After the economic stress caused by the pandemic and 12 months of soaring inflation, the debt burden of American households is increasing. According to a recent survey by the Federal Reserve of New York, American households have an average of $161,749 in debt, including mortgages, home equity lines of credit, credit cards, car loans and other debt. consumption – a jump of 6.2% compared to a year ago. .
If you’ve found yourself taking on more debt, now is the time to take a stand for your financial independence. Debt is one of the greatest threats to financial independence. While a mortgage can be helpful if it’s properly matched to your income, consumer debt and the interest you pay on it is a daunting task.
Albert Einstein said: “Those who understand [compound interest], earn it; those who don’t, pay for it. A more pointed indictment of consumer debt was given by J. Reuben Clark who said, “Interest never sleeps, gets sick, or dies; he never goes to the hospital; it operates on Sundays and public holidays; he never takes a vacation. … Once in debt, interest is your companion every minute of the day and night; you cannot avoid it or walk away from it; you cannot reject it; he yields neither to supplications, nor to requests, nor to orders; and every time you get in his way or cross his course or fail to meet his demands, he crushes you.
If you want to be financially independent, you need to understand some hard facts:
1. Consumer debt is the enemy of financial independence.
2. Those who entice you with buy-it-now, pay-later programs are trying to destroy your financial independence.
3. Choosing to live beyond your means is an act of self-betrayal.
When you buy on credit, you become subject to what I call the debtor’s paradox, a situation in which buyers are actually sellers. In the debtor’s paradox, debtors sell their financial freedom – something of enormous value – in exchange for things of insignificant value. Some people may think I’m being too dramatic about this, but anyone who’s dealt with serious debt issues understands what I’m talking about. Granted, it’s a matter of degree, but any degree of consumer debt diminishes your independence.
Living within your means may require you to be more in control of your spending. You may need to eliminate certain purchases that have become part of your daily spending habits. For example, how often do you go out for lunch? How often do you stop at Starbucks on your way to work? Do you have a gym membership that you don’t use? What type of cable TV subscription do you have? What’s in your grocery cart? These are small things, but they add up quickly.
While you’re getting your spending under control, you’ll also need to have a clear view of the debt you’re in. You can do this by making a list of every penny you owe. This list will include every credit card, every car loan, every medical bill – everything you owe anyone. For each loan on your list, indicate the outstanding balance, interest rate, and minimum monthly payment.
Once you have a complete list of your debts, decide how much money you will set aside each month to pay off your debt. I call this your ransom fund because it is the money you will pay each month to buy your freedom. The larger your ransom fund, the faster you will gain financial independence. If possible, the ransom fund should be at least double your total minimum monthly payments.
Every month, you will systematically use your ransom fund to repay your loans. Your first step will be to take money from your ransom fund and pay the minimum monthly payment for each loan. You will then take the remaining money in your ransom fund and apply it to your smaller loan balance. Repeat this every month until this loan is paid off. Once it is repaid, add the minimum payment for that loan to the ransom fund and continue the process as before. As each loan is repaid, the ransom fund grows and the repayment rate accelerates. If you follow this process and maintain your spending discipline, you will be surprised how quickly you will regain your financial independence.
Steven C. Merrell is a partner at Monterey Private Wealth Inc., an independent wealth management firm in Monterey. He welcomes your questions regarding investments, taxes, retirement or estate planning. Send questions to Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to smerrell@montereypw.com.
