The principles of avoiding debt and maintaining financial freedom are simple: spend less, save more. But to Americans who are struggling to get by financially, this formula can sometimes present a major challenge. Debt was a trigger for the financial collapse of 2008, and the resulting conditions made it harder than ever to pay-down (or avoid) debt. And although some economic factors have improved over the last few years, personal income and rates of saving generally haven’t kept pace.
The Federal Reserve Bulletin for Fall 2014 showed that debt from home loans has dropped from 2010 to 2013, but debt from student loans has grown. The overall debt burden for an American family dipped very slightly, from 74.9 percent of Americans to 74.5 percent — which is good news for the country’s bigger picture, but also means that three-quarters of Americans are still having a tough time balancing their finances.
Now that you know you’re not alone, what can you do about it?
Avoiding Debt the Old Fashioned Way
Start by saying — and creating — the B word (that's “budget”). It shouldn’t be a scary prospect, but something that gives your family greater control and a realistic idea of how much you’re spending vs. how much you have coming in. Once you've established a framework and an understanding of where your money is going, you can begin to examine areas of waste to reduce or remove entirely.
If math really isn't your strong suite, there are plenty of services and technologies out there that can give you a boost. Mint.com is one example. It's a free website (and mobile app) that can help you visualize your finances and serve as the basis for your budget. Mint provides easy to read visual representations of where you spend your money (categories include groceries, clothing, restaurants, and gas & fuel) so you can identify any areas that are out of proportion with the rest. If your "Coffee Shop" category takes up more than a tiny sliver of your pie chart, odds are you'd be better off making coffee at home and putting the remainder in savings.
Many of these services also will allow you to subscribe to helpful notifications such as "Your restaurant expenses this month have exceeded last month." This lets you know that it might be best to cook at home for a few weeks. Of course, everyone's priorities are different and one person's area of waste can be absolutely essential to someone else. Choose a platform that fits your needs, or create your own budget framework in a spreadsheet or the old fashioned way — with a pencil and some paper.
Paying-Down Existing Debt
If, like many Americans, you already have substantial debt, consider these strategies to help you start paying it down:
- Set Specific, Appealing Goals.
A.J. Smith writes on MarketWatch.com that a specific desired outcome can help motivate you and also help you get back on track if you slip up. Vague goals like “future financial freedom” are nice concepts, but may not be as easy for some to strive towards as “more money for next summer’s vacation” or “a secure nest egg.” Even “a nice retirement” can be hard to visualize if you're a young person and it’s 40 years away. Set a goal that inspires you, in direct relation to your circumstances and desires, and you improve your chances of achieving it.
- Get Used to Saying "No, thanks!"
Smith also says that people who are successful at reducing their debt become accustomed to saying "no" to offers to spend. This might mean declining when co-workers invite you to go to lunch every day or to join friends at a big concert. A simple "Thanks, but I'm trying to spend less" is a gracious and very relatable response. You can even suggest an affordable potluck, a walk in the park, or a trip to a free museum instead if you're worried about being seen as anti-social.
- Use the "Envelope System."
Daily Finance suggests putting cash for your projected expenses into separate, categorized envelopes at the start of the month. Include one for "Payment Towards Debt" and keep it sealed until it's time to pay. If you end up needing more for one area, you’ll have to take it from another envelope, like “Entertainment.” This helps you avoid turning to credit cards as an easy back-up, and lets you visualize how spending in one area can impact another – and how the money will start growing once you start turning things around.
- Ask for Help.
People who have significantly reduced their debt load will be glad to share tips and encouragement. And remember, most Americans have struggled with debt at one time or another, so asking for help doesn't mean you've failed — it means you're on the path to success!
A qualified and certified Wealth Manager is a great resource for investment recommendations, retirement planning options, and many other services that can help you clarify your goals and put yourself in the best possible position to achieve and maintain financial freedom. It's never too soon to enlist the help of an advisor, even if you're currently struggling.
What are your strategies for avoiding or paying down debt? Let us know by tweeting @Lindsey2Wealth!