How to Reduce Debt and Live within Our Means

Everyone wants to improve their quality of life.  Quality of life improves as we have less negative stress and more peace in our life.  One area of negative stress that most people have in their lives is debt and living paycheck to paycheck.  In fact, the number 1 cause of financial stress in New Mexico is “paying off debt.”  New Mexico has the third-highest unemployment rate in the nation, tied with Louisiana and Illinois, according to the Bureau of Labor Statistics. Without a steady income, residents might be relying on credit more or having trouble coming up with the cash to pay the debts they have. Sometimes people find themselves in debt because they don’t have enough income to meet the most basic needs.  Most people, however, are in debt because they spend money they don’t have on wants. 

George Clason once said, “That which each of us calls our ‘necessary expenses’ will always grow to equal our income unless we protest to the contrary.”  In other words, our expenses grow as our income grows because we believe we can spend more.  Most of us look at our income and think, “If I could only make $xxx more each month, then I would be fine.”  But, what we find out is that once we get the raise and have the extra money, we are STILL living paycheck to paycheck and barely making ends meet.  Why???  Because we don’t control our spending!  Improving our financial situation is usually more about decreased spending than increased income.

The Growth of Consumer Debt

The debt problem in the United States has grown dramatically over the past few decades. Between 1970 and 2010, the median family income in America increased 10 percent in real (or purchasing power) terms. During the same time period, total consumer debt per capita increased 119 percent in real terms. If you want a sobering picture of debt in the United States, go to www.usdebtclock.org, which projects debt in the United States in real time.  Don’t go there if you are susceptible to heart problems, because what you will see is truly heart-stopping! I visited the site on October 5, 2016 at

about 3:00 PM, and this is what I saw:

• Total Student Loan Debt: $1,386,074,261,657

• Total Credit Card Debt: $975,127,632,454

• Total Mortgage Debt: $14,108,106,892,145

• Total Personal Debt: $17,807,638,322,093

As I viewed this continually updating screen, I saw the total personal debt increase by thousands of dollars every second. Personal debt is rapidly exceeding 17 trillion dollars (a trillion is a million millions). That’s a lot! This amount translates into $54,021 of personal debt for each of the 323,281,052 people living in the United States.

The United States national debt is also growing to astronomical proportions. As of October 5, 2016, it was $19,539,926,482,257, which translates into $59,486 for each person in the United States. If you want to better understand how much debt $19 Trillion is, visit the following two sites: 1) US debt graphically depicted - http://demonocracy.info/infographics/usa/us_debt/us_debt.html and 2) How much is a trillion dollars? - https://ihtd.org/festivalguide/resources/how-much-is-a-trillion-dollars/.  Here it gives multiple examples to help you understand the value of a trillion dollars.  For example:

·       If a person’s salary is $40,000 per year it would take:

o   25 years to earn $1 Million

o   25 Thousand years to earn $1 Billion

o   25 Million years to earn $1 Trillion

So if you combine personal debt with the national debt, there is enough debt for more than $113,000 for each person in the United States. We are truly a nation of debtors—both in Washington, DC and in our own homes. So what can we do??  We discuss various solutions next.

Needs vs. Wants

Dave Ramsey said, “It is human nature to want it and want it now; it is also a sign of immaturity. Being willing to delay pleasure for a greater result is a sign of maturity. However, our culture teaches us to live for the now. “I want it!” we scream, and we can get it, if we are willing to go into debt.  Debt is a means to obtain the “I want its” before we can afford them.”  What should we do?  We need to distinguish between needs and wants.  What are our basic needs?  Basic needs are food, shelter, and clothing. But within these basic needs, we need to be modest.

·       Food IS a necessity, but going out to eat every day or eating expensive food is NOT a necessity.  We should buy healthy, inexpensive food at the grocery store to make at home and refrain from going out to eat until we are debt free and can add the extra food cost to our budget.

·       Clothing IS a necessity, but expensive outfits or additional outfits when we have enough clothing is NOT a necessity.  Can we get by with the clothing we have until we are out of consumer debt and can save and pay cash?  If we do need an item of clothing, can we purchase a good quality item at a location that is inexpensive (e.g., Walmart, Target, etc.)?  When in debt we should go by the mantra “Fix it up, wear it out, make it do or do without.”

·       Shelter IS a necessity, but it should be a modest shelter that fits easily within our budget.  Whether renting or owning, limiting the amount of our income that goes toward housing will allow us to use our finances to accomplish other financial goals.  Having a home that stretches the limits of our income, restricts our choices and ability to accomplish other worthwhile financial goals.

If we can live frugally now while we become debt free and build a reserve, later we can increase our standard of living while spending less than we earn.  Research, and common sense, shows that minimizing our expenses while attacking our consumer debt until we are debt free brings peace of mind.  We should do all we can to decrease our expenses and increase our income while becoming debt free.

Spending Leaks

What is a spending leak? A spending leak is when we spend money on wants rather than needs.  We each have multiple spending leaks every month, week, and possibly each day.  Similar to how a continual drop in a bucket will fill the bucket with water over time, spending leaks will add up to an extremely large amount over time.  Spending leaks can be candy, cigarettes, chips, soda, alcohol, vending machines, coffee (e.g., buying Starbucks vs. making it at home), newspapers, magazines, going out to eat (fast food or restaurants), unintended fees (e.g., late fees, overdraft fees, etc.), spending too much on cable, dish, cell phone, etc. (especially when we don’t use all the channels, data, etc. to the fullest), gas (when driving more than needed), and many other ways.  Spending leaks are the things that add up over time but when looking back we aren’t sure where our money went.  These leaks are severely limiting our ability to accomplish our financial goals; goals like getting out of debt, building an emergency fund, and saving to pay cash for a vacation, car, or other goal.

The only way to find out where your spending leaks are so you can redirect the money towards getting out of debt and accomplishing your other goals is to TRACK every expense over a month.  You can track your expenses by only using your checking account (debit card or checks) and/or a credit card and using the statements, you can write everything down as you spend, or you can use a tool like Mint.com.  The important thing is to track every expense, especially those expenses that are considered spending leaks.  If you are like my students (who also get to track every expense for a month), you will be AMAZED at how much you spend on going out to eat and other spending leaks.  Most of the time spending leaks add up to thousands of dollars per year!!  If you were to LIMIT (not even eliminate) your spending on these leaks, you would find the money you need to get out of debt.  Until you do this, you cannot use the excuse, “I don’t have enough money.” 

Debt-Elimination Calendar

In order to accomplish your family’s financial goals, debt elimination is imperative. What if your family is already in debt? Is there a process that can help you get out at an accelerated rate?  Thankfully, there is.  The following process is essential for debt-reduction:

1.     Recognize and accept that you have a debt problem.

2.     Stop incurring debt. Don’t buy anything else on credit. Be especially careful about using home equity to pay down debts until you have your spending under control. In the words of Will Rogers, “If you find yourself in a hole, stop digging.”

3.     Make a list of all your debts.

4.     Look for many different ways of reducing debt, not just one. Examples might include consolidating balances to a lower interest rate credit card, having a yard sale to earn money to pay down debt, taking a second or third job for a short time, or using savings to reduce debt.

5.     Organize a repayment or debt-reduction strategy, such as a debt-elimination calendar, and follow it.

Many financial planners suggest organizing debts, then paying off either the most expensive debt first or your smallest balance owed first (my preference).  With the smallest balance first approach, you see success as smaller debts are eliminated, which gives you more motivation to continue repaying your debts. Either of these methods can be helpful in eliminating debt. Most of the time, the difference is not significant, and either method will accomplish the same objective. The key is to act now!

I recommend that you set up a spreadsheet or ledger with a row for every month you will be making payments on your debts and a column for each creditor. You pay the minimum amount to all other debts and attack the first debt with the lowest balance with all extra money you have until it is paid off.  Once one debt is paid off, move that money to the next debt until it is paid off, and so on until all debts are gone.  The key is to continue applying the same total amount of money to your debts until all debts are gone.  In other words, if you were paying $1400 toward your total debt, you would continue paying $1400 toward your debt even as credit cards, cars, personal loans, student loans, etc. were paid off until your last debt is gone (yes, include your home mortgage!).  See the example below.

An excellent tool to help accomplish either debt elimination strategy is https://powerpay.org/.  This website is an easy tool that creates the elimination calendar for you and will calculate how long it will take to eliminate your debt and the overall cost savings of eliminating the debt.  For most people, it saves years of debt and thousands of dollars saved in interest.

How this Applies to YOU…

Although the Unites States is in over 19 Trillion dollars of national debt and its citizens are in 17 Trillion dollars of personal debt, YOU CAN BE DIFFERENT!!

·       Distinguish between needs and wants and identify where you can cut spending. 

·       Show greater maturity by delaying gratification by saving and paying cash or not making the purchase. 

·       Live within your means by not spending more than you earn.

·       Track your spending and minimize your spending leaks.

·       Create a debt-elimination calendar (use https://powerpay.org/ to help), attack your debt, and be debt free years earlier while saving thousands of dollars in interest payments.

The Bottom Line –

New Mexico, along with most other states, has “paying off debt” as the number 1 cause of financial stress.  We can relieve that stress by tracking our spending, identifying and plugging (reducing) our spending leaks, spend less than we earn and live within a budget, and attack our debt with the debt-reduction calendar. As we see our debt decreasing and that we are winning financially, instead of missing the spending leaks, our financial stress will go down and we’ll feel in control of our finances!  We’ll feel great that we are making progress towards our financial goals.  This will bring more peace into our lives and into our relationships and our quality of life will increase. 

To learn more about these topics, visit www.mymoney.nmsu.edu and/or contact your local extension office to talk with a Family and Consumer Science extension agent.

By: Bryce Jorgensen, PhD

Family Resource Management Specialist