Don’t Just Get Out of Debt, Save Out of Debt!
Whether you’re chipping away at a loan payment, are carrying a credit card balance or have overspent your way to anxiety, you’re probably looking for ways to pay down debt ASAP.
You’re not alone. Many people are feeling a sense of fragility in their financial lives, stuck in a cycle they can’t get out of. Did you know that even before COVID-19 hit, consumer debt in the U.S. had been steadily growing? It’s up 19% since 2009, to its current record high of $14.1 trillion!
Also, many people are facing financial uncertainty because of COVID-19—the latest stats show that 22 million Americans are unemployed. And a Bankrate poll released in January 2020 showed that just four in 10 U.S. adults could cover the cost of a $1,000 car repair or hospital stay with savings!
I’m not sharing these figures to scare you, or to bring you down. Instead, I want to use this opportunity to share a fresh approach that I think can help: using a savings plan to help you stay out of debt, not just get out of debt.
I often hear “How can I save if I am in debt?” and “It’s impossible to not have debt.” I made this shift myself, and can offer you some tips to help you increase savings on your path to reducing debt.
3 Steps to Staying Out of Debt
I’ve worked with clients who have paid off debts—often big ones—only to find themselves deeply in debt again when they come to me. What has helped them change the cycle is looking at the deeper emotional links to their money, debt and savings cycles. This can stop the constant up-and-down of debt weight and emotion, which can feel similar to yo-yo dieting.
We all have a relationship with our money, our debt and our savings. We’re going to take a closer look at those relationships. And while we’re doing so, I want to remind you of the power of approaching your financial story with compassionate curiosity, not judgment.
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First, I invite you to identify your money mindset.
Whether your mindset is one of scarcity: “There will never be enough money” or abundance: “There will always be enough money,” it drives your behavior and decisions every day. Your mindset also influences behaviors like whether or not you’ll keep cycling in and out of debt, make promises to yourself that you won’t overspend this time (but do it anyways). There are online quizzes for identifying your money mindset, and I also find a helpful way can be to journal out some of your top money beliefs. This can give you some good clues!
By having a deeper connection to what prompts you to make the financial decisions you do, you’ll begin to tune into your money mindset, and reduce disconnected spending.
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Now, what’s your debt mindset?
I see a lot of “black and white” in how people think about debt. Debt is bad; no debt is good. This rigid thinking can feel a bit like holding your breath.
When you throw every dollar at your debt and don’t have any savings, eventually you have to gasp for air. You use your credit card or go into overdraft to cover that unexpected expense, or use your credit card as your emergency fund, creating a revolving door of debt.
Remember, no judgment! I used to be a “balance transfer queen,” shuffling debt around on a regular basis…
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Finally, identify your savings mindset.
What does it feel like to ask yourself “What is your relationship to savings?” You do have a relationship with savings, no matter what your account balance is.
Some people notice a sense of perfectionism pops up and sounds like “If I don’t have $1000 (or pick your amount) to start with, what is the point? Some may feel so overwhelmed by bills that they can’t imagine taking money from an already-stretched monthly inflow.
One of the biggest impacts of COVID-19 might be that you are more painfully aware than ever that you didn’t have even a month (or a week!) of funds saved up. You may have been longing to ‘do different’ and aren’t sure why it isn’t happening. And you may feel too embarrassed or ashamed to explore this pattern.
Financial therapy is a safe place to start the conversation with yourself. And whatever your savings mindset is, I encourage you to try starting with an automatic transfer of even $10 or $20 into savings per month. And notice how this feels, and how it can spark momentum.
By setting up automatic transfers, you’re also saving yourself from “decision overload,” which can make you feel stuck. It’s one less decision you have to make in your day!
Take a Breath, Then Take the First Step
When you identify your money, debt and savings mindsets, it helps you change the way you approach, organize, and feel about your finances. And this kind of clarity can even improve other areas of your life!
So I encourage you to take a breath before you rush to pay off debt, whether you just got a coronavirus stimulus check or are working full-time. Instead of focusing only on how good it would feel to be out of debt, breathe and consider paying off debt as just a part of your overall money plan, balanced out with savings and spending.
No matter where you’re at in your money journey, I can help. Book your first session with me today.
