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How Does Debt Happen?

by Judy Hoctor

Money does not discriminate. It doesn't matter if you make $18,000 per year or $250,000 per year. If you want to enjoy financial freedom, you must spend less money than you earn. This doesn't sound like rocket science, but it's amazing how many intelligent people are missing this mindset. This was driven home in a powerful way through our 15-year old daughter. She was concerned that we would run out of money after we quit our jobs to run our own software company. We assured her that our new venture would cover our previous salaries with plenty to spare. Unfortunately, she wanted to spend the "plenty" immediately. We told her that we are confident that our cash flow will improve in the future, but since we don't have the money today, we can't spend as though we do.

Years ago we found ourselves in a similar situation and did the same fuzzy math. We were expecting year-end bonuses and thought that somehow it was okay to spend that money ahead of time since we knew it was coming to us. As is frequently the case, much of what we expected never materialized, and we found ourselves using credit cards to subsidize a standard of living that we couldn't afford. While our salaries were good, they were less than what we were spending and we got ourselves in trouble.

When we looked around our home, we didn't see a lot of big-ticket toys to show for our debt. To the contrary, we were paying for burritos from 1992 and trips to Target for who knows what. We floated through life, and since we didn't have routines in place for grocery shopping and meal planning, it was easier to pick up fast food than prepare inexpensive, nutritious meals at home. Although we built many budgets based on our historical spending, we found them hard to follow because we had unpredictable income and we didn't check in with our budget before we spent money. We based our spending on how much we had in our checking account at any given time and never factored in that we needed to set aside money this month for expenses that we would incur three months down the road. We cycled between depriving ourselves when money was lean, and then when money came in, blowing all of it to make up for what we hadn't been spending. When we finally came up for air and really looked at our finances, we found ourselves thousands of dollars in debt. We didn't know how to prioritize our expenses and spend less than we earned.

Your story may be different than ours. Your family might be facing huge medical bills or experiencing a financial downturn based on job layoffs. In an effort to fix your situation, you might have borrowed against your house, gotten a consolidation loan to lower your monthly credit card payments, signed up for additional credit cards to pay existing cards, or tried other schemes that have left you deeper in debt than before. It can be scary and overwhelming when you finally face the consequences of your spending history. You might think that you are in a vicious downward spiral that is impossible to break out of or that your situation is uniquely worse than anyone else's. These are dangerous lies that will keep you a slave of your finances.

The first step to recovery is to take stock of what you earn and itemize all of your expenses. Once you really know what your financial picture looks like, you can begin to take action and get on the road to a new freedom and happiness that doesn't include being in debt. It won't always be easy but it will be definitely worth it.