Start the Decade Off Right: Pay Off Debt

Welcome to the 10s! It is unlikely this year will resemble Arthur C. Clarke’s classic science fiction novel. Rather than preparing for contact with intelligent life from another world, we could prepare for the coming years by making sure we have the tools and attitude for financial success.

Here is one way to start the decade off right: pay off debt.

Paying off debt is one of the top new year’s resolutions but resolving to get out of debt is not enough. To be successful, a plan is necessary, and that plan should be more than just the Debt Avalanche, Debt Snowball, or other methods for prioritizing your debt. The most important part of getting out of debt is identifying and solving the root cause. Simply paying off your balances solves the symptoms, but might not affect the underlying condition that is causing the problem.

People find themselves in debt for different reasons. The most talked-about cause for getting into debt is excessive spending. Here is what happens when you spend more than you earn. If your family’s income is $4,000 per month but you spend $5,000 per month, your net worth decreases every month. You can pay part of debt from your income but if you pay off more, it has to come from your savings. Once your savings is depleted you have no choice but to continue adding debt at a faster rate.

Furthermore, if you pay only the minimum balances on your credit cards, either by choice or by necessity, while still adding to your debt load, you simply will not be able to get out of debt until you change your behavior.

Spending money whether it’s to buy products, experience the best of what life has to offer, or to feed a psychological or physiological habit like drug addiction can be dangerous because for some people, it creates a good feeling. We’re designed to seek out anything that causes us to feel good, some individuals more than others. Spending itself can become a physiological habit like a drug. To solve this underlying cause, where spending it an addiction, it’s helpful to talk with a psychologist or other doctor.

In other situations, a family can find itself in debt if a source of income disappears. The loss of a job can be devastating to financial stability. For a family with one income source, when the one person generating income loses a job and can’t replace the income with a new job right away, the family must live off savings for a time. In today’s economy, many people are having hard times finding jobs, so this situation could last a long time.

When a sole job is lost, consider two things. All adults of working age in the family could look for ways to earn income even if the former sole income provider has to take a lesser job while looking for one that would fully restore income. Also, find ways to reduce living expenses.

Two-income families have a buffer. For these families, the chance of losing all income at the same time is lower than the chance for one-income families. Regardless, when there are bills to pay every month, the income needs to be there.

Another reason for getting into unmanageable debt is an expensive emergency. Medical bills, particularly when insurance won’t cover a necessary procedure, can be the cause of debt even for families who are otherwise financially capable. Sometimes, medical debt can be avoided with a solid cash emergency fund, but let’s be clear: If you are involved in a major accident after being laid off from your job and COBRA coverage has expired, or if you haven’t been able to get your own insurance coverage due to a pre-existing condition, no normal emergency fund is going to cover your $500,000 hospital bill.

You have options, such as negotiating with the hospital and looking towards charitable funds that help in these situations. Even when these options have been exhausted, you could still be saddled with several hundred thousand dollars of debt. In cases like these, the medical emergency is the root cause of debt, and theoretically an individual can return to proper financial health if the massive debt can be paid off.

Once the root causes of your debt are recognized, acknowledged, and solved, the actual process of paying off debt will be much more successful.

This article is part of a series called Start the Decade Off Right on Consumerism Commentary.

Photo credit: bartificial