Image by xJasonRogersx via Flickr
The average U.S. household spends $1.22 for every $1 it earns, according to research from Northwestern Mutual. That’s a recipe for a lifetime of debt. Yet, many of us spend well beyond our means. This is an area I know about all too well, because for many years I was a very big spender. That’s a part of my life and personality that I have to carefully manage, even now.
How I Got Out of $100,000 in Credit Card Debt
I count myself very fortunate. I once had just over $100,000 in credit card debt, and now I have Zero Debt. When I say I have Zero Debt, I should clarify that: I no longer have any credit card bills – the worst form of “bad” debt. I still have a mortgage. Fortunately, I’ve managed to pay off the loans I had from undergraduate and graduate school. All were at interest rates below 6%. Mortgage debt and college financing are “good” debt. A home is the foundation for wealth building and can be leveraged for investment purposes. Debt associated with your home has tax advantages, as well. My graduate school education at the University of Southern California – even the loans that financed my Master of Arts degree from USC – represented an investment in my future. Having an advanced degree has afforded me greater earnings over the years.
With regard to my $100,000-plus credit card debt, though, I am pleased to say that I have paid off everything I owed to creditors. What may be even more startling to most people is that I paid my debts without credit counseling, without enrolling in any debt management program, and without resorting to bankruptcy. What I did do was educate myself, read the fine print on my agreements, and get smart about my use of credit. I was also lucky, very lucky, that I didn’t get a single negative mark on my credit file even when I had so much debt.
Ultimately, I paid what I owed – in full and with interest. The interest I shelled out – many thousands of dollars – was the price I paid for overspending and racking up debt, year after year.
Being In Debt Denial
When I reflect on my debt, I realize now I was very much in denial. I definitely had a debt problem for years. But I was one of those people who would never admit it. After all, I was a financial journalist. I knew a lot about making money, saving it, and investing it. In fact, I was doing a lot of the right things economically – like socking away pre-tax earnings in my 401(k) every year, putting aside money for my kids’ college education, protecting my family with life insurance, and so on. To top it off, I had a nice six-figure salary. So in my head, the fact that I’d amassed this huge $100,000 in debt was somehow okay. Of course, I know now that it was anything but okay.
I ran up large amounts of debts in several ways. First, I made poor choices with my money, mainly in that my family lived a lifestyle that, in truth, exceeded our income level at the time. We traveled whenever we wanted to, frequently bought gifts and gave money to people, paid for an expensive private school for my children, purchased any kind of electronics or gadgets we wanted, and so forth. I rationalized that the things I was buying were the things my family needed. The reality is that it was mainly just stuff we wanted.
Living beyond our means caused us to also use credit to pay for our normal monthly bills from time to time. But a big chunk of my credit card debt came, believe it or not, from a single big-ticket purchase. In 2001, I bought two plots of land for $37,500 at a city auction. My plan was to quickly build a few multi-family homes on the land, sell the properties and net $150,000 bucks. To acquire the land quickly, I didn’t bother with getting bank financing or a construction loan. Instead, I just got cash advances from my credit cards and those handy checks that credit card companies sent me, month after month. I figured any financing charges I paid would ultimately be worth it. I even convinced myself that I “owned” the land outright – simply because no bank held a mortgage on the property. Well, it’s true that I was the owner, on paper, but it was the credit cards that really financed the purchase.
To make a long story short, the “quick” real estate deal I envisioned never happened. But the debt remained. To get rid of it, I started negotiating for lower interest rates, paying aggressively on my credit card bills and immediately turning over to my creditors any “extra” money I received.
Downsizing Hits Home
In early 2003, I lost my six-figure television job as a Wall Street Journal reporter for CNBC. Like millions of others in corporate America, I, too, was laid off in a cost-cutting move. (Remember the five Dreaded D’s – Downsizing, Death, Divorce, Disability and Disease – that I told you could throw your finances awry or exacerbate existing problems?)
Even after my layoff, I didn’t rein in my spending. In fact, my spending increased dramatically because I launched my own business and spent $100,000 funding it in 2003. This time, though, I primarily used my savings. But even amid my downsizing, I didn’t go deeper in debt. I’d spent three years managing that debt, negotiating with creditors and paying big chunks of money to drastically reduce about $70,000 worth of credit card bills. It wasn’t until early 2004 that I paid off the last of all my debts in full thanks to – can you guess? – that real estate investment I made back in 2001. Turns out buying the land was a smart investment, after all, just not in a way that I’d ever imagined. I never built a thing on it. But the land alone shot up in value and I received $200,000 for it from a cash buyer – more than five times what I paid for it.
So, yes, I’m a Zero Debt convert now, a zealot you might say. But to get here, I’ve paid a high price for over-spending and for racking up large amounts of debts in the past. For instance, because I wasn’t really adding to my debts in 2003 and 2004, I tapped other forms of available funds – and in my case it was hard-earned savings. I took $80,000, for example, out of my 401(k) plan – a money mistake I’d never advise anyone else to make.
Next – Day 16: Scrutinize Your Spending (Part 2)
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Lynnette is a personal finance expert, author and speaker.