2014: Declaring the Debt End Game
Making Goals is easy...
New years are a time for new goals. Goals are important after all. Most people who seriously adopt philosophies to repeatedly overachieve their incomes have and regularly revise them. Thankfully, we are by nature optimistic people and so we continue through life automatically harboring some vision of what we'd like to see come to fruition. The task left is to simply assign some definitions to those daydreams tucked inside of us and thus creating measurable building blocks.
You want to retire “comfortable” for instance, right? I would have to assume that is a widely shared desire for a lot of us and for most of us under 60, it's about as far as we get regarding our long term goals.. But what is comfortable? Though the numbers for each of us will be drastically different, the premise is universally the same: saving money to mellow the inevitable turbulence involved in permanently reducing income while dealing with elevated inflation, medical costs and leisure to fight boredom on that great never ending vacation ahead.
It really does end sort of like it begins
Remember kindergarten? Sea of wide eyed kids more or less bonded solely by geography. Way back before all of life's ruthless division. Advanced reading group vs. beginner. Shop vs. chemistry. University vs. trades. McMansion vs. bungalo, and so on and so on. Nothing in this life will ever restore the purity and innocence of being there and then however, the distribution methodology of social security can sure come close to lumping us all back together in a similar group for the long haul.
A tool I often use with clients is the estimated benefit income calculator through the Social Security Administration. Sure, it's really simple and the figures that compose an actual award amount are anything but however, it provides one with a pretty good idea of what they can expect as it currently exists. For instance, using my date of birth (I am 36) and estimating retirement at age 67, I played with numbers on varying levels of income and further compared monthly net now (70% of gross across the board) with the monthly amount through social security.
$25,000 annual salary $1458 est net $1141 est ss amount 78% of current
$50,000 annual salary $2917 est net $1807 est ss amount 62% of current
$100,000 annual salary $5835 est net $2565 est ss amount 44% of current
$500,000 annual salary $29,174 est net $2749 est ss amount 9% of current
Regardless if you toss cheeseburgers out of a drive thru or play shortstop for the Twins, you can expect to lose income in retirement. Now since a large population of us wishlisters with aspirations for a “comfortable” old age either would not describe themselves as financially “comfortable” now or if so, wouldn't feel that way if they suddenly lost 22%, 38% or 56% of monthly income, it means working harder and smarter to stay on course. Investing in retirement savings is an unequivocal necessity towards bridging qualify of life during your transition but like anything else, a good offense works much better with a good defense.
Quit pretending you are borrowing the money from others
Simply put, the debt you have was income your borrowed at some point from future you. It represents everything from higher education, real estate, transportation and millions of other consumer choices. Now, if ultimately you're bound to lose income the older you get, what sense does it make to keep borrowing income from future you? Especially since statistically you are bound to make less between ages 52 and 67 then you did between 37 and 52, present you needs to adopt an end game when it comes to debt.
A Realistic and Comprehensive Budget is your tool
Anyone can take 5 minutes, look at a handful of bills and come up with a list of regular expenses but a budget should be so much more than that if you are serious about getting out of and staying out of debt. At the very least, you should conceptualize at least the next year of your life and EVERYTHING you will spend money on. While assigning goals to regulate grocery and gas consumption is a solid start, unless you factor other elements like planned and unforeseen home and car repairs, recreation, travel, holidays, clothing, ect – you'll be frustrated when all the work you put in results in lost progress. You are not a robot, rather a human being subject to Murphy's Law and your budget should resemble such. Lastly, the budget needs to balance. You cannot be serious about making financial improvements until you predictably and regularly earn more income than you spend. There is no strategy or product that defies this.
Your consumer debt needs to go, now
Unsecured debt has a funny way of masking itself as affordable by offering prolonged terms through small monthly minimum payments. You don't need me to point out that minimums don't really help you pay off the debt but rather help you live with it. This mean you need to redefine your own terms. Figure out how much it would cost per month to pay off all of your non housing or education debt in a period of 4 or 5 years at the most. Compare the current terms to what you do through a debt management program with a certified consumer credit counseling agency or a consolidation loan with a reputable local bank or credit union if your credit allows. If you simply do not have the resources to pay the debt off in that amount of time, bankruptcy now becomes an option – additional income is another option that accelerates your payoff goal - however repackaging debt to continue making it barely manageable during your working years is not a plan at all, just an avoidance of responsibility.
Savings is HUGE
Everyone likes to talk about emergency savings and rightfully so. You cannot even pretend to be serious about staying out of debt if you don't have something to pay for unexpected expenses after all. However, in order for you stay out of debt for the long haul, you need to start looking at savings not just as a rainy day – bail out fund but rather a holding tank for predictable expenditures in which you pay yourself forward regularly for the privilege not to need debt again. For instance, you may pay off your car loan but if you do not put aside money regularly to replace the vehicle when the time comes, you will only experience debt hiatuses. Not only does a total conversion to purchasing goods from savings mean you will stay out of debt but it monitors what you can really afford. What, you could never save up cash to buy a brand new $35,000 car on your salary? If that's the case, then you probably can't really afford to spend that much on a depreciating asset.
Mortgages should not be a lifelong expense
I'm going to simplify things here a lot, if you have an interest rate of 5.5% or less then you should be more interested in what you can do to pay your current mortgage off than how much you can save monthly on a fresh new 30 year note. Considering how much lost progress we as a collective nation have experienced in the past decade from borrowing against our homes, can we please just re-adopt the classic rule that you never refinance unless you are both decreasing rate AND maturity date? Back to holding tank savings, it is important to afford improvements as if you need to repackage your mortgage every time you have a $5000 project surface, you will never get out of debt alive. Even if there is no way of paying your home off before retirement, it helps to still have goals like having enough of it paid off so it's plausible that you can downsize to something that is either free and clear or close to it.
Carrying a mortgage or any significant debt into retirement may look approachable with having a decent amount of retirement savings however, the art of retiring “comfortably” boils down to ones ability to turn spending up and down based on how their money is performing. Having a large amount of fixed expenses leaves you vulnerable to spend savings down at an insane pace during market drops.
So now that the new year is upon you, go ahead and write down the following long term goals defining your own debt end game:
1. I will have all consumers debts paid off by ___________
2. I will have enough in surplus savings to realistically avoid needed any new debt by _______
3. I will have my mortgage and or educational debt paid off by ________