Credit card debt jumped 13% last year, the biggest increase in 20 years. If you find yourself with mounting debt, you need to get back on a solid footing before it spirals out of control.
As I’ve learned from coaching thousands of people on how to get rid of credit card debt and stay debt free, the answer is more than just cutting out the credit card.
This mix of mindset and behavioral changes along with some crucial financial milestones will get you there.
Change the way you talk about money
To really know your “money self”, watch what you say and hear about it at work, at home, when you go out with friends. There is often a tendency to focus on the negative. Change your language if you want to change your attitudes towards money, which is the first step to improving the place of money in our lives.
Start by using positive language around money today. Start by saying “I choose not to” purchase this item or “It’s not a financial priority.” It demonstrates that you are making conscious choices.
On the other hand, saying “I can’t afford” something takes responsibility away from you. You become the victim of something beyond your control, which implies that you had nothing to do with it.
For example, if you decide to buy a more expensive home with a higher mortgage and maintenance costs, you might not have to spend as much on vacations, clothes, or a big-screen TV. That doesn’t mean you can’t afford the big-screen TV – it just means you’ve spent your money elsewhere. Your decision reflects what is important to you.
Mindset is a powerful influence and the language you use can support this change. Use positive words to support this change. Telling yourself “I’m saving a little bit every month” changes your perspective as you accumulate savings, no matter how much your savings account grows.
Making the effort to use language that demonstrates ownership and responsibility around money is what’s important. Positive language changes our attitude towards money when heard often enough.
Negative reinforcement of the state of your finances, even if it is self-talk, affects self-esteem. Stop beating yourself up with negative language like “I’ll never get out of debt” and “I’m a financial failure.” Debt has a psychological cost and studies have linked it to depression and suicide.
You are not a victim of your financial situation.
Change your behavior slowly
Don’t even consider a debt consolidation plan or a home equity loan until you’ve stopped creating new credit card debt.
While that pile of debt can disappear, people typically get back to their previous balance, even if it’s five figures, in just six months if they pay off their credit card debt in one lump sum. This is because there has been no change in behavior. Instead, invest your time in behavior change.
Like changes involving food, slow and steady wins the race in forming new financial habits. Start by reviewing what’s on your credit card bill each month. People often find recurring expenses for services they don’t even use anymore or worse, something they never signed up for! Take the time to withdraw them from your credit card.
Are there any other automatic payments for the services you use that you can forgo until you’ve paid off your debt? Every $10 you cut also reduces interest charges and gets you to the repayment point sooner.
Choose to live bill-free for a month while you create a sustainable plan for your financial life.
A credit card break will help you develop a new habit of thinking before you swipe, click, or tap. Keep using this new language around financial decisions to make it easier.
When cutting back on spending, be honest with your friends. Meet for a drink instead of dinner or a coffee instead of a drink. If what you value is the time spent with your friends, they will understand and maybe even be happier with alternative and creative plans.
Plan the vacation now. Talk to the family with a request to “simplify the vacation”. Suggest that each person give a gift to just one person instead of giving everyone gifts or everyone bringing food for the meal. If you take the lead, you might be surprised who else feels relieved and grateful.
Create a spending plan
Once you start switching languages and limiting your credit card usage, it’s time to face your numbers and create new habits for life.
Always pay the minimum on your credit card debt. Otherwise, you will pay more penalties and fees.
Until you create a spending plan that will allow you to live within your means and see the big picture, only pay the minimum. (Yes, you read that right.) Sitting with the discomfort of knowing your total debt will help reinforce why you need to make changes in your behavior and language. Debt takes time to get into debt. It will take some time to reset it. Remember that a quick fix is not a lasting solution.
Create a plan that allows you to cover your expenses with your income. It’s your net income, not your salary, that counts. Write down all the expenses you incur throughout the year, not just the monthly expenses. The physical act of doing this rather than just reading a summary of the past year’s expenses makes you more aware of your expenses because your brain processes the information better. Visually seeing the difference will help you understand why there is an incipient debt problem.
Be sure to plan something you consider a treat – a dinner out once a week, a movie a month, or something else you enjoy. If you’re hoarding money for fun, you’re more likely to stick to your spending plan and continue to use positive language.
For a powerful reminder of how the combination of new language, new behavior and a new approach to spending can improve your finances, I offer you one of my favorite examples, a customer who told me she would “never get out of debt”. I tried.”
I asked him to try one more time. I challenged her to complete two simple tasks each week: first, create a way to save money, and second, have fun with just $10 a week.
After six weeks, she appeared in my office full of energy and smiling. “I tried so many new things! Saved money by going to the library instead of buying a new book. Then I bought a friend coffee, which was fun. She continued the list of new behaviors that fit into his cash plan, from one afternoon matinee to canceling two movie subscriptions.
I asked about paying off his debt. She smiles: “I pay the minimum and I live entirely on my income. I’ve already saved $150!
She ended up paying off her debts over the course of the year, and then went debt-free.
Research shows it can take as little as 18 days to form a habit, although for some people it takes weeks longer. The key is not to give up if you make a mistake. Just get back on track without negative language or resorting to old behavior.
Consider other resources to help you: anonymous debtors, books, podcasts, and therapy, which insurance may cover, will remind you that you are not alone and that there is a way out. My favorite book is “How to Get Out of Debt, Stay Out of Debt, and Live Prosperously Forever” by Jerrold Mundis; the latest edition was published in 2012.
Think this slower approach will never get you out of debt? Consider this: if money solved money problems, then lottery winners would never go bankrupt. However, many of them do. More importantly, interviewed five years later, many regret never having won.
Debt is not just a numbers game. Start changing your behavior, your language and create a cash flow plan now. The long term effects will be felt for years.
CD Moriarty is a certified financial planner, a columnist for MarketWatch and a personal finance speaker. She blogs at MoneyPeace.
Learn how to shake up your financial routine at MarketWatch’s Best New Ideas in Money Festival September 21-22 in New York City. Join Carrie Schwab, President of the Charles Schwab Foundation.
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