(Why not skip to the “fun stuff?”)

As a financial advisor, it’s fun for me to focus on the exciting things: investments, wealth creation, real estate, and income. I talk and write about all of these extensively. What’s equally important, though, is building a strong foundation from which to explore these exciting financial topics. That strong foundation starts with understanding debt, avoiding unnecessary debt, and building a safety net to protect us from unexpected expenses that can lead to debt. Investments are fun. Making money is fun. Debt is not. But, for many, it needs to be dealt with first.

Debt is a four-letter word—both literally and figuratively. It’s easy to get into and often difficult to get out of. Difficult, yes. Impossible, no. The problem is that many of us simply weren’t taught a) how to avoid getting too deep into debt and b) how to get out once we’re there. It’s this lack of a fundamental framework that leaves us feeling like we’re in quicksand instead of being at the bottom of a series of achievable steps.

Step One – Stop Digging
Debt is the result of spending money that we don’t have. So long as that keeps happening, the debt keeps growing. Step one of getting out of debt is to stop the behavior that got us there. For many, this means eliminating the use of credit cards. For others, it means ripping those home equity line checks in half. It means physically destroying the means by which we spend more than we have, and, by doing so, altering the behavior of overspending. There are tools of all shapes and sizes that can assist in this endeavor and none of them are a one-size-fits-all panacea. I’ve seen everything from a legal pad to an iPhone budgeting app do the trick.

Step Two – Build a Safety Net
Not everyone in debt is there because they routinely spend more than they have. Many simply had an unexpected (or unbudgeted) one-time expense; think heat pump, car repair, ER visit, etc. These weren’t extravagant expenses—they were one of life’s curve balls that resulted in debt. How do we prevent this from happening again? We don’t. But we do prepare for it. That’s where cash savings comes into play. This is your boring old savings account. Boring, that is, until life happens and it comes to the rescue. Building a cash safety net is what can prevent us from going further into debt.

Step Three – Tackle Your Existing Debts
Once the behavior and mechanisms that lead to debt have been stopped and a safety net has started to build, it’s time to start eliminating debt balances already in place. There are multiple methods to accomplish this end. There’s the popular psychology-based approach of the “debt snowball”—tackling debts from smallest to largest and rolling up the payments of the eliminated debts to the next smallest until they’re all gone. There’s the mathematical “always the highest interest rate first” approach. Both can work—and so can others, and you may have to experiment to find which helps you make the most progress.

Step Four – Reinforce Your Progress
Debts are shrinking, not growing. Expenses are less than income. Cash is building. This is a happy place, but it’s only the beginning of a strong financial foundation. Once enough cash is in place for those unexpected “life happens” events, it’s time to start saving towards future purchase goals. Accomplish your financial goals such as car purchases and home additions by setting aside cash, over-time, to pay for them. Once you do this you will have gone full circle from worrying about debt payments to being able to fund your life out-of-pocket.

Disclaimer: This article is generalized in nature and should not be considered personalized financial, legal, or tax advice. All information and ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.


By John N. Hall, CFP® (Millennials on the Move 2018)

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