Debt? What debt?
Funny thing, debt. The more familiar you are with it, the less scary it seems.
Some people get to a point where they owe so much, worrying about it seems pointless. What’s another thousand dollars for a winter getaway, you think. I’m only young once!
If you’re really deep in the hole, you might not even know you’re in trouble. Your denial skills are so finely honed, you’ve got owing money down to a science. Chances are, whenever you do wake up, it will be with a gasp.
Lynnette Khalfani knows where you’re coming from. A former Wall Street Journal reporter for CNBC who now works as a money coach, Khalfani learned about debt — and denial — the hard way: through personal experience. She racked up more than $100,000 in debt before coming to her senses and digging herself out. In her book, “Zero Debt: The Ultimate Guide to Financial Freedom,” she outlines a 30-day action plan to help debtors get back on track.
Dealing with debt is a two-step process, Khalfani said. The first part is realizing you have a problem, and the second part is figuring out the mechanics of how you’re going to solve it. Unfortunately, people can exist in denial for a very long time.
If you’re a well-behaved debtor, and you make payments on time, you won’t have bill collectors chasing you down and calling you at work. In fact, your mailbox may be full of offers for more credit. To top it off, if you have a reasonably high income level, you probably feel comfortable, like everything is OK. That’s where the problem starts, Khalfani said.
“People are living in this quasi-safe zone, but it’s really a danger zone,” Khalfani said. “And you won’t spot it or know you’re in it until one bad thing trips you up. You lose your job, your spouse loses their job, you get sick and have medical bills, you go through a divorce and then you realize how precarious your situation has been.”
The standard for whether you have a debt problem isn’t whether your credit cards are maxed out, Khalfani said. It’s other things: Fighting with your partner about money, losing sleep or stressing about how you’ll pay bills, juggling payments because you don’t have enough to meet your obligations and constantly moving big balances to new cards to take advantage of temporarily low teaser rates. Transferring balances feels proactive and can help if you do it right, but doing it too often can damage your credit.
Khalfani says she slid into debt by simply living beyond her means. The irony was that as a business journalist, she considered herself savvy about money. And in many ways she was; she had life insurance, a cash cushion, 529 college savings plans for the kids and she invested regularly in her 401(k) retirement fund.
But when it came to credit and debt, she was not in control. For Khalfani, the epiphany was subtle. She knew she was carrying a lot of debt, but ultimately what made her address it was vanity: She was denied credit because her debt-to-income ratio had gotten too high, and her credit score had plunged. That’s when she realized it was time to end her ride on the credit roller coaster. She wrote down every debt she had and tallied the total, and was shocked to find the number topped $100,000.
“That was the final straw. I said, ‘this is beyond ridiculous,”’ Khalfani recalls. “To overcome really overwhelming debt, sometimes you have to downsize in areas of your life where you would otherwise prefer not to.”
For her, that meant switching the kids to a less expensive school, slashing spending and tripling her credit card payments. There are lots of ways to exit the credit maze; many experts recommend paying off higher interest debt first. But if you owe money on lots of cards, you might find more satisfaction in reducing the total number of outstanding accounts. The important thing is to find a strategy that keeps you motivated — and to recognize the quirks in your money personality.
“People have to do what works for them,” Khalfani said. “There is no one-size-fits-all strategy when it comes to being debt-free.”