My Debt Quest

Almost every Personal Finance Blog out there has a "Get out of debt plan." There are debt snowballs, snowflakes, debt reduction plans, named plans, unnamed plans, my plans, your plans, commercialized plans, etc. Although it seems a waste for all of those blogs to write about the same subject, the harsh reality is that consumer debt is the number one problem for personal finances.

The first step in forming any plan is to identify the specifics of the problem. To this end, in March, I wrote about my plan for Getting Out of Debt - Step 1: How I got there in the first place. Now that I figured out where I went wrong, I can start looking at ways to fix it:

In the face of an increasing debt, I need to stop adding debt before I can eliminate the debt.

Committing to a credit-free lifestyle has one huge potential pitfall -- loss of motivation, resulting in failure of the plan. One of my goals as I pay off my debt is to make sure that I maintain a lifestyle that I enjoy so I don't lose the desire to push forward with my debt-reduction. With this in mind, I also realize that any decision to spend money, whether with cash or credit, will delay my progress towards being debt-free.

I needed to find ways to support my lifestyle choices -- clothing, household goods, entertainment, food, etc. -- without using credit. This meant that instead of spending money that I had yet to earn, I had to reverse the trend and instead spend money that I had already earned.

To accomplish this, I opened a couple of savings accounts: an account at ING Direct for longer-term savings and an account with my bank, USAA, for shorter-term savings. Each pay-period, I transferred money into each savings account as soon as my paycheck posted, before I could even consider the money in my account balance. Before long, the USAA account was funded to $500, may target balance, and the ING account continues to fund each pay-period. Whenever I decide to make a purchase, I can transfer the money from the savings account into my checking account. Essentially, the savings accounts become my own line of credit to myself. Instead of spending as much as 14% APR on a credit card, the loan to myself is less than 1.5% APR, or the current interest rate for the savings account.

For the first time in my life, I have funds in reserve for unexpected expenses like auto service, medical bills, etc., and I can still cover any planned personal purchases without using credit.

I've been in debt for a long time. I've made so many mistakes with money that I doubt I should even be here offering advice to others on how to get out of debt, particularly since I'm still in debt myself. However, as I've mentioned before, the reality is this blog is more for my own benefit than anyone elses. As the saying goes, sometimes the best way to learn is to teach. In this case, I certainly hope that saying applies far more than the related saying, those who can do and those who can't teach.

I am a math and science geek. I am analytical, I love numbers and formulas, and I'm good at problem-solving. I figure this makes me uniquely qualified to figure out how to get myself out of debt. Once I decided that it was time to get out of debt, I approached it like any other problem - starting with determining the root cause.

The root cause of my debt: Spending more than I earn.

Of course, I didn't intentionally run out to spend more money than I earned. It just happened. I got my first credit card during orientation week at college. I barely used it initially, and when I did, usually to buy something online, I paid it off right away. Somewhere along the way, I decided that I really wanted something and didn't have the cash available right away. I don't even remember what that first credit purchase was, which speaks volumes about the actual value of that purchase, but I do know that I convinced myself that I would just buy it now and pay it off over the next few pay periods. In doing so, I opened Pandora's Box.

With the balance of that first purchase sitting on my credit card, I used the same faulty logic over and over again, each time telling myself that I would just pay the credit card balance down - not today, but soon. I still made payments on the card every month, always more than the minimum payment, but always less than the remaining balance. My definition of "soon" kept growing and growing.

It wasn't enough that I slowly ran the balance up on my first credit card. As the balance crept up, so did my credit limit. I started getting offers from other credit cards offering rewards and points and miles, and before too long I fell for one of them, leaving me with a second card that allowed me to dig further into debt.

With two credit cards running a balance, I finally realized that I had to do something. I consolidated the balances from the two cards into a personal line of credit for the simplicity of one low monthly payment. Those were the exact words of the advertisement that I naively allowed to entice me. With both credit cards cleared and a new personal line of credit carrying the balance, I still failed to see the light. I ran up the balance on the credit cards again.

The theme through those years is consistent - instant gratification, poor planning, lack of concern for the future, and an overriding failure to consider any logic or common sense. I spent more money than I earned, all the while thinking that I was somehow making good decisions as I moved the debt from one credit card to another.

Step 1: How I got there in the first place
1. Spent more than I earned.
2. Believed that credit card offers were there for my benefit.
3. Never looked at the big picture of credit card debt.
4. Failed to consider the impact of credit card debt on my future financial health.