are a few situations where it just might be okay to skip scrimping and saving to build an emergency fund.

You Have High-Interest Consumer Debt

Unlike an emergency, your creditors are a sure thing. If you have credit card debt, those high interest rates will be applied month in and month out. But the interest you'll get from a bank on a savings account is something akin to not-worth-mentioning. Get more bang for your buck by paying off your credit cards first.

You Have No Retirement Savings

If you're young and trying to decide between funding a Roth IRA or 401(k) account and putting money away in case of emergency, bank on your retirement. The time horizon is long enough that you'll see real growth from compounding interest. Plus, with 401(k)'s company match and Roth IRA's tax-free growth, both types of savings vehicles can be powerful wealth producers over the long term.

You Have No Debt and Low Expenses

On the other side of the coin, if you have no debt and very low expenses, an emergency fund may not be the critical lifeline for you that it is for others. In an emergency, low overhead works in your favor and modest financial obligations can be met in a variety of ways besides a savings "super-fund." Redirect that cash toward investments that offer better long term returns.

You Have Investments That Are Accessed Easily and Without Penalty

Panicked about not having money saved for the what-ifs in life? Relax — maybe you already have an emergency fund and just don't realize it. Investment dollars that you can withdraw without penalty achieve the same goal (and may be earning a higher interest rate in the meantime).

You Have Flexible Finances

If you're financially flexible and can easily contract in the event of a temporary layoff or unforeseen income hiccup, maybe an emergency fund isn't an absolute essential. Having some serious wiggle room financially has some real rewards — and not needing a huge emergency fund is one of them.

None of this advice is meant to suggest that preparation is a bad idea. Being financially alert helps us survive, thrive, and seize amazing deals when they come our way. But bloated emergency funds, built only by ignoring other wealth producing opportunities and applied in one-size-fits-all fashion just don't make sense. In other words, sometimes the best preparation is knowing what we don't need to prepare for.

Do you have an emergency fund? Is your fund in a traditional savings account or another type of investment?

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Beyond Debt-Free: Getting By in the New Economy

Kentin Waits — Thu, 20 Jan 2011 14:00:12 +0000

For most Americans, the pinnacle of financial independence centers on some vague notion of living debt-free. This debt-free life comes either through amazing feats of financial discipline during our working years, or as a final hard-won reward in retirement. But with an economy in turmoil, the specter of increased taxes looming as state and federal government deficits mushroom, and jobs becoming more and more temporary, is living debt-free even enough anymore?

We all know the pitfalls of consumer debt, and we all strive for that sweet moment when we make our final mortgage payment. But beyond the fundamental lessons of living debt-free, how can we leverage our work, our income, and our knowledge to truly stay ahead of what appears to be an ever-more precarious financial curve? I assert that becoming debt-free is just the first in a series of steps necessary to survive in the new American economy. Here are some other points to consider:

1. Ruthlessly Examine Expenditures

Face it: Putting the credit cards on ice isn’t enough anymore. We can work to avoid debt night and day and still be hit with some unforeseen event that levels our plans. A layoff, an uninsured medical emergency, or an accident can put us back at square one (or worse) financially. Staying ahead means saving more, and saving more means carefully examining every expenditure we make, becoming savvier to nefarious marketing influences and plugging the leaks in our financial lives. Ask yourself: Is this purchase essential? Does it support my larger financial efforts, or is it simply a black hole?

2. Activate Your Passive Assets

We work so hard to afford our homes and cars, but really put no demands on those assets themselves. Why shouldn’t our largest purchases be income-producing capital investments too? As most people’s biggest purchase and highest monthly expense, homes should be put to work. Is there a room you can rent out? Could the basement or attic become a permanent separate rental unit? And your automobile — would a truck serve you better and let you accomplish more (and more cheaply) by avoiding moving or delivery expenses? Could it become a means to launch and support a small side business?

3. Leverage All Types of Capital

Capital comes in all shapes and sizes. Living beyond debt-free means appreciating and leveraging social capital (your professional network, your friends, and your neighbors), knowledge capital (your skills and expertise), and time capital. How can each of these help you add to your income or reduce your expenses?

4. Rethink Industry and Marketing Forces

America runs on consumer spending, and most consumer spending is fueled by debt. Understand how the house of cards is built and carefully step away from the card table. Though the larger economic forces at play may be unchangeable, understanding how to not get caught in the worst of it is the key to success. Simplify your life where you can and become an ambassador for simplicity and frugality for your friends and family. Recalibrating expectations during birthdays, holidays, vacations, etc. can go a long way toward a saner and smarter financial existence.

5. Differentiate Needs and Wants

Reevaluating your ideas about needs and luxuries (sometimes ruthlessly) is probably part of what helped you become debt-free in the first place. Continuing to separate needs vs. wants and keeping your eye on the larger luxuries of freedom and security is still key.

6. Become a Micro-Entrepreneur

You are more than your day job. Your skills and time can be leveraged in new and creative ways to add to your income and help you be less vulnerable to the whims of larger economic forces. What skills from your primary job can be applied as a free agent part-time? What talents do you have that might translate into freelance work?

7. Embrace Independence and Local Interdependence

In an economy built on consumer unrest and dissatisfaction, independence and self-sufficiency are subversive concepts. Realizing how little you need through careful examination, thoughtful consideration, and efficient living is nothing short of revolutionary. Try growing a portion of your own food — it’s local, organic, and virtually free. Share it with your neighbors. Learn to lend and borrow; return everything in better shape that you received it. Turn your neighbors into friends, and see how much we all already have and how independence (and friendly interdependence) can create small liberations.

As we adjust to life mid-recession and realize that the economy is much more fragile than most of us ever understood, debt-free living may become the newest marker of success and a baseline for even more personal financial security. Though harder to attain, maybe this marker of restraint, financial mindfulness, community engagement, and simple living will be how we forge ahead and collectively change the industries and practices that brought us to the edge.

This article is from Kentin Waits of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Goal Setting: Getting Out of Debt Once and For All

Nora Dunn — Tue, 16 Dec 2008 21:11:59 +0000

It is easy enough to say that you have a goal of being debt free in “x” months or years. You have crunched the numbers, and your plan is realistic and achievable. But why is it so hard to actually put into practice?

Isn’t it interesting how impatient and short-sighted we generally are? A friend of mine has gads and gads of consumer debt – the worst kind, with high interest rates and very little to show for it at the end of the day. And yet she is also the first person to whip out her credit card and dig an even deeper hole of debt in the name of “treating” herself. She is tired, she works hard, and she has been good. Time for an expensive dinner. Sadly, the expensive dinner (along with a host of other similar “treats”) will haunt her for years to come as she continues to try to get out from under this increasing pile of debt. Every time she is faced with the reality and magnitude of her arrears, it seems she makes yet another purchase to drive the stake in even further, seemingly having lost hope that she’ll ever get out of debt and figuring that at least she’ll have a good time going down in flames.

At first blush, I would say she is not motivated enough. Given enough motivation, you can truly do anything, and I believe that. (Look at the people who are maimed in car accidents, told they will never walk again, and in the face of such predictions they are walking inside of six months. Those are motivated individuals).

As a financial planner, I watched a couple with a modest income purchase and pay off a large house in five years. In the name of preaching balance in life, I constantly questioned their actions and suggested they at least diversify their savings and have the house paid off just a little bit later. But they only had eyes for a mortgage-free house, and despite logic or any other argument, they had to have it. They didn’t mind all the corner-cutting and super frugal living they had to do in order to have that house paid off, because every time they were faced with a potentially distractive “want”, they simply envisioned a mortgage-free house, and were able to keep their goals in perspective.

But I believe there is more to my friend’s debt quandary than basic motivation and goal setting. I believe the types of goals she is setting is the catalyst for her failures. What did the couple above get at the end of the day for their five years of sacrifice and effort? A mortgage-free home. That is a pretty big goal, and a reward they immediately reap the benefits of by having extra money each month which doesn’t have to go towards a mortgage. It shaped other life goals they had such as travel, retirement savings, having children, and taking career breaks.

What is my friend’s goal, and why is it not giving her that special something our mortgage-free couple had to hang on to? My friend’s goal is not lofty, and not unrealistic; it is simply to be out of debt.

But it is in the basic simplicity of the goal that my friend goes awry. What does it mean to be out of consumer debt? Not much. It is basically a “return to 0” scenario; one which doesn’t hold much excitement or reward at the end of the day. Sure – she won’t have a mass of debt hanging over her head like a dark cloud, and she will have extra money to play with that formerly serviced her debts. But it is obvious that these benefits are not strong enough to give her the proper motivation to make the sacrifices now for the benefits later.

So how do we fix this? Here are a few ways you can set financial goals that create a better sense of motivation and ultimately help you to attain them.

Shoot for the Stars, Hit the Moon

If my friend decided not only to be out of debt, but also to have a down payment saved for a house, she might have a little more pep in her step. With this new goal in mind, she isn’t focusing just on debt, debt, debt, as there is a school of thought that says as long as you focus on the negative (even if it is to eliminate it), the negative is all you will get.

Instead, she is focusing on something she can only dream of having right now: a property. When faced with that expensive dinner out she would like to have, she can focus on living in her comfortable new home, and maybe that vision will be enough to curb her appetite for impulse spending. Or maybe the focus can be having children. She wants children, but would like to be on solid financial ground before getting pregnant. If she focuses on the day she is out of debt as being the day she and her husband will try for children, she may be more successful in her debt-reduction plight. Having a vision to hang on to that is more emotionally charging than simply being out of debt can be very powerful.

Reward Yourself Along the Way

The longer-term your goal is, the harder it will be to achieve it without getting sidetracked. Hence, the bigger your debt load is, the harder it is to see the forest through the trees. So although it may initially sound counter-intuitive, create rewards that you can enjoy when you reach and surpass certain debt-reduction goals. Enjoy that nice dinner out each time you pay off – and cut up (or freeze) – a credit card. Buy that new game you want when you reach the halfway point to being debt free. Yes, this reward may involve a backwards slide initially, but if the milestone and reward you set is alluring enough, it may just be what is required to keep you on track on a course you may otherwise not have had the discipline to maintain.

Getting out of debt is the plight of many people, and the goal in and of itself is the downfall of many more. Instead of focusing on the mistakes you have made or the crappy hand life dealt you to land you in this position, try to look forward, move on, and find the silver lining. By making getting out of debt a simple by-product of a different and more exciting goal, you too can get out of debt once and for all.

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This article is from Nora Dunn of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

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