The federal government’s search for a solution to its mounting debt burden continues to dominate the news. It also has prompted many Americans to scrutinize their own budgets.
A Dose of Reality
“The nation’s debt situation has been a good wake-up call,” says Scott Halliwell, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. He says nearly a third of the questions he receives from members in Ask USAA with Scott Halliwell are about credit or debt.
His message is simple: Just because you can borrow money doesn’t mean you should.
“Live your life in a way that minimizes your need to take on debt. That means living on less than you make and — when debt is necessary — using less of it than lenders are willing to give you,” says Halliwell.
That’s something USAA member Nikki Tracht learned the hard way. Just seven months ago, her family’s debt had climbed to nearly $350,000 — not counting the family’s home mortgage. So she and her husband sat down and created their first budget ever.
“We’ve been married almost 10 years, but we had never made a point of figuring out where our money was going,” Tracht admits.
But they didn’t just make a budget, they stuck to it. And after just seven months and the sale of an unprofitable rental home, the couple’s debt is down to $131,000. And with more than $30,000 of their personal debt paid down since October, their “debt ceiling” continues to fall.
“If I can help one other person make a change for the better with their finances, it would all be worth it,” Tracht says.
Strategies for Balancing Your Budget
Unlike the U.S. government, “you and I don’t have the luxury of being regarded as the financial ‘big dog’ on the block,” says J.J. Montanaro, a CERTIFIED FINANCIAL PLANNER™ practitioner at USAA. “We can’t borrow seemingly without limits or repercussions, so ultimately the buck stops right on our own doorstep when it comes to managing our budget and balance sheet.”
With that in mind, we spoke to USAA members across the country to come up with a half dozen real-life ways to lower your reliance on credit and strengthen your ability to pay down your debt.
1. Spend extra money on credit card and loan balances. Tracht calculated her family’s household necessities and now applies any leftover money toward bills. “The first time you pay something off, when you’re actively trying, is just a fantastic feeling,” she says. “It’s like, ‘Why have I been holding on to this bill forever?'”
She makes minimum payments on all bills except the one with the lowest balance; all the money that’s left goes to that. Each summer, when her kids head to grandma’s house, she takes the money she normally would spend on daycare and pays down her credit card bill.
2. Selling (or returning) what you’re not using. Since a penny earned can be a penny that fights debt, many members report selling their surplus items online. Tracht, for example, says she recently sold a CD changer on Amazon.com for $100.
That money went toward her ever-shrinking credit card bill. And she took a giant bite out of her debt by selling a rarely used second home and trading an expensive truck for a decade-old Honda.
“It made me a little sad to get rid of my truck,” she said. “But I wasn’t as sad once that $384 payment each month went to another bill.”
3. Freeze your credit — literally. Member Jessica Otieno of Atlanta froze her spending on frivolous items by sticking her credit card in water and stowing it in the freezer. “I figure if it’s something I really need, it will be there in a few hours when I need it,” Otieno says. “And for now it’s locked out of my mind, so it’s not such an easy temptation.”
She made the decision after talking with a USAA financial advisor on the phone. “He got me thinking,” she says. “Put a little bit of money in a separate account, just a little bit, so you can go into that for the little extra costs — birthday gifts and so on — instead of turning to credit.”
4. Lower your rates. Reducing your interest rates and changing your W-4 withholding can quickly add up. For Chad Holden, all it took was a phone call to lower the interest rate on his credit card. “I talked to a USAA rep on the phone,” he says. “She was very helpful in telling me how to transfer my credit debt so I could get a lower interest rate.” And here’s the bonus: Lowering your interest rates while aggressively paying down debt helps you to eliminate it even faster.
Instead of waiting for an income-tax refund, Tracht decided to make good use of that money now. “I’m adjusting my W-4s so I get more back each month to pay debts,” Tracht explains. By paying more now instead of later, she’s not only whittling away her bills, she’s paying less in interest.
5. Take a look at your bank statement(s) for any monthly auto-debited financial commitments. Consider what you can cancel, at least until your debt is paid down. That may mean doing without storage units, gym memberships, book and wine clubs, music downloads and in-car navigation.
“We’ve cut off cable in the past if we’ve had to do without,” says USAA member Treva Tribit. “Whatever it takes … so that we don’t go into debt.”
6. Don’t spend it unless you have it. Tribit, who grew up in a military family, and her husband were forced to adopt this philosophy in 2007. Their newly blended family of 10 had to cut back any way they could.
She and her spouse took on multiple jobs, while Treva “did all the couponing to try to save every dime on everything, especially groceries,” she says.
They also downsized and moved to a smaller place. “We knew it wasn’t forever, so we rented,” she explains. “And we refinanced our one car loan to one with a lower rate with USAA during that time. And we’re just about ready to pay that totally off.
“We only had about $300 extra per month, but we started putting that to the side and continued living just very carefully,” she says. In 2010, they had enough to buy a home.
“We couldn’t completely pay cash,” Tribit says, “but we paid a lot of the upfront costs and brought in a 10% down payment. We bought just enough home where a couple of the kids share a bedroom, but it’s definitely not extravagant by any means.” Now, she says, they stick to the philosophy passed down from their parents: If you don’t have the money, live without it.
Make Your Debts History
Apply the lessons the government is learning to your own life, advises Montanaro.
“Use the hoopla over Washington’s failings to manage your own financial future,” he says. “Sit down today and lay out a budget, a budget where inflows exceed outflows and outflows include saving for life’s emergencies … and your long-term goals. Develop or follow through with your plan to eliminate debt — don’t increase your personal debt ceiling. Use our government’s struggles to motivate your own actions.”