Reduce Debt, Increase Your Worth

Eric Fanelli*, a Manhattan therapist and artist, knows all about debt and the limitations it imposes emotionally and financially. He found himself with $50,000 in credit-card debt—not once, but twice. “Both times, I had a drop in income and used my credit cards to pay for necessities,” he says. Seeing a pattern he didn’t wish to repeat, Fanelli had to come to terms with how he got into trouble with money, find a way to reduce his debt and ensure that it didn’t happen again.

If you’re in trouble with credit cards, student loans or other debt, you’re not alone. In fact, the average debt per U.S. household is about $9,882, according to Cardtrak.com.

Debt can come from many sources. While we hear a lot about credit-card debt, co-signing of loans, mortgage debt and car repossessions are very popular ways to get into trouble. “In today’s society, a lot of people would argue that it’s not possible [to owe nothing],” says Steve Bucci, columnist for Bankrate.com and president of Money Management International Financial Education Foundation, a nonprofit organization that operates to educate the general public on sound personal financial skills and money-management principles. “They will always have to carry some sort of a car loan or a personal loan.” In addition, student loans are becoming more common as the cost of education rises. Even if you can’t get down to zero debt, getting things under control is a big step. Reducing debt is a huge concern in our personal sphere, yet there can be reluctance, shame and difficulty in admitting that you need debt help.

It’s important to gain your esteem not from buying things but from finding a deeper sense of happiness and fulfillment that, trite as it sounds, money can’t buy. Getting to the root of why you buy can help you in taking the next steps toward reducing and eliminating debt from your life.

Examining your relationship with money may bring up some difficult emotions, but the first 30 days of reducing debt are also about developing some empowering new habits and starting down a path to financial freedom. While it may seem stressful now, coming into a place where you can realistically regard your situation will help you reduce debt and increase not just your financial worth, but your esteem as well.

Feeling Your Debt

Money has a strong emotional component, and making the decision to reduce debt can be draining at the outset. “It’s not uncommon for people feel overwhelmed when they realize they’re in over their heads, even [feel] shame,” says Lynnette Khalfani-Cox, a best-selling author of numerous books on personal finance, including Zero Debt: The Ultimate Guide to Financial Freedom. “By the time they hit rock bottom, they feel a sense of despair.”

Many people go “unconscious” when it comes to money. Eric ignored his situation for too long and hit his low point when he was served with an eviction notice for his apartment. He says, “The money wasn’t coming in, but I wasn’t functioning any differently. The credit cards seemed like play money, and I went into total denial.” Eric eventually came to the conclusion that credit cards could no longer be a part of his life, and eventually made his way back from debt.

Khalfani-Cox says the biggest shock for most people is when they realize in that first month they can totally transform their financial picture. “Then, a huge sense of relief, triumph and empowerment comes,” she says. “They think, ‘Wow! I got myself into this, but I can get myself out, too.’” It can be an exhilarating feeling.

People often create an identity based on their ability to buy things or take care of others financially. Admitting you need debt help can be a humbling, yet empowering, experience. Mary Hunt, an author, speaker and founder of Debtproofliving.com, says that many people discover this identity only after they begin to reduce debt and live within their means.

Hunt personally dug her way out of $100,000 of unsecured debt before she made a career of helping others debt-proof their lives. “To actually take the credit cards out of my wallet was like pulling out something of myself,” she says. “People often don’t understand the grip those cards have on them.” Hunt recommends people avoid over-analyzing the emotional component the first month because it can sabotage their efforts. Instead, she advises people feel everything fully and work through the emotions. Then, you’ll be ready to move forward and create a plan for getting out of debt.

A Plan to Reduce Debt

While some people get into debt for emotional reasons, others simply lack knowledge and skills surrounding finances. The first practical step in reducing debt is to stop accumulating it. While many experts no longer advise closing accounts because it negatively affects credit scores, it’s important to remove credit cards from your immediate possession or, better yet, cut them up.

If you’re in debt, you may not have a handle on where your money goes. Simply writing down every cent you spend for the first 30 days can enlighten you and lead to better spending habits. Hunt recommends using cold hard cash for 24 to 36 months, rather than a debit card. “Turning over a $100 bill at Wal-Mart is really hard, but swiping a debit card for $99.43 doesn’t seem like anything,” she says.

Getting organized and developing a budget is crucial as you endeavor to reduce debt. Make sure it’s a plan you can live with in the long term, and that you don’t completely deprive yourself of the things you enjoy. If budgeted expenses exceed your income, cut your expenses. Conversely, selling things, getting a second job or examining tax withholding can increase income to help with expenses.

When taking steps to reduce debt, whether it’s loans or credit cards that have you maxed out, the plan you create doesn’t have to be fancy. Shari Potter* of Washington D.C. used a notebook to track her expenses and develop a budget. At 29, Shari quit her full-time job to attend graduate school and lived off her student loans and credit cards. Upon graduation, she found herself with $110,000 in student loans and more than $20,000 in credit-card debt.

Shari had no knowledge of financial planning but developed a logical game plan. “If my salary was $3,000 [per month], I paid almost all of it to bills and continued to live on peanut butter,” she says. Shari got a bare-bones phone plan and did without as much as she could. She paid off her smallest bills first, because it gives the quickest emotional rewards. As she continued to pay off her credit cards over the next two years, Shari also worked to have old items removed from her credit report. “My credit score began skyrocketing,” she says. “It was miraculous to watch.”

As you plan to reduce debt, examine what the biggest problem is before developing a strategy. “If you’re nearly maxed out on certain cards, reduce those balances first,” suggests Khalfani-Cox. Exorbitant interest rates aren’t the thing ailing most consumers, she says. It’s the 30% of their credit score that’s based on the amount of their available credit they’ve used up. “If you’re paying default interest rates, you should pay off those cards first. But if your problem is being maxed out, pay those first,” she adds.

If you have debt from multiple sources, you’ll have to prioritize what to pay first until you get back on your feet. Bucci stresses that with mortgages, once you’re late, it’s very hard to catch up, and you quickly risk going into foreclosure. “You should pay no bill before your mortgage, with the possible exception of your car payment,” he says, noting that many people need a car to keep their job.

As you begin to formulate and use your plan to reduce debt, you should also set aside a small amount for unexpected expenses so that you don’t fall back into old habits. Without an emergency fund, many people have no choice but to revert to credit cards when a medical crisis, home repair or other unexpected issue comes up. By planning ahead, you’ll be able to stick to your goals more easily.

Finding Debt Help

There are many resources available to help you develop new money habits during the first 30 days and beyond. Bucci says people should seek out help in whatever way is right for them. “Some people like to sit one-on-one with a counselor, some enjoy the anonymous support of an online community and others prefer books,” he says.

Bucci recommends credit-counseling (or “debt-repayment”) services, but says it’s important to do research. “Make sure it’s a non-profit,” he says. “And ask if the agency and counselors are accredited by an independent-standards organization.” Bucci says the advantages to using a credit-counseling service are getting a clear picture of the situation and having debt “brought current,” meaning removal of late fees and past-due status.

There’s a big difference between credit-counseling and a “debt-settlement” agency, a service that is heavily advertised on television. Debt-settlement companies have you stop paying your creditors, and communicate with them on your behalf. Meanwhile, you pay a monthly fee to the company. Then, when enough monthly payments have accumulated, they call your creditor and offer to settle your debt. While it may seem like a relief to have creditors off your back, using this option is risky, as the credit-card company may or may not settle, and the debt-settlement agency will have taken a portion of your “savings” as their fee. In addition, you will almost certainly ruin your credit.

To find reputable professional support, check out the US Department of Justice’s web site for a list of approved providers, and don’t rule out personal support as well. Eric turned to Debtors Anonymous for support and found permanent healing. “I was able to share my feelings and admit I had a problem controlling my spending with people who had been through the same experience,” he says.

In addition to Debtors Anonymous, psychotherapy may be helpful for some people, especially if there is a deeper issue, like gambling, fueling the debt. But many people find support via online communities. “The internet is open 24/7,” says Hunt. “People can go online and realize they’re not in this alone.” Finding a message board at a reputable site, such as MSN Money or Hunt’s site, can provide moral support and practical advice. And of course, you may simply want to talk to a trusted friend, who can help keep you accountable as you work to reduce debt and live more freely.

Living Debt-Free

Reducing or eliminating debt will require long-term changes and self-discipline, but it’s definitely possible. “I realized that I had a problem,” Eric says. His landlord was very kind and worked with him to avoid eviction. He received money from a city program that allowed him to pay his back rent. Eric says what amazed him was how his income soared once he got control of his money. “Once I released my old beliefs—that someone would always rescue me—money started flowing into my life,” he says. He accumulated substantial savings and then called his creditors and negotiated lump-sum payoff amounts. Today, he is debt-free with $25,000 in savings.

Shari paid off her consumer debt and continued to live below her means to allow herself to build up savings. She saved $52,000 over a two-year period and was able to purchase the home of her dreams. In just four years, Shari has amassed an emergency fund, which she continually builds, and owns mutual-fund shares and stocks. (She continues to make student-loan payments each month.) “My goal is to have three months of mortgage saved and $10,000 in emergency savings,” says Shari, who used most of her funds to put down a payment on the home. “My ultimate goal is to invest more.”

While complete debt relief for you may seem very far away, the first 30 days of reducing debt are your stepping-stones to becoming free from the burden of being a borrower. By working through your emotions, finding support and making practical changes, it is possible for you to turn things around and take control to eliminate your debt completely.


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