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How Can We Really Get Out of Debt?

03/02/2015 02:54 pm ET | Updated May 02, 2015

Question: What is the Secret to Getting Out of Debt?

Dear Steve,

My husband and I have been limping along just breaking even for sometime now just trying to dig ourselves out of debt and save money. We've cut everything back to the minimum and have to constantly tell our kids to do without. I can't even afford for them to get invited to a friends birthday party or participate in some school event.

I feel like such a failure and feel guilty I can't do more for my kids. My husband and I seem to be fighting more about money these days.

What is the secret to getting out of debt?

Susan

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Answer:

Dear Susan,

I can certainly understand how the struggle to deal with debt can feel like a long grinding journey in your life.

The reality is that getting out of debt doesn't take a textbook of advice. The formula is quite simple; just adjust your life to spend less than you make after your expenses. It would also be wise to include regular savings and retirement savings as part of those mandatory expenses.

Creditors won't often let you pay what you can realistically afford and instead insist on what they demand.

I've seen far too many people tumble back into money troubles because they used all available funds to pay down debt but had to use credit again to pay for an unexpected emergency like car trouble or an unexpected home repair because they had no savings.

Dealing with debt is complicated because it is more about perceptions and emotions than it is about math. In fact there is an entire intellectual field of study about the illogical actions we take when it comes to dealing with money; behavioral economics.

If you spend a great deal of time studying the hidden influences of money you will learn how easily people can be subconsciously manipulated to make illogical financial choices based on the science retailers use or good old fashioned peer pressure.

I have always found it interesting that tactics like a faint cookie smell pumped in dressing rooms causes stores to sell more sweaters in the fall. However, the most perplexing group mentality that constantly leaves me scratching my head is why people in financial trouble spend so much time trying to repair the past rather than addressing the real demands of making sure they are prepared for tomorrow.

There are entire industries which exist to persuade people that getting angry about their debt, and spending the next few years repaying it, is the moral thing to do. While repayment works for some people, for countless others it just does not make mathematical sense and leaves them significantly more exposed to a worse financial future. Keep reading, just because that statement seems counterintuitive does not make it wrong.

So Susan, ultimately the best way for you to get out of debt is going to be for you and your husband to take a deep breath and spend some time in contemplative introspection. Ask yourselves if you have a greater financially responsibility to your future old, unemployed, and potentially sick 80-year-old selves, a duty to provide a financial safety net for you and your children today, or to abandon logic and set yourself up for significant risk by just breaking even each month on your current path without getting ahead or saving for the future.

If you decide your financial future is more important than the past then we need to look at altering your current equation. You will either need to reliably and consistently increase your income, reduce your expenses, or do a combination of both.

If you can increase your income to a point where you can take advantage of the maximum retirement and matching contribution your employer may provide, save money each month in an emergency fund and reduce your debt, then maybe that's worth considering.

If that's not a realistic option then maybe it is time to look at debt intervention through the only solution that gives you legal power over your creditors, bankruptcy.

Sometimes the decision for people really comes down to whether they feel doing without and living a dangerous financial life for years is more moral than setting themselves up for future financial success. Often math and logic are at odds with emotional comfort and assumptions.

Only you can decide how you want to tackle your debt. I hope that you make that choice based on reality and not assumptions about what makes the most sense as told to you by others, including myself.

Before I go I wanted to leave you with three easy action items you jump on right now to address your situation. Just click here.

Steve

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