Avoid the Debt Trap

Debt, that hard to slay, life sucking, insidious beast. There are any number of straight-forward, familiar ways – through various actions and circumstances – in which people become its victim. Some people are simply hyper-consumers and perhaps, are trying mightily to keep up with the Joneses. Through ignorance, some take out a number of student loans and once they graduate, cannot find a job that pays enough to service the loans … and live. You know, do things like eat and pay rent. Some buy way more house than they need or can afford under crushing (e.g. variable rate, high fixed rate, or balloon payments) terms.

The Debt Trap

When not specific actions taken by an individual, sometimes it’s circumstances beyond their control, a stroke of bad luck, that traps them. Perhaps its a medical emergency. Maybe it’s a young couple in the process of developing an emergency fund, but before its fully established and funded, they are hit with three or four unforeseen events that force them to max out credit cards or take out a payday loan. Or maybe it isn’t a series of unforeseen events for that young couple; maybe it’s just one event … a job loss.

Those are some of the most common types of stories of how people end up fighting for air under the weight of debt. We’ve all heard them.

Jez Timms

What about the occasions when the Devil of debt is much more subtle? What about the times when it isn’t because of clearly – at least what appears to be clear to many others – faulty thinking, skewed values, or a lack of planning? How does it happen when it isn’t a high-priced emergency or a series of unforeseen events? How does it happen to people who give thought to their finances, make an effort to educate themselves, and generally do a lot of things right with respect to their finances?

A Slippery Slope

It’s what I call the debt gut punch. Let me give you an example. Imagine a young couple, who a year ago, realized they had fallen into a debt trap. They were servicing two student loans, had a significant car payment, and had two credit cards that were nearly maxed out. As they considered moving from an apartment to a house and the wife became pregnant, they realized they needed to change their ways. And change they did. They cut back on their cable television package, started packing their lunch instead of eating out most days, gave up the daily Starbucks’ coffees, and trimmed the fat in a few more areas.

Flash forward one year. While they haven’t fully funded their emergency fund or completely paid off the credit card debt, they’ve cut the balances in half, continue to live with fewer cable channels, and limit their Starbucks’ coffee to Saturday mornings. They are on the right track! Imagine their joy when they received their $1,500 tax refund last Tuesday.

When they first learned they would be getting a refund this year, they talked a little about how the money would be spent. They knew they had to spend about $600 to get new tires for the wife’s car. They planned to apply another $600 to the credit cards, and $200 or so was going to be spent on some dental work the husband had been putting off. That last $100? The wife was thinking about some new power tools that were going on sale at The Home Depot and the husband thought the house could use some new window treatments. See the first problem? Yep. A lack of detailed communication.

On Wednesday, the day after receiving that $1,500, the wife got those tires she desperately needed ($623). On Thursday, the transmission, which had been showing signs of problems, failed on the husband’s car. Instead of paying $600 toward the credit cards, he paid $610 to have his car fixed. Also, he ordered new blinds ($95) for the living room, and finally got that dental work ($230) taken care of. On Friday, the wife bought ($90) the tools she had been pining for, and for the time being, just set them on a shelf in the garage, forgetting to tell the husband when he came home that evening. Also on Friday, out of the blue, friends who they hadn’t seen in three years called and wanted to meet for drinks and dinner on Saturday since they would be passing through on their way to a vacation in California.

Dinner at their favorite burger and beer joint went well, and since they wanted to enjoy their good fortune – the tax refund – by treating themselves to a great meal and lots of beer with friends, they treated their friends and paid the $80 bill with a credit card since neither had taken the time to pick up some cash. See the second problem? I bet you do.

Burger and Beer

Imagine their mutual surprises on Tuesday, one week after getting the tax refund, when they sat down to do the bills:

  • Tires – $623
  • Credit Cards – $610
  • Blinds – $95
  • Dental Work – $230
  • Tools – $90
  • Dinner – $80

Total? $1,728. Uh oh! What was supposed to be a $1,500 windfall has turned into a $228 deficit. Not only that, their credit card balance moved in the wrong direction – up – over the last week.

The debt sucker punch is that subtle fall further into debt when a giant step should be taken toward the lip of the hole. Too often people receive a large windfall (e.g. tax refund, performance bonus at work, inheritance, etc.) and spread that windfall too thin, overspending and compounding their debt problem.

Should they have declined dinner with their friends? I don’t know. Should they have volunteered to pick up the entire bill? Don’t know. Were the tools or the window treatments necessary? Don’t know. None of the purchases in themselves were wrong.

Final Thoughts

It isn’t really a question of right or wrong. It’s a matter of maintaining constant communication with respect to developing and executing your financial plan; and being ever vigilant and disciplined when digging out of the debt hole … especially when you receive some type of windfall.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

5 Comments

  1. A good example of the trap, James. Further evidence communication is so important for a couple, to stay on track with their financial goals or any other life plans for that matter.

  2. Oh my, that’s quite a pickle the young couple found themselves in!

    We personally try to avoid debt at all costs! Both my boyfriend and I had debt in the past and, while we weren’t on the verge of ending up on the streets or anything tragic like that, debt was seriously inconvenient.

    We’ve learned to be extra careful over the past few years and have avoided loans like the plague. It isn’t always easy (for instance, we try never to say no to dinner out with friends) but we find ways to compromise and somehow manage to stay on the right track.

  3. Good advice for couples on how to keep debt at bay. It is a serious problem in this country and it will be until the system changes or the people learn how to control it.

  4. Communication, vigilance, and discipline–the only way a couple can keep Devil debt at bay. Excellent post on how debt doesn’t always pounce on you out of the blue but creeps up on you slowly over time. When it comes to debt, we need to heed the immortal words of Sgt. Phil Esterhaus from Hill Street Blues, “Let’s be careful out there.”

    • While some debt is immediate and obvious; a car loan or mortgage comes to mind, a lot of debt is incremental and sneaks up on you over time. As you note, it is important to stay vigilant.

      Nice quote. Indeed. You have to be careful out there. Thanks for stopping by and sharing your thoughts.

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