Having Trouble with the Debt Cycle? Stop Agreeing to More Debt!

In the wake of a menacing recession, U.S. consumers seem to be at a crossroads in debt accumulation and pay-off. While many households have spent the past few years paying off consumer debt, some are seeing a stronger economy and lower unemployment rates as a sign that it is safe to borrow again (despite all of the strides we’ve made in frugality, DIY, and living on less than you make). To bring this reality to the forefront, The Huffington Post reported that consumers borrowed $2.75 trillion in October 2012 — a number that represents an all-time high in America.

the debt cycle

Many consumers feel that debt is a cruel cycle that seems to be inevitable for some, yet completely avoidable for others. I can’t count the number of times I’ve been told that “you’ll always have a car payment.” However, reality is that no one should have to be a slave to debt for the rest of his or her life.

Despite that being the case, there unfortunately isn’t a magic potion or quick fix; but with time and persistence, anyone can end the debt cycle for good.

Make a Plan to Pay-Off Existing Debt

Regardless of how much debt a consumer has — whether $1,000 or $100,000 — there is always a way out of it.

There are many strategies for paying off debt, including some that recommend tackling accounts with the highest interest rates first. While this may be most financially beneficial, financial expert, Dave Ramsey, suggests that it may not be the most effective way to successfully tackle personal debts.

Instead, Ramsey suggests a “debt snowball” plan that requires borrowers to pay minimums to all accounts except the one with the lowest balance. Each month, extra funds are used to pay off the lowest balance account until it is paid in full. Then, the money that was once used to pay down that account will be coupled with the minimum payment on the next lowest balance to pay it off as well. This technique provides borrowers with small debt pay-off victories until eventually, all debts are paid in full.

Stop Acquiring More Debt

While most discussions around the personal finance community (it’s even been a prevalent topic here over the past 45 days) center around these debt payoff strategies, consumers forget one of the most fundamental aspects of paying down debt: you have to stop accruing debt before you can pay it all off!

Old habits die hard. Most consumers do not rack up tens of thousands of dollars in debt overnight. Instead, borrowing becomes a lifestyle in which using plastic to pay for both wants and needs is an acceptable practice. In order to break the debt cycle, consumers must first learn how to stop acquiring more debt:

  • Stop charging to credit cards
  • Stop financing large purchases that cannot be paid for in cash
  • Create a budget that balances every month
  • Establish a liquid savings account that can be accessed for unexpected expenses

A Popular Trap: New Car Purchases

One of the easiest ways consumers get into debt is by purchasing a vehicle. These large purchases seem like needs, but far too often buyers spend more than necessary on a new car. Often, consumers are also led to believe that the costs associated with auto repairs and maintenance are disproportionate to the cost of purchasing a new vehicle. However, all things considered, including payments, interest, DMV fees and higher insurance costs, purchasing a newer vehicle is rarely more affordable than keeping one that is paid off.

Cars are assets that depreciate in value, which is why consumers should put less money in to vehicle purchases and more money into assets that typically increase in value, such as real estate and/or investing in the stock market.

However, consumers who are ready to upgrade — perhaps in an effort to achieve better gas mileage or to purchase a vehicle for a young driver — should try to avoid financing if possible. If that is not possible, personal finance expert, Suze Orman, emphasizes the importance of refusing to finance a vehicle for more than three years. According to Orman, a vehicle that must be financed longer than 36 months is a vehicle that the buyer cannot afford. While we’ve paid cash for each of our recent vehicles, I realize that’s not possible for everybody out there. With that in mind, it is important to shop for rates with multiple banks and lenders before making a purchase. With the help of a car loan calculator, a buyer can easily determine how much car he or she can afford according to these terms.

Protect Against the Unknown

The final step to slaying debt once and for all is gaining financial protection against the unknown. According to Bankrate.com, reduced income, medical expenses and failure to save are among the top seven reasons consumers fall into debt.

To prevent debt accumulation from a sudden reduction or loss of income, make sure you maintain a significant emergency fund! Here at WSL we suggest having around $2k-5k in cash reserves while you’re working your way out of debt. Once you’ve slayed the debt cycle, then ramp it up to a full 6 months of living expenses and you’ll have a good chance of avoiding the debt cycle if anything were to (eventually) go wrong.

Why don’t more consumers try to avoid car payments? Have you gone further into debt even though you’ve been trying to pay it off? Why might that be?

Picture by FreeDigitalPhotos.

About the Author

By , on Feb 21, 2013
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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{15 Comments}

  1. I have trouble getting ENOUGH debt. I want MORE debt.

    Why? I can earn money on borrowed funds at a greater rate then it costs me.

    Why would I throw away free money?

  2. Just because borrowing costs are at all time lows doesn’t mean you own the money you’re borrowing, and it still means you’re paying on top of the cost of whatever you’re ‘buying’ with someone elses money. My bank and credit card company keep sending me information of how easy it is to go deep into debt. They can forget it, I’m not buying what they’re selling. I expect my bank to grow my savings and they can earn their money that way, not from trying to get me to make massive loans.

  3. Lawrence says:

    Avoiding unnecessary purchases will somehow help to get the financial freedom that you’re aiming for next to a determined pay-off debt game plan. It’s important to consider paying all the credits one at a time, even at slow phase just to make sure that you’re doing it the right way. Seeking for assistance might also apply to avoid confusion and hesitations.

  4. Chris says:

    The car trap caught me out it’s easy to justify a shiny new car payment! Stick with an old banger, it gives you so much more financial freedom!

  5. Once our car payment is paid off in May, we plan on taking the money we were using for it and putting into savings towards paying for the next car. If we can work out staying with one car for another 3 years, we will be able to buy the next one with cash.

  6. Laurie says:

    Andy, love this post, especially about the new car gig! I’ve been taking notice of the new car commercials lately, and they seem more entrancing than ever before. People have got to stop being deceiving into believing that debt, in any form, is ok!

  7. I hate payments. People need to think of actual cost of owning, not whether you can make the payment. Unfortunately you can make payments on anything, tires, plastic surgery, furniture. We did it for years, but each debt that we pay off that ends a payment is like a weight off our backs. I can’t wait until they are all gone.

  8. You got that right! Stop getting into more debt. It’s the hardest part. Throwing away the cards is not enough…it’s behavior behavior behavior. Thanks for this!

  9. It’s amazing what people think they can buy if they can “afford” the payments. Like you said, I think our society has had taught us that payments are “normal”. Problem is everybody, is maxed out in payments.

  10. That’s it Andy, unfortunately if you want to pay off debt you have to stop acquiring it so your lifestyle is inevitably going to take a hit. Once you’ve paid the debt off though, your new lifestyle will be better than it ever was free from interest payments and the worry of debt! Great post & Great advice!

  11. Dave Brennan says:

    I use a system where I put a certain amount per mile into a savings account. That savings is used to cover all non-fuel expenses, including replacing the vehicle. For fuel, I just buy it as an ongoing expense like everyone else.

    About once a month, I enter the current mileages and the non-fuel expenses for both cars into a spreadsheet. It calculates the miles travelled and multiplies it by the cost per mile. It then subtracts the amount spent during the month and displays a final amount.

    If the final amount is positive, I deposit it in the savings account. If it is negative, I withdraw that amount. When I make a major repair or a purchase, I withdraw the amount from the auto savings account before I make the purchase.

    If the per mile amount in too low or high, it needs to be adjusted. If you keep records, you can look at your expenses and mileage for the last year and make a preliminary guess.
    A benefit that I did not expect is that I know what it costs to drive the average mile. Since I know how many miles per gallon I get, the per mile gas cost is easy to calculate. I add the non-fuel cost per mile and I know how much it costs per mile. If I make a trip, I budget to put the money for those miles into the auto account.
    This account helps to decide whether to fix the transmission or buy a newer car. For me, the question of financing a car is answered.

  12. Jose says:

    If you pay off debt only to see an ocean of empty credit cards that need filling again, then there is fundamentally something wrong with your approach to your finances. I have fallen into that trap in the past. Get a few cards paid off and feel good about it and then somewhere in my mind, I get a signal to make a purchase that I shouldn’t make and use one of the paid off cards to do it. I’m not making those kinds of mistakes anymore but definitely understand how easy it is to fall into that trap. The same can be said about debt consolidation. If your going to wipe out your credit card debt with a fat consolidation loan and then are going to start the credit card cycle again. Then your better off not getting a consolidation and dealing with the credit card debt you started with.

  13. The most important step, in my opinion, is to stop acquiring debt. You can never get out of a hole if you are constantly digging it deeper. Great post!

  14. One point you talk about is to stop accruing more debt before you pay off what you already have. I know one family who has consolidated all their debts into one and now it’s a smaller payment but are going out and spending more. It’s a vicious cycle that people get into and unless they put their foot down will continue to do until the options are limited to the inevitable.

  15. A few years ago we got a car payment because we thought we could afford the payment and we didn’t realize that we could afford the car. We have since learned our lesson and now we have two cars that we paid cash for :)

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