7 Ways to Avoid Debt Hell

The winners of the Savings Tips give-away are Samantha Travenor and Sheena Beaverton. Please send me an email (getgvo@gmail.com) with the word WINNER in your subject line,  your snail-mail address, and whether you’d like the Canadian or U.S. version of Debt-Free Forever and I’ll have your books out to you licketysplit.

STAY TUNED: I’ll be publishing many of the tips I received for y’all to enjoy. There were some great entries. Thanks for playing.

Going into debt is sometimes a choice. We make the choice when we buy something we can’t afford to pay for, every time we don’t bother to check to see if we have enough money in the bank to get to the end of the month, every time we waste $5. But sometimes there are life events that can contribute to pushing us into debt:   illness, widowhood, divorce. If you are managing our money wisely, those life events will be a lot less painful.

#1 Get yourself some money management skills. That’s right, money management is a skill and, unfortunately, loads of people are missing it. They fly by the seat of their pants hoping that things will turn out okay, and end up fire-fighting to stay afloat. A lack of money management skills is, perhaps, the biggest predictor of financial failure. All the credit counseling, all the bankruptcies, all the income in the world isn’t going to save your butt if you don’t take the time to figure out how to use what you’ve got to your advantage. There are rules to follow, work to put in, and self-control to be applied. It’s much easier to simply whine, “I can’t” and go happily on shooting yourself in the foot.

#2 Set up an emergency fund. Whether you bought the marketing B.S. that “a line of credit is an emergency fund” or you’re using the excuse that interest rates are pathetic and your money would just be idling, you’re deluding yourself if you don’t have an emergency fund. If you’re not willing to live on a little less now so that you’ll have a cushion set aside just in case, you’ll be pushed into Debt Hell in no time flat. With six months’ worth of essential expenses in the bank, getting sick won’t also make you financially ill. Having money in the bank means you have options.

#3 Work harder. Some people are just born lazy. Some people think that earning $14 an hour for 37.5 hours a week is just fine. It may be, if you’re prepared to live on $400 a week. But most people aren’t. They want to buy beer. They want cell phones and premium cable. They want to buy everything else their pals have. And they use the excuse that working more would take away from their Mommy or Daddy jobs. Ya know what? That’s an excuse for not wanting to work harder since many of those same people spend hours a day doing stuff that doesn’t involve their kids. Those are the hours you could be spending making more money.

#4 Keep your income and expenses even. There are people who buy a home and think they can still eat out six nights a week. And there are people who get laid off from work, become ill, or stay home to raise their children, but don’t cut back on their spending. Whether your income has gone down or you’ve made a move that sends your expenses up, if you use credit to fill the gap in your cash flow, you’re stepping onto the road to Debt Hell.

#5 Buy some insurance. Some people believe they will never get sick. It’s why people don’t bother to get critical illness insurance, disability insurance, or life insurance. Of course, you may not be the one to get sick. It may be your partner, at which point you better have some money to help pay for the things (s)he used to do. Or it may be a child or an elderly relatively that causes you to lose time off work.

#6 Talk about your money. How can you have an intimate relationship with a partner and then refuse to talk about your money? How weird is that?  You love each other enough to make a life commitment but aren’t willing to talk about how to manage your money as a team? Perhaps it is because one or both of you don’t want to be held accountable and so long as no one’s watching, you can just do whatever you want. Or maybe your self-esteem is bruised because your partner makes more and throws his/her weight around. Whatever the reason, Debt Hell is around the corner.

#7 Don’t bank on a windfall. Count all the people who aren’t saving for their retirement in this group. Ditto the people who aren’t putting money away for an emergency. And all the people buying lottery tickets instead of saving. Or the ones counting on their parents croaking and leaving them a pot of money. Like magic, money will fall into their laps and they will be able to right all their financial wrongs. Except that most people who benefit from a windfall end up in debt anyway because they never had the discipline and strategies for money management in the first place. More money isn’t the answer. Focus and a plan are.

Having a balanced financial plan is so important. Sure you can forgo one leg of your financial plan because you’re trying to make another stronger; giving up saving until your debt is repaid is the classic example. But don’t fool yourself into thinking you’ve got a balanced plan. For like a table with a weak leg, it’ll only take a little pressure in the wrong place to make the whole thing fall down go buff!

28 Responses to “7 Ways to Avoid Debt Hell”

  1. #6 was the hardest hurdle for Hubby to overcome, but I’m happy to report he’s a “we’ll always have debt, debt is normal, so why worry about paying it off” convert! He’s even started watching TDDUP (he’s really enjoying the “Home” editions. Believe me, this is a HUGE step for him; he’ll actually initiate finance discussions; music to my ears 🙂

  2. avatar Amelia Says:
    May 3, 2011 at 7:25 am

    What happens if you have an emergency that is stupendously larger than your EF and backup EF? You may be stuck with credit then. I shudder to think of that happening.

  3. I’d add #8–don’t hang out with other people in debt hell. It’s hard to make smart choices when everyone you know is doing the wrong thing.

  4. avatar Lori Geary Says:
    May 3, 2011 at 8:13 am

    great post Gail!!! i reminded myself of a few of those things this past weekend as we were out furniture shopping. i’ve wanted a bedroom suite for 8 years, we have a certain amount set aside and went to scout some out. realized that to get the quality we want, we have to save about another 1500 more. found a beautiful set and my first instinct was ‘we can pay off the rest’, but NO!!! our credit cards and our LOC are now all paid off (horray!) for the first time in 3 years, our emergency fund is growing, we have a ‘New Car savings’ account that is growing, and i don’t want to take a step backwards.

  5. @Amelia: You’d still be further ahead than if you had no EF at all! 🙂

  6. All good points, but #7 is the one that really bothers me. There is something wrong with people, and I know some, who are counting on that inheritance to rescue them from their poor planning and overspending. These same people are not being very supportive of aging parents. Just as bad is borrowing from elderly relatives with no intention of repaying the loan as the money would be part of their inheritance anyway. Better to live your life with no expectation of inheriting anything. Then if something comes your way it’s a bonus, but if everything goes to others or charity that’s fine too.

  7. avatar psychsarah Says:
    May 3, 2011 at 10:31 am

    Amelia-I agree wtih Dawn. Even though we can’t mitigate every risk, we can do what we can to remain afloat when the typical ones (e.g., sickness, job loss).

    I agree wholeheartedly about the last point too. DH’s company is supposed to pay them quarterly profit share cheques, but his boss is lackadaisical about this process (don’t get me started-it’s illegal and slimy, but there’s little to be done until DH finds something else and moves on). When he first got the job, he would expect this bonus and then be scrambling when it didn’t arrive for 6 more months. Now we assume it will never come, and if it magically appears, we’ll put it toward one of our goals.

  8. If this was my woulda shoulda coulda list #5 would be #1. I was diagnosed with an autoimmune system disorder at 21, 3 months after graduating from college and getting my first ‘real’ job. Disability insurance was the last thing on my to do list, and now they will not touch me with a 10 ft pole. These days I am struggling to find a balance with money – part of me knows I should save as much as I can for the future because I am going to need it, but the other part wants to live the life of a normal 20 something and enjoy it while I still can.

  9. @Linda – I agree, and have always found the concept of inheritances a little unsettling, in the same way that I imagine some people find talking about funerals unsettling. I hate the thought that my parents wouldn’t spend all their hard-earned money to give themselves the most care and enjoyment they can in their older age just so we can have their money later. It’s part of their generous nature, so I wouldn’t be surprised, but I really hope it’s not something they’re planning on doing.

    Re: Insurance – Gail, you’ve been an inspiration here for me, as have stories like @tracy0. I’ve got a few quotes and should be buying my disability policy soon!

    Also, this is my favorite quote of the whole post: “…they use the excuse that working more would take away from their Mommy or Daddy jobs. Ya know what? That’s an excuse for not wanting to work harder since many of those same people spend hours a day doing stuff that doesn’t involve their kids. ” I think this A LOT whenever I watch a lot of TDDUP episodes. I’m sure many people would benefit from keeping a log of just how much time/money they spend engaged with their kids, and see if it reflects what they think they spend.

  10. avatar creativeme Says:
    May 3, 2011 at 12:22 pm

    I’m stubborn with #5. I have the emergency fund, house insurance, car insurance, life insurance and a will, but other than my husband’s work-sponsored disability ins. we have nothing extra. I loathe paying for insurance as much as I loathe paying interest (I have managed to get rif of debt interest, but the insurance just gets more and more expensive!). To get the monthly cost of it down, I have my car and house deductibles at the upper limit.

    The thing that blows my mind is how many people really are counting on the windfall, or beleive they “deserve” the luxuries on an average wage. It’s pure madness.

  11. avatar Suzanne Says:
    May 3, 2011 at 12:26 pm

    I am living the nightmare at this moment – several broken bones last year used up any sick time at work, and 12 weeks of EI. Returning to my full and part time jobs for four months earned me enough hours to start another EI claim when I had knee surgery in January. No EF in place to speak of, as I am a late Gail ‘convert’, and the bones issues took care of that. I tried to find a Disability Insurance to no avail (I am in my 50’s), although I have LTD coverage at the full time job. Management is ill-equipped to advise about the procedure tho, telling me: #1- the waiting period was 6 months, its 119 days; #2 – “Wait and see”, when the application actually has to be filed 8 WEEKS prior to the waiting period being fulfilled; #3 – “I guess you have to go on Welfare” when I asked what one was to do between the 15 week EI entitlement and the 6 month waiting period for LTD. The knee was in worse shape than they thought, the recovery has been brutally painful and slow, EI runs out end of May, and LTD waiting period will be met in the middle of May. I JUST got the paperwork to apply for LTD, having found out that when I return to work on reduced hours in early June, LTD will supplement my wages to equal full time hours! This is a Godsend, but I am annoyed that my management team at work could/did not tell me any of this in time to make for a smooth transition. I worried that I would have to go back full hours and risk hurting myself again, resulting in the waiting period having to start over. GWL has been advised, and tells me to get the paperwork in – I hope that means they will put a rush on it! For those of you who have insurance/EF’s, double check everything. I have Account Balance Disability Coverage on my CC – the knee surgery was a direct result of the broken ankle, which happened 6 months prior to surgery – making the disability a “Pre-existing Condition”, and I was denied. My truck loan is covered, but the paperwork still has not been processed, now the fellow is on holidays, and I can expect that to take another 3 weeks! I will use that $2,000 worth of truck payments to get through the delay with LTD, because once again, I will be back to work before the insurance kicks in. On the up side, I bet I didn’t spend more than $50/month on groceries during all this time due to a well stocked pantry! If you think you have all your ducks in a row, double check that one of them isn’t a goose – surprises while trying to recuperate from anything triples the stress load, making recovery harder. Trust me, I found that out the hard way…

  12. avatar Elizabeth A Says:
    May 3, 2011 at 12:45 pm

    Really enjoyed the article today, and the posts, thanks so much!

    Suzanne, you can’t appeal that the ankle and knee are connected? I did that on an insurance policy and won the appeal. It’s so complicated to be off your game, isn’t it?

    My knee surgery has taken 4 months for me to be more or less normal, and I was happy to have “money management skills” during that time. I would have been so fretful about what wasn’t being done without a budget, etc. Things took longer than normal to do and I got behind on posting and such but at least when you are used to the process you have a plan.

  13. I usually agree with you Gail, but I’m going to disagree with you on #3 here. Sure, if you’re in debt you need to work hard in order to get out of debt. But if you’re not in debt, and have savings and an emergency fund, then working harder in order to be able to afford things like cable TV, name brand clothing, a second car, or whatever else is on your list of wants is totally up to you.

    Personally, I’m trying to go for a life where I work less and consume less. Part of that is so that I can spend more time with my kids. Do I spend all of my spare time playing imaginatively with my kids? Of course not. However, I think there’s great value in the quantity of time we spend together – even if that time is spent doing nothing. I understand that this may not be how others choose to live, but I don’t think that it’s an irresponsible or wrong thing to do and I certainly don’t think it makes me “lazy”.

  14. avatar Suzanne Says:
    May 3, 2011 at 2:08 pm

    Elizabeth – the ankle and knee being connected is the problem! I didn’t have the credit card when I broke the ankle and signed up for the Acct Balance Coverage. Since I knew that I would need knee surgery (whenever the hospital had a spot for me) because of the fall that broke the ankle, and it was within the 6 months previous to getting the card/insurance, it is ‘deemed’ pre-existing. I called the Ins. Co. and argued with them, since they can pretty much rule out most conditions as pre-existing, and doubting the value of having the insurance. I then called the CC company and explained the situation; they were surprisingly compassionate, and to help me out offered to deem me a ‘Hardship Case”, meaning I do not have to make a payment in May, nor are they going to charge any interest! I thought that was pretty decent of them. I am, however, going to double check the fine print and see if I can find grounds for an appeal – can’t hurt to try, right? In the meantime, I know that I am up for a total knee replacement in the future, so I have a definite ‘heads-up’ to get rid of the goose and get my ducks in a row more effectively, as soon as I get back to work and on my feet, such as they are, lol

  15. @Jane

    Gail says in Point #3 “Some people are just born lazy. Some people think that earning $14 an hour for 37.5 hours a week is just fine. It may be, if you’re prepared to live on $400 a week.”

    You are obviously prepared to live on a smaller amount. She never called anyone willing to live on less “lazy”.

    I work my butt off now, but the plan is to retire early and live on what most people would consider a pittance. Then do nothing but paint, sculpt and read until I am so happy I explode. Kiss the cellphone good bye (cursed blackberry!), kiss goodbye to the Bluetooths, laptops, and the rest of the necessary evils I have to have now to earn a living.

    My life will be so simple, it will hurt others just to think about it.

  16. What else besides a liquid savings account would constitute a EF?

  17. I’d get super excited about saving money! Just like there is a quick hit from spending on crap, introduce a reward when you get to your savings goal! I have a nice dinner with my family. It’s what makes me happy.

  18. Re inheritance. With people living longer these days, medical expenses are more and go on for longer. I am assuming my parents house will have to be sold to pay for medical/nursing home expenses for them. Contrary to getting an inheritance, I assume I will end up financially supporting them to some extent in the next 15 years. I am putting a small amount of money away for this future eventuality.

  19. Tess you are a wonderful example to adult children every where.

    My grand children were eight and ten when they told me what they would get when we pass on…and people think kids don’t pay attention to what is said in the home.

    It’s a horrible feeling when one realizes their kids are just waiting for them to pass on

  20. Dave – I really wish I felt the same way about saving. For me, it’s much easier to spend than to save. I find I don’t make money quick enough.

    That being said, when I find myself weakening I look at my budget again, look at my savings goal line graph, grab a Gail book, read this blog or watch TDDUP reruns. Sort of to remind myself why I’m saving.

    Point #7 pushed some of my buttons and I like point #3.

    Work hard, save for your future, live within your means. What I’ve learned is that you can offer up all the excuses in the world (and people do) for not working hard, but they are just wasting precious time. I feel like saying keep your excuses in your throat, purse your lips together, get your butt in gear and do it!

    My parents’ money belongs solely to my parents. They are hard working intelligent people and I am grateful to be their daughter. They had me and my brother at a young age and I know it wasn’t easy for them raising us. I do not want anything from them but their love and when they get older I want to be there to help. I really like that Tess is putting some money aside to be in a better position to help her parents.

  21. As an insurance advisor I agree whole heartidly with number 5.

    I hear this all the time (especially younger people). I’m young, i’m not going to get sick. It won’t happen to me… it happens to everyone else, but not me.

    I can’t keep stressing to clients there is no harm in having a conversation with an advisor. With a good reputable advisor, they will educate you on your options and the risks you have without it. You cannot make an informed decision if you do not have the information.

    Having a conversation with a good advisor is not tedious. It can be an enlighting situation which they will help guide you on the correct path into your future.

  22. […] Gail Vaz-Oxlade suggests 7 ways to avoid debt hell. […]

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  24. I don’t know about Canadians but here in the States folks like to live on other people’s money. They just keep borrowing with no end in sight.

  25. […] 7 Ways to Avoid Debt Hell Debt really is hell and should be avoided if at all possible in every situation. Here are some ways to help. [Gail Vaz-Oxlade] […]

  26. I’d say that managing debt is as important, if not more, than avoiding it. People take on debt when they buy their home. If they learn how to manage this debt, it could be better than avoiding debt in other areas. It’s why I tell people to not pay off their home. Equity isn’t safe, liquid, or interest earning. It puts the power into the banks hands and out of yours. Many pay more and more each month and it just gets riskier and riskier.

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