I was listening to a clip of a Joe Rogan podcast the other day where he pointed out something interesting. Joe said we would like to think that we all make independent decisions and go through life deciding everything ourselves, but the fact of the matter is that we are strongly influenced by our environment. If you want to change your life, you have to be conscious of this and take a look at the people around you.

This made me note the fact that I am around high earning, highly educated and financially sophisticated people much of the day and this skews my view as to what people want to hear. If you take a look back on some of my older posts you will see that some of the topics were pretty advanced personal finance topics like using optimal leverage, macro levels of investment grade debt and a potential short of GE stock. I enjoy writing about these topics but I also have to take into account that there is only a very select audience that is interested in these topics and have the specialized knowledge to fully grasp them. I plan to move away from these topics but realized that there is a knowledge gap for some of my readers that I would like to fill. I am more than willing to help friends and readers on any financial topics that my opinion can help with. I noticed however, that many of the questions I have been receiving have been very basic financial questions. In order to help out those readers, I have been dedicating my last few posts to my point of view on basic topics like saving and investing.

After speaking with more readers, I realized that for some, even saving and investing are advanced topics. When it comes to personal finance, many people are not starting out from the ground floor, they are starting out from the basement. What I mean by this is, some people are not starting to tackle their finances from a point where they have little or no debt, no credit and no savings but rather they are starting from an even worse position: little cash and a large amount of debt that they need to dig themselves out of. Just take a look at the chart I came across which showed that based off of the average consumer expenditure, half of America spends more than it makes.

Source: Deutsche Bank

Maybe it’s not as bad as we think though. As of 2018, the average household debt is about $50,000 but most of this is made up of mortgage debt.

Source: American Banker

Mortgage debt is not the bad debt that you necessarily want to get rid of as fast as possible since it supports an asset that has the chance to increase in value. It’s the debt that backs an asset that is decreasing in value, like a car, or the debt not backed by anything that you want to attack first like credit cards or student loans.

Before you even prioritize getting out of debt, I think you need to prepare yourself mentally to get out of debt just like you do for saving. It’s easy to look at debt and be overwhelmed but being overwhelmed is an emotion like any other and it isn’t going to help you deal with the problem. Instead, confronting your debt and starting to take a systematic approach is the first step towards becoming debt free and then saving.

Start Thinking Differently About Debt

Paying Off Debt = Savings – A basic question I often receive is: should I put money aside to save or should I pay off my debt? This kind of depends. If you are young and looking at a mountain of high interest debt, it may make more sense to pay off your debt as quickly as you can. However, if you have matching for a 401(k) not saving up to that point is like throwing away money as well. Likewise if you are close to retirement age, you should be prioritizing savings. The answer will really depend on your particular circumstance.

This is the kind of conundrum a lot of people in debt face and there aren’t always straight forward answers when it comes to things like retirement savings. What you have to keep in mind is that paying off debt is a form of saving because it will allow you to eventually earn more in the future. So in a way, you can look at debt as putting away future savings. Retirement is just another form of saving but getting ahold of your debt situation and doing something about it is the first step and will allow you to tackle retirement with more vigor at some point down the road, even if you just have to put away a minimum amount for now. I usually advise people to put something towards retirement no matter their age but focus now on changing habits to tackle debt in the short term.

Current Debt Steals From Your Future Income– Due to interest on your current debt, every dollar you don’t pay down now, is taking away from the dollars you make tomorrow. To give a simple example, with a 5% interest rate on something like student loans, every dollar not paid down today will mean you earn about 95 cents on the dollar you make a year from now. I would rather have all of my future money come to me as opposed to giving a chunk of it away to someone else. So another way to look at it is that when you pay down your debt, you increase your future earnings. Who doesn’t like a raise?

Paying Off Debt Develops the Habits Needed to Save and Become Wealthy– If you grow accustomed to paying off debt, once you do pay off that debt you don’t need to change your lifestyle. You can simply keep the same lifestyle you had before and start to save that emergency fund and eventually an investment fund. The key is the habits. Just like in one of my recent posts about saving, many of the reasons people don’t save are the same reasons they end up in debt. Of course there are unforeseen circumstances that can change our financial situation in an instant: a sudden death in the family, a health emergency or a job loss. The majority of us however, really don’t have much of an excuse and we end up in difficult situations not by chance, but because we have developed poor habits in regards to our daily financial decisions. These decisions led us on a long slow path downwards towards debt. One of those key habits I mentioned in my post about saving was developing a strong self confidence to fight the affliction that I believe plagues many people today: trying to convince others you are well off or keeping up with the Joneses. This leads me to my next point.

You Can’t Care What People Think– Paying off debt is likely going to mean cutting some things out of your life. You may not be able to get new clothes for a while, you may not be able to buy the latest iPhone, you may have to fix up your car instead of getting a new one. With each of these, you have to keep in mind that material things are not the long term determinant of your happiness, only you are responsible for that. Key to achieving this happiness is to let go of having the newest and the latest and not caring what others think about it. I often turn people down who want to go out to the bar and party. What do I say to them? I can’t afford it, plain and simple. Just be frank, be honest. Yes people may laugh and yes people may tease you but I can guarantee that at least some of those people are going home broke themselves after that night of partying. They are just trying to escape their own problems and they want to pull you down with them, misery loves company. Don’t get dragged down by temptations like these.

Have Patience – Most importantly throughout paying down debt is to develop patience. Patience is going to be the key towards the long slog of paying down debt and eventually starting to save. Keep yourself from getting distracted by the constant consumer culture media, what friends or family say you should do with your money and the temptations of the habits that led you to being in debt. Paying off debt is great practice towards getting rich. It develops the discipline, patience and goal orientation needed to take your savings and your well being to the next level.

Finally, an Exercise

If you find yourself in debt now, it’s time for you to focus, maybe work those extra hours or take that side job. It may take cutting out some luxuries in your lifestyle that you didn’t even realize were luxuries. One exercise I learned from a bankruptcy attorney was to write down every time you spend money, write down how much you spent and what you spent it on. Do this for a month and at the end of the month take a look at your list. Then go through the list and cross out everything you don’t need. You may surprise yourself on what you find in this list and how easily we waste money on small things that really don’t matter in the course of our lives.

Step it up so that you can get out of the hole and begin to build your financial life. There are more than enough opportunities out there to achieve it, but in the end it starts with you.

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