It’s easy to pretend there is 100% “good” and 100% “bad” debt. But is life ever really that simple?
What if the definition of debt is a lot more personal than whether it created income or not? Whether it was secured by another asset like a car or house or whether it was unsecured like credit cards?
What if we took a closer look at what led us to debt in the first place?
Reaching financial goals with debt can be like getting to the center of a labyrinth: You go one way, take a sharp turn, find yourself on the outside, then in the center, where you get to take stock of what brought you there…
On your debt journey remember it’s possible to get through it and come out the other side transformed, with a clearer understanding of what does and does not work for you. And no, paying it off in full is not the only way. There are a variety of options available to you, as well as resources to decide on the right one.
Definitions – What are we looking at?
Debt is a way to cover a cash shortfall. In its most basic form, you borrow money from someone else and pay them interest as a “thank you” for borrowing the money. The repayment of the initial loan could be included with the interest payment, or it could be a lump sum payment at the end of a set amount of time.
The interest rate will vary depending on your credit score, whether the debt is secured, and even your zip code. Credit scores are made up of five components – you can learn more reading Who’s FICO and Why do They Have My Number? A Primer on Credit Scores.
Common examples of secured debt are auto loans and mortgages where the loan is secured by your car and home, respectively. Unsecured debt examples are credit cards and payday loans.
Why would you have a cash shortfall?
It could be because you’re waiting to get paid, you had an emergency, are making a large purchase, or just because you want to spend more than you have available. Given salary growth has been dismal since the 70s, sometimes there just is not enough to cover the costs of life. This is even worse for women and people of color.
Society can paint not paying a debt as a moral failing, as if the person who borrowed and could not pay back is always 100% at fault. Sometimes this is the case, but it can be more more complicated than that.
Be gentle with yourself when looking at your debts. If debt is unmanageable and causing a ton of stress, a good resource is Debtors Anonymous.
Without an emergency fund to cover unexpected expenses, borrowing can be the beginning of a very hard road. This often happens unconsciously with credit cards.
Without an emergency fund to cover unexpected expenses, borrowing can be the beginning of a very hard road.
This often happens unconsciously with credit cards. You buy today and hope that future you can make the payments. If future you still can’t pay, then you kick the can down the road until you get a tax refund or some other windfall or make a plan to pay it all back or…
Running out of options can be a good thing because it makes you try a different road.
A Caveat on Medical and Educational Debt
According to Physicians for a National Health Program two-thirds of US bankruptcies are linked to medical issues. Finaid.org states that student loan debt has been growing for years and total outstanding student debt is higher than credit card debt.
Could we call either of this 100% a personal issue? In other developed countries medical care and higher education are subsidized by the community.
Higher Education: As an exchange student in France the family I lived with was SHOCKED by the amount I had to pay for college. They kept asking, but isn’t it good for society for you to get educated? Why is it so expensive?
Medical Debt: In the US medical debt is particularly tragic. Few are able to make it through a medical emergency without financial repercussions.
When I was assaulted in an attempted robbery, the medical costs were over $10,000 out of pocket over eight months, even with employer provided health insurance. There was an ambulance ride, CT scans, my nose was broken, and I began to have panic attacks.
Thankfully, because I was the victim of a crime the state paid for it. But it took MONTHS to get reimbursed. What if I had not been able to pay for those costs with savings? What if I had put it on a credit card and then owed a bunch of interest?
Even as a financial planner it was very emotionally difficult to advocate for myself, when all I wanted to do was hide under the covers. I am so grateful I had the means to cover that type of emergency. I am grateful this happened in 2019 and not in 2011 when I was earning minimum wage with student loans.
Moving Out of Debt
Bari Tessler, financial therapist and author of The Art of Money, suggests we rename our debt. Say you have debt from the birth of your child, you can call it “Joshua’s landing” or whatever makes you smile. Or if after a divorce you took a trip and put it all on your credit card, you can call it “Recuperating from BS in the Bahamas”.
There’s something sweet and aware in acknowledging how we took care of ourselves when there was not enough money. Life ebbs and flows, as does our income and our debt. If today you are at a point where you cannot afford your lifestyle, be gentle as you bring changes. The change might be as small as being aware of how your debt changes (either or up ) month to month, thus being in relationship with your debt and feeling the feelings that come from it. Or you might decide to ask for help through debt consolidation, or friends and family who can help pay it off.
Bari Tessler, financial therapist and author of The Art of Money, suggests we rename our debt. There’s something sweet and aware in acknowledging how we took care of ourselves when there was not enough money.
Introducing Life Happens Funds & Bougette’s (aka Spending Plans)
As I mentioned earlier, getting into debt without an emergency fund can get ugly fast. Paying off debt without an emergency fund can also be real slippery.
An emergency fund can also be called a “life happens fund” or an “opportunity fund” or whatever you like. The general recommendation is that you hold 3 to 6 months of living expenses in cash as an emergency fund.
To build up an emergency fund you need to first create a bougette, aka spending plan. The spending plan needs to include at least minimum payments towards your debt while you build up the emergency fund.
Some people may enjoy Dave Ramsey’s “Gazelle intensity” where you send all disposable income to debt, while others like myself prefer a gentler approach. You do you boo.
It’s good to first build your reserves before moving towards paying off debt, because emergencies such as replacing car tires, can come up. By building an emergency fund of at least $1,000 you will have enough mental space to start paying off debt.
Once you have at least $1,000 you can start to make payments beyond the minimum towards debt. Plus, the act of creating an emergency fund and a bougette will grow your financial independence skills.
Two popular ways of paying off debt are the debt snowball vs the debt avalanche.
An emergency fund is more than money in the bank. It’s also your relationships – who do you lean on when things get rough? If you’re a single parent, do you have others who pick up your child when a meeting runs late? If you’re sick, is there someone who will make food for you? Living within our means includes giving and receiving in our many relationships.
Thinking in a Universe of Possibility
Now that you’ve looked at how much you can pay with your current income consider how you can INCREASE your income.
Are there things you can do to make money quickly? I always remember my grandmother saying that after my grandpa passed away she started making and selling empanadas to make ends meet. My mom’s first entrepreneurial venture was selling menudo on Sunday’s as a hangover cure for her tiny four street town. There’s been many a time when I’ve sold stuff on Craigslist and eBay when I needed cash.
Is it time to increase your rates if you’re an entrepreneur or ask for a raise if you have an employer? Consider how what you’re currently doing can be more financially supportive for you.
Can you ask your community for support? I’ve loaned and received loans from others at different times of my life at 0% interest. Be sure to do this ONLY if you feel confident the relationship can hold the financial component. Also, consider asking for gifts in a community a type of “go-fund-me”.
Paying Back in Full is Not the Only Option
There are many great non-profits who can help with unpaid debts in collection with options such as debt consolidation, debt settlements, and bankruptcy.
- Debt consolidation: This is when multiple outstanding debts are put together into one big account and the interest rate (or how much you pay to have the debt) is updated depending on your circumstance
- Debt settlement: Here the person who owes or someone helping them will call the owner of the debt (whoever you borrowed from) and settle upon the amount that will be paid. For example if you owe $15k on a credit card they might forgive it if it’s been in collections for a while and settle for an up front payment of $5k
- Bankruptcy: There are different types of bankruptcy options available depending on your situation. In this case the debts would be forgiven and your credit score (and ability to get debt in the future) will be affected.
In Philadelphia I refer clients to Clarifi, a local Consumer Credit Counseling Services center. There are centers like this across the county that that charge minimal fees to help with debt in collections and are very transparent. In Charge and Beyond Finance are other great organizations that offers support throughout the country.
Life Beyond Debt
If you are struggling because of debt, know that you are not alone. Sometimes you need to spend less, other times you need to earn more, often it’s both things. You have not failed morally. It is possible for you to move out of debt.
A Note for Historically Oppressed Communities
It’s important to note that women and BIPOC have been victims of a Jim Crow credit system.
It wasn’t until the 70s that women were able to have a credit card without a man as a cosigner. Women continue to face a gender pay gap, which is worsened for BIPOC.
Often credit interest rates are impacted by your zip code. Given how segregated the country is, this can be quickly linked to race or at the very least socioeconomic status. If you live in “working class” neighborhood your interest rate may be higher than your coworker who lives in a pricier neighborhood.
Good money management is about behaviors and changing our identity with money – growing who we see ourselves as, from someone who “just doesn’t get money” to someone growing skills to steer their money life. Be aware of this whenever debt feels like an “easy” out – remember that the house (in this case, whoever is lending you money) always wins.
We need to understand the systems we live in so that we can care for ourselves and our communities.
The key ingredients to get out of debt are a plan and consistency. The Consumer Financial Protection Bureau has great resources on paying down debt and dealing with collections issues. It may take much longer to get out of debt than it took to get in it, just remember that it is possible for you to be debt free!
Debt can be…
- Useful when you have an emergency and are able to pay it back with minimal interest
- Addictive when it gives the illusion that at some point the problem will be solved, sometime in the future
- A ball and chain when creditors are hounding you or most of your income goes towards debt payments
- A sign of hope that your education/investment/new home/business will pay off
If you are struggling with debt or simply have questions on it, please reach out. I remember making payments towards my credit card and having $32 to live on till the next paycheck two weeks away. I remember the joy of fully paying off my student loans. I remember helping my mom file bankruptcy.
I am here for you. You can set a free 30 min Heart-Centered Money Call to talk things through. There is a way out and you don’t have to do this alone.
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