The Mint Grad

Real FLC: Life without debt

FLC-LynnetteThe story below highlights the real life experience of Lynnette Khalfani-Cox, a financial journalist who got herself in (and out) of debt. Lynnette, also known as The Money Coach, shares how she used budgeting basics to give her bank accounts some financial loving care. Her story is one of a series that focuses on real money mistakes made by real people, and the lessons learned along their financial journeys.

In 2001, Lynnette was $100,000 in credit card debt despite having a six-figure salary and a healthy 401(k). She and her then-husband didn’t live an extravagant lifestyle, but they put almost everything they purchased on their credit cards. Clothes, travel, dining out, real estate, private school tuition for two children, impulse buys…it all started to add up. Ultimately, Lynnette found herself overspending without managing an effective budget.

At the time, she thought she was doing fine. She was making payments on time (albeit minimum payments), had money in the bank, and bill collectors weren’t calling to track her down. But what she really had was a false sense of financial security. Eventually, Lynnette’s creditors cut her off; she had maxed out most of her cards and couldn’t get approved to take out any more. She quickly realized she couldn’t continue spending at the pace that she had been.

“I’m thankful I didn’t have to hit rock bottom to make a change,” Lynnette recalls. “Most people experience a crisis – like a job layoff – that forces them to address their debt. In my case, nothing traumatic happened. I just had my cards declined at stores, which was downright embarrassing.”

Lynnette knew she had debt, but she didn’t know how much. “I didn’t really want to know,” she admits. Once she tallied up the bills, Lynnette discovered she and her ex-husband were more than $100,000 in debt.

“Looking back, I know I rationalized being in so much debt. I justified my spending because I had done so many other things right,” Lynnette explains. “I made good money; I had life insurance, disability protection, a will, a six figure 401(k) and a substantial emergency savings account.”

Taking back control

To combat their debt, Lynnette and her former husband started operating on a strict budget. They overhauled their spending and cut out frivolous expenses almost entirely, focusing strictly on the necessities. They also took every bit of extra money they received for holidays, birthdays, bonuses and tax refunds and applied that to their “accelerated debt payoff” fund.

“You have to know the difference between your family’s needs and wants,” says Lynnette.

Because she had previously paid just the minimum on her credit card bills, she decided to double (and in some instances triple) the amount she paid back so she could dig out of debt faster.

“I now know that it’s a trap and you’ll be in debt forever if you only make the minimum payment,” she says. “You’re going to have a lot of extra debt from interest rates on top of your principal balance.”

Among Lynnette’s other strategies, one crucial technique included negotiating with creditors.

“I called up every one of them – I had many – and asked for lower interest rates,” Lynnette recalls. “I was able to negotiate because I always paid my bills on time, even if it was just the minimum payment. I was a good customer and those banks didn’t want to lose my business entirely, so they worked with me.”

By doing all of this, the couple managed to knock about $70,000 out of their total debt. To cover the rest, they made a profit selling land they had previously planned to build on. Within three short years, Lynnette was debt free.

Lessons learned

In the end, Lynnette wrote a book about her experiences called “Zero Debt: The Ultimate Guide to Financial Freedom.” In it, she outlines a 30-day action plan to provide readers with a step-by-step guide to get out of debt.

“Most people get into debt for one of two reasons: overspending (spending more than you have and not managing your money) or the dreaded D’s (downsizing, divorce, death, disability, disease),” explains Lynnette. “Typically, when someone experiences one of the five D’s – a personal or professional setback – they face a financial setback that results in some kind of debt.”

Lynnette shares the following advice for avoiding debt:

  • Act your wage.
    If your salary is $30,000, don’t live a $50,000 lifestyle. I’d like a nice McMansion, but do I want a nice big mortgage to go along with that? No!
  • Be plugged into your finances.
    Be responsible and know how much your credit card balance is at all times. Use financial tools or email alerts to help you. Some people choose to simply opt out of their financial lives while others abdicate responsibility. When I was running up my credit card bill, I wasn’t being responsible.
  • Enact a 24-hour rule.
    For purchases you haven’t planned or budgeted for, give yourself at least 24 hours to cool off and evaluate whether you really need it or whether it’s simply an impulse buy that you want. This will help you maintain your budget. If you decide after a day or more that you really need it, or even that you still want it, it will be a smarter purchase.
  • Have a “zero debt” mindset.
    Always be actively trying to avoid debt. You must have a strategic plan that guides your spending decisions and overall financial planning.
  • Make sure you and your partner are on the same page.
    It’s tricky – but common – to have one person who spends freely and one person who saves religiously or wants to do so. People with different money personalities can happily co-exist in a relationship, but only if they both are committed to the same general goals as a couple. If two people aren’t on the same page, it’s just not going to work. Read: The cost of commitment.
  • Don’t deprive yourself.
    Manage who you are. Don’t create a budget you can’t stick to. My budget kryptonite is traveling, and so I work hard to set aside time and money to enjoy it – without going into debt.
  • Ask for help if you need it.
    A lot of people suffer in silence and live with shame and embarrassment over their money problems. Stop the trial and error – it’s a quick way to financial ruin. Contact a financial professional or counselor, someone you trust and someone who has good money habits.
  • Set financial goals.
    In 2007, I remarried and thankfully my current husband and I both have shared goals to build our savings, increase our net worth, plan for retirement and pay for our three kids’ college education. With those four big goals in mind, it helps to direct our spending, budgeting and overall financial planning.

For more information, read Dealing with debt.

 


Financial Loving Care

 

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