Monthly Archives: April 2007

Looking at the Bigger Picture for Your Replacement Ratio in Retirement

It seems that retirement savings is getting more complicated. Some reports are saying we are not saving enough while other reports are saying that we are saving too much. So who do you believe? The answer is that neither of these reports has anything to do with your situation. These reports are on the macro level, looking at the country in general. To understand your situation, you need to look at your long-term financial picture. In particular, you need to see how your big ticket items, like housing, medical, savings, children, taxes, etc., will affect your saving for and your spending in retirement.

To understand how much you need to save in retirement, many people point to the income replacement ratio that you should target for retirement. The general rule of thumb is that a retiree will need to replace 70% of his income in retirement (recently this has been bumped by some advisors up to 80%). Yet, this number is based on looking at the spending habits of current retirees. It has little to do with what you may need in your retirement based on your spending habits.

Many look at the 70% to 80% and justify it by starting with 100% of income and making adjustments in spending for the typical retiree. It assumes the average retiree will save some money in taxes, will not need to save for retirement anymore and will need to spend additional money on medical care. It also assumes retirees will save some money on living accommodations in retirement. However, because some retirees rent, some retirees are paying off their mortgage and some retirees are paying for assisted living, the savings is usually not an all or nothing adjustment (just an average of the typical retiree). So for someone retirees who paid off their mortgage and have long-term care insurance, they may need to significantly less money for shelter. The key is to plan your large expenditures as you get closer to retirement to see what your target number is, for example:


Middle Age

Near Retirement

In Retirement

Retirement Savings




Children (or Grand-children)




Medical Spending








State Tax




















In this example, the worker is planning on using his current expenditures for his children and using it towards his retirement savings as they leave home. He is also planning on paying off his mortgage before retiring. Thus, instead of needing to replace 80% of his income, he may only need to replace 65%. This is significant reduction, especially if Social Security was going to replace 35% of his income, because he may only need to replace 30% of his income instead of 55% (nearly ½ of what he may have planned on). However, he should also be careful and additional money for assisted living since he is assuming nothing for his housing in retirement.

Yet, as you see, the actual replacement percentage is very dependent on the retiree’s situation. If a retiree’s mortgage has not been paid off before retirement (for example, he bought a more expensive place in Florida to retire to), the 65% needed for retirement may be closer to 85%. In addition, if the retiree had not been saving a lot of his retirement due to having a good company pension plan, the income he may need to replace in retirement could increase from 85% to 90% or 100%.

Some things to consider in figuring out your replacement ratio:

Retirement Savings – How much are you currently savings for retirement? If you do not have a company pension plan, you may be saving 15% to 20% already which will significantly reduce the amount of your income you need to replace in retirement. If you have a great company pension plan or wise investing early in your career (which decreased the need to save later in your career,) you may not have been saving that much, the closer you get to retirement. If you are spending the money instead of saving it, you will need a higher amount of your income replaced in retirement.

Taxes – If you plan to move to a state with lower or no income taxes (like Florida or Nevada), you will be able to save some money (yet compare the state’s sales taxes to see if this will be higher). In addition, if you saved more money in post-tax investments like a Roth IRA or regular investments (e.g., non-IRA/401(k) accounts), then you have already probably been taxed on most of this income, thus you will save some money on Federal taxes.

Housing – If you have paid off your mortgage before retirement, you may need less money in retirement (unless you have already used this savings for other purposes like more extravagant vacations). Do not forget, even if you do not have a mortgage in retirement, you may have costs for assisted living and/or nursing home care later in retirement that should be factored in.

Note, some would say needing less money for retirement by pay off your mortgage is an important step to do. Yet, paying off your mortgage will lower the amount you need to save for retirement but will also lower the amount that you can save for retirement (which basically cancels each other out). For example, if you had a decision whether to invest $20,000 for retirement or use the $20,000 to pay off the mortgage, the decision should be determined on which investment will provide a better return for your risk tolerance (see Should I Have a Mortgage? ). If it is in investing, you can use the money you invested to pay off the mortgage during in retirement. If it is in paying off the home, you will have saved less for retirement than you otherwise would have yet you will also need less for retirement by paying off your house early.

Vacations & Hobbies – If you plan on using your extra time in retirement to take longer and more frequent vacations and to play more golf (or other hobbies), you may need more money for this. These expenses will curtail as you get older, so some people would not think this is a big deal to reflect in your planning (reason to use a lower target replacement ratio). Yet you never know how long you will remain healthy and active. I have a grandmother who kept on traveling into her 80s. Also, you may find yourself traveling less as you get older in retirement, yet the types of trips may be more expensive as you choose tours that are more inclusive than going it on your own. In addition, as your vacation and hobby expenses decrease, some other expenses (like medical and in-home nursing care) can increase. Thus, those who say your first 5 years of retirement are more expensive due to vacation plans, they can be right for those whose health quickly deteriorates without a corresponding increase in medical expenses (until later). However, if you remain healthy, you could continue to keep active with you vacation and hobbies if you planned ahead and saved.

Working expenses – If you had some expenses to keep the corporate image or to compensate for long hours at work, like dry cleaning, clothing (buying suits) or eating out (due to time limitations), cutting these expenses in retirement can save you some money. However for some retirees like my parents, they actually increased their eating out costs in the years leading up to retirement and in retirement because there were no children at home to feed anymore (to expensive to take a family of 6 out to eat) and thus cooking was viewed as more of a choir that they preferred not do than a requirement. So some costs may decrease (dry cleaning and gas) while other costs may increase (eating out) depending on what you want to do.

Handyman expenses – As my parents aged, the cost of expenses of maintaining their home increased. As the home aged, it needed more upkeep (as things broke down more frequently). Some of the repairs became more difficult for my parents to do by themselves (they did not have the same energy as they use to). And, since none of us children lived near by, they had to hire more help to maintain their house for things such as mowing the yard each week and cleaning the outside windows because my dad stated to avoid tall ladders.

In the end, we tend to find a way to live on what we have whether it is a little or a lot. Just like some people can live on 50% of their income while others live on 110% of their income via borrowing, a retiree can find ways to adjust how he lives on what he can afford. However, to live the life you want and to make retirement easier, you should map out some of the big expenses that you are planning on (like money needed for the mortgage and vacations) and see what you need to put away now to have the retirement you want. In retirement, you can make adjustments depending on how much you saved (e.g., adjust the number of vacations you take or the number of times you go out to eat). Yet, have a target in mind, so that these adjustments are more minor in nature than a major change because your actual savings was too far off from what should have been targeted.

Just Get By Syndrome

Many people know what it is like to live paycheck to paycheck. We (as a society) have made a game out of living on the edge, kind of like playing chicken waiting for someone else to blink first. Unfortunately, the economy does not blink by allowing us to continue to live on the edge indefinitely. Thus, for many, living on the edge, waiting for our fortunes to change, is a disaster waiting to happen. It is a waiting game where one small financial hiccup puts them over the edge and possibly into bankruptcy. It can be scary to live on the edge, yet we, as a society, have become so good at it that we have become masters in the art of tight rope walking. Each time that we survive, we get a little braver and take on more risks, walk even a finer line between financial success and financial disaster. It only takes one little slip to fall off the edge. Why do we do it? We have become accustomed to thinking in terms that just getting by is good enough. We have fallen into a trap without even realizing it. So why have we fallen into this trap?

We get a little ahead and then ease off

When we have financial trouble, we have set our goals just to the point of recovering such as getting out of debt but not higher goal of saving (as mentioned in Why is Getting Out of Debt so Hard?). It is like saying that we will go on a diet if we hit 200 lbs. When we see the scales tip to 205, we make a goal of losing 5 pounds and slip back into our old habits when the scale tips to 199. Because our goal was not higher, we stay right at the edge. Financially, this is living day by day. So, when we fall into debt, we make quick changes to get out and ease off our financial goals when our debt is eliminated, yet never are far removed from slipping back into debt again.

If we see ourselves tilting over the edge a bit, we make small changes that last a few months (e.g. make a goal of not eating out at all) to get us back from falling over the edge. The short-term changes we make are just that, short-term and are sometimes unrealistic in the long-term. Thus, we keep on going on and off diets and are happy with the results in the short-term. However, the changes we make can not be sustained over the long term (e.g., live on bread and peanut butter for a month). We choose the short-term solutions instead of looking for a better longer-term solution (looking for a room mate to share the rent payments) which can get us ahead of the game. Sometimes what we need is a longer-term change that will get us beyond our short-term goal of just surviving. Yet, for someone living on the edge, all they look at is the short-term, wondering if something will happen.

Do not want to be too greedy

Sometimes when we are struggling financially, we envy those who are well off. For some this is used as motivation to achieve what they want. For others, it brings up resentments that others have what they do not. Thus, for this group, they form a belief that the rich are just greedy and should be despised with their resentments. Unfortunately when their financial fortune turns around, they avoid being like those greedy people that they despise. They tend sabotage their success so that they do not appear to be greedy (hoarding money) like the people they despise. And, in their mind, they have not set the limit of what is greedy ($1 million, $100,000 or $10,000). Thus, having any money can be construed to be well off and thus can lead to greed. So they unconsciously avoid having any substantial amount of money.

No motivation to change

When living on the edge, we have a sense of what can happen (e.g., having a financial setback). Yet, there is no real motivation to change our habits. If things are going o.k. now, why would we want to make a change that makes us feel like we have lost something (cut back on some spending). We rather feel o.k. now than deal with the shame that we would have by giving something up or by not giving our children everything they should have. We would rather stay the course (and play to a draw) than feel like we just lost a game (need to give something up), even though it would have set us up for a brighter future. We put so much of our worth in what we have that giving up something can seem like a fate worse than death because it represents a failure. We need to see that just like exercising is critical for our future health that setting up an emergency and retirement fund is critical for our financial health.


If many American’s are living paycheck to paycheck, it is easy to fall into the trap that this is all there is. If others can not get out of the situation, why would we be able to? Role models play a big part of our financial success (and success in life). If we look around to see everyone else living paycheck to paycheck, we feel that we are off the hook from trying to achieve anything different.


We look at others who seem to be having the good life: sailing on their yachts, traveling around the world or even just sitting back in the back yards cooking on their monster grill. We want a glimpse of this perceived good life and take any opportunity to get it without thinking about the long-term circumstances. The drive to ease this envy is so overwhelming that we give into it (reason why marketing works), like needing to get an ice cream cone on a hot summer day at the beach. When we tie our happiness based on having what others have, we are more concerned about the “here and now” more than setting up a solid financial plan for the future.

Taking advantage of not being behind

I was reminded today watching the news that when we have a nice day outside (especially in Cleveland), we take advantage of it wondering if we will get a series of bad days (snow or rain). In working with people’s finances, I have heard the phrase that “money seems to slip through my (their) fingers as soon as it comes” their way. For some, the belief that they can have money is difficult to imagine. Thus, once they do get some money, they figure they might as well to spend it before something else comes up (e.g., bill collector or an unplanned expense) that takes their money before they can enjoy it.

So what can we do?

1. Set up a financial plan

By seeing what we want to shoot for, we become less envious of what others have around us because we are focused more on our goals.

2. Pick better role models

We often set our sights too low on what we can accomplish. We see people like Oprah and believe that she is lucky, something that we can not achieve. So, we choose examples of what we can accomplish (or not) and never really push ourselves to bigger and better things. So pick a role model of someone that has achieved success, something that you can strive to become.

3. Understand how abundance works

Unfortunately, the world does not work where if we give up some money, it will end up magically with someone who may need it. Even if we give a direct donation, it may help the person short-term yet not long-term. People who don’t feel abundant need more than our money. They need to understand how to fish (figuratively). We can not become poor enough to help others to escape their poverty. By not living up to our full potential, we may actually give them another role model showing them why living day to day is not all that bad to achieve for. If Bill Gates settled for living in his parent’s garage, where would we be today? Bill has made a lot of money, yet he has also help generate a lot of jobs for others. If he played small and did not claim his abundance, he would have been able to serve the world like he has with jobs and all his charity work. He did not take abundance from others, rather generated more abundance by creating jobs and a computer system that has made our lives easier (even though we complain about it crashing).

4. See how we have become complacent

Probably the biggest step is to become aware of we have settled for living paycheck to paycheck instead of having what we could have achieved whether it is with money or other aspects of our life. If we do not see how we have kept ourselves a prisoner to living on the edge financially, we will not understand that we also have the ability to get out of the situation.

What You Need to Know About Credit Counseling Companies

With many more credit counseling firms, there are few good companies and other companies out to take advantage of unsuspecting consumers. When people are in debt, their desperation to fix their credit situation makes them more vulnerable to being conned. I have known people thinking that a company was going to help them get out of debt only to find out that the company closed up with no forwarding address. To make matters worse, they find that the credit card companies with their debt have not been paid as promised. So what can you do to not be one of their unsuspecting victims?

First, understand the motives of the company vying for your business:

1) Companies that really want to help you

These are companies that want to understand the whole situation and help you with your budget. They know that the problem with debt is not just paying off the debt, yet educating their clients so that they do not get back into the same situation again. The focus is understanding the whole situation so that they can focus the education where the consumer needs it to be to continue, instead of just focusing on getting out of debt. Their fees are also clearly defined and easy to understand.

2) Others companies (there are too many to lists)

Many companies have their intentions to make money as their first priority instead of helping their clients. Some have even been set up as non-profit organizations that were set up to look like they were in the business to help, yet were the entry way to push their clients to their for-profit operations. Even though businesses need to focus on making money to stay in business, it should not be to the detriment of helping their clients get out of debt as some companies in this group do.

How do you avoid being a victim to companies who are in the later camp? How can you tell the difference? There are a few signs of trouble that should raise a red flag

1) Advertising

The companies who spend the most on advertising may be a red flag to look out for. The companies that really want to help their clients usually have a good reputation where they do not need to promote themselves as much. I tend to ask friends for a recommendation to help weed through the sea of many companies vying for any service. And, then double check with the Better Business Bureau ( before pursuing. Thus, it may be better to trust a recommendation before an advertisement airing at 3:00 in the morning.

2) Pushing a plan on you

If you are sitting in an office for less than 10 minutes and they have already given you a plan to follow, their intent may be focused more on selling you a plan than helping you out.

3) Wanting you to sign on the dotted line before leaving

A good company will let you think about what you are getting into and more importantly to check them out before signing any agreements. Those that want you to sign before leaving are probably thinking more about the commission they are going to get for signing you up.

4) Do not clearly discuss their fees with you

Fees should be clearly spelled out and fully documented; preferably not in fine print. Compare the fees from one company to another and read the fine print to make sure there are no hidden fees.

So how can you find the best counseling firm?

1) Take a step back

When we hit the time to call a credit counseling service, many people feel pressed to find something quick because they have gotten fed up with all the calls about their debt. The tendency is to rush out for the magical solution as quickly as possible because the stress has gotten to be too much. The best thing to do is take a deep breath and know that you have options. Even if you need to take a day off to visit 3 credit counseling firms and review the information overnight, it is better than trying to fit one appointment in and sign out of desperation.

2) Read up on the topic

There are a lot of things to think about when hiring a credit counseling firm. Some of the better publications may be from our own government (Federal Trade Commission) that has looking into this business especially after the most recent bankruptcy reform.

Fiscal Fitness: Choosing a Credit Counselor from FTC

For People on Debt Management Plans: A Must-Do List from FTC

List of companies approved by U.S. government to offer financial education needed to proceed with filling for bankruptcy

National Foundation of Credit Counseling with a list of companies accredited through their organization (mostly its original Consumer Credit Counseling Services affiliates)

3) Take the first step in handling your finances

This may sound counter intuitive when looking for help with your situation. However, a good credit counseling service is going to ask some basic questions: What is your budget? What debt do you have? Have you called the credit card companies to lower your rates? It makes the process go a lot smoother when you come prepared. Plus, it is about taking another action step towards owning your power. Sometimes people give their power over their finances to credit counseling services and are not that involved. Yet, because the consumer needs to continue on with their finances after their debt issue is solves, it is best to be a partner with a counseling service and share the responsibilities. Plus, it make you more aware of your situation so that you can ask better questions to see which plan will work best for you.

4) Comparison shop (look for the right plan not the easiest solution)

As I mentioned before, it is not wise to jump at the first credit counseling service that comes your way. It is best to look at the different options that you have and pick the best plan for you. This may not be the easiest plan, for example a plan that promises to reduce your debt or a company that pays the bills for you. Each of these types of plans has been known for the possibility of serious abuse and fraud even though they seem to be the simplest plan for the consumer. Thus, do not take the easy way out and find the advantages and disadvantages of each plan. You can even review this with an independent financial planner or a financially astute friend. This is a big financial step that should not be taken lightly.

Credit counseling may be a very valuable step in taking control of your finances and, in particular, debt. However, because of consumer’s desperation, the field is ripe for fraud and abuse for consumers that do not fully investigate the company they sign with. Unfortunately, it is not even as easy as saying going with _______ to get the best service. I remember asking a client what counseling firm he went to. I asked if it was Consumer Credit Counseling Service which he replied that he made sure it was due to thier reputation. Unfortunately, it turned out to be a company with a very similar name that shut it doors soon thereafter, leaving him high and dry and deeper in debt. Thus, the key is to fully analyze your decision by interviewing a few agencies, getting a recommedation from trusted friends and double checking with the BBB and even with your State’s attorney general’s office before signing on the bottom line.

Golden Rule of Debt

We all know that we should treat others like we want to be treated. Should we apply this rule when dealing with greedy credit card companies who hold our debt? Absolutely, however some people try to vilify these companies to justify how the company does not deserve the same respect. I know that most people try to live up to their commitments and this is not an issue for many. However, there are some subconscious things that we do to credit card companies that we would not like done to us. We complain about how high interest rates increase when we miss a payment. We complain about why we are hit with a high late fee when our payments are even late by just one day. We say that we would be flexible if we were in their position, yet have we really thought about treating them exactly how we would want to be treated?

This article is intended to make us to think how we treat our debt by making stark contrasts in how some people treat debt with credit card companies versus how many would want treat a loan between friends. Thus, it may seem a bit harsh in questioning how we treat our debt to credit card companies. It is intended to spur our thinking about the issue and is not intended to be accusatory in nature.

I think the main issue is that some think of a credit card as a short-term loan instead of a tool to avoid carrying around too much cash and a tool to make paying at stores easier (with a little bit more security than a debit card. For this service of a credit card, the terms are to pay it back within 25 days in full, otherwise there are consequences. Thus, the question is do we own up to the consequences for our debts as we would like other to own up to theirs if we loaned them money? For example, to act in the same way that we want to be treated, we should

Have a plan to pay back the money before making the purchase

If someone borrowed money from us and promised to pay it back in 25-days, would we be upset (or annoyed) they did not pay us back especially if they made the promise without thinking through their finances before making the commitment? How would you react if someone borrowed $1,000 with a promise to pay it back, yet they were not in the position to do so and were not honest to own up to it?

I think any promise to repay a loan should be taken only after looking at our finances before hand. However, how many people use a no money down payment plan without really thinking if they can really pay it back, thus taking advantage of their promise to repay? In addition, how many people push there finances to the limit where if one thing goes wrong they that could not be lived up to their promise to repay the loan? Having a plan may not be feasible in all circumstances (a medical emergency), yet it should be more of the exception rather than the rule.

Pay on time and warn credit card company when we can not

If someone promised to pay us back $100 on Friday and we were planning to cover our weekend getaway plans, how would we feel if they were a complete no show with no warning? However, we want a credit card companies to let us slide another 4 to 5 days in addition to 25 days they already give us with no consequences? And, worse yet, we do not call ahead of time to try to work something out instead of waiting until after the facts to get fees waived. Now, calling a credit card company each time that we miss a payment may be overkill. Yet, how many times do we wait until after the fact to address our debt even when we are in dire circumstances? It is easier to work out something with a friend or a company over a loan ahead of time instead of waiting until the last minute (e.g. the final foreclosure notice).

Avoid shifting the blame to others

We have become good as a society of making excuses, usually starting when we blamed our dog when he ate our homework in school. We are ultimately responsible for the situations we get ourselves into. Looking at adjustable mortgages, shouldn’t we take responsibility for knowing that we were taking a risk and gambling that interest rates will remain low? So, why blame mortgage companies for ARMs that have backfired just because we could not afford the payment on a 30-year mortgage for the house we wanted. Did we not have the option of looking for a home that we could more comfortably afford or rent until we had enough money for a bigger down payment? Many consumers do this, yet there are still some who are faulting mortgage companies for lending them money that they could not reasonably afford to pay back.

Make it a priority to pay back the money

How would we feel if someone owed us $500 and then they decided to go get a message or to go to a baseball game instead of paying us you back the money on time, even if all they could afford was $100? We would be mumbling underneath our breath (or out load) about how inconsiderate they are when they are late. However, some people in debt do this to credit card companies without giving it a second thought.

Understand bankruptcy is a safety net and a gift

This doesn’t mean that we relinquish our debts because it is easier for us instead of doing the right thing and paying it back. However, know that if we get over our heads due to situations beyond our control, there is a way to get out of the overwhelming burden. However, if we are helped by bankruptcy (a helping hand), should we pay it back if we are able to rebound after bankruptcy? I do not thing many think about this, however how would you feel if you were in the other shoes?

If someone owes us $1,000, we will want them to pay it back. Yet, we know that sometimes things are beyond the person’s control and we are willing to help them out. However, if they end up winning a million dollar lottery 5 years later, what would we expect? We may see it differently because credit card companies factor in the risk of defaulting (bankruptcy) in their interest rates so they know some will default and declare bankruptcy, thus it all evens out in the end. However, should we at least help others (whether the company or a charity) based on the gift that we got for getting back on our feet from eliminating our debt? It is an interesting question to think about because we think bankruptcy dissolves us from ever repaying the money back. Yet, why not see it as a gift and help others out like we may have been helped out.

We think a credit card company is such a big company that a few days late on a payment or missing a payment of a few $100s will not matter here or there. I find it interesting that many people avoid dealing with credit card companies out of their shame of their debt. However, I know I would prefer someone to call me to work out issues on repaying their debt with me, and I expect many others would expect the same as well. So why would credit card companies be any different? Credit card companies and mortgage companies are more willing to work with people in debt than many expect. There have been many stories lately about how to head off foreclosures by calling the mortgage company early on because the company knows it is in their best interest to keep the mortgage going on a modified basis rather than go through the costs of foreclosing. However, we do not treat a company like a person. We try to vilify them to justify why it is o.k. for us to be late when we would be angry and furious at the company we work at for not paying us our paycheck on time even once let alone months at a time.

The Secret to Debt

As someone who wants to help people get out of debt, I was a bit perplexed when I head the contributors to The Secret say the key to get out of debt is stop thinking about your debt. How can someone get out of debt by just not paying attention to it? Their premise is based on the Law of Attraction, in that what we think about expands. Thus, if we think about debt, then it is debt that expands. So, if we think about being in debt, then debt will expand. Their premise is to focus on financial prosperity instead. Thus, by focusing on the prosperity, people are taking action to get achieve wealth.

This is similar in some ways to what I was explaining last week on why getting out of debt is so hard . First, if we focus on just getting out of debt, we are setting our upper limit to get out of debt. Then if we slip, we fall right back into debt and get discouraged and possibly give up. If we set our sights higher to financial prosperity, then even if we fall a little short, we are so much further from where we started, that we are not discouraged and actually encouraged by seeing how far we have gotten and continue to push ahead.

Second, if we focus on the debt itself, we can become discouraged (feelings of shame and guilt of getting into debt). Because shame and guilt are negative energies, they weigh us down making it harder to move forward. Getting out of debt, takes action. The less energy we have, the less we will achieve. Thus, by taking the focus of the debt burden, we are more energized to do more.

Third, by thinking about our debt load, we are also focused on how hard it is to get out of debt, something that can seem like an insurmountable task. Our thinking is focused on how impossible things are instead of focusing on options and alternatives available to get out of debt (whether the ideas are cutting back or on increasing income).

However, I do not think that not thinking about debt is the right answer either. There are specific actions that we need to do when in debt, including calling credit card companies to lower interest rates to watching our spending to get ahead to relieve the stress level of debt. We also need to proactively manage our debt reduction plan by proactively calling those we owe the money to, especially if we can not meet their expected payments. Thus, if we stop thinking about our debt, we may be getting further behind by not taking the appropriate actions.

So what to do? The key with The Secret is what we think about and how we feel about it has a direct impact on what happens to us. This is nothing new. We know that if we are discouraged about our debt, thinking about it will just bring us down. Being discouraged makes it harder to get motivated about other things in our life including work. Letting go of the feelings of being discouraged will keep our focus on other important aspects of life including being able to work more efficiently (to get a promotion) or on being motivated to work overtime. Thus, focusing on our work instead of drowning our sorrows over debt has a positive impact on getting out of debt.

In thinking about debt it is important to understand how we feel about it has a negative impact while creating a plan to get out of debt has a positive impact. Usually, we feel things such as overwhelmed, shame, guilt, anger, etc. It is these feelings that have a negative impact on the actions we take and our actions have a direct impact on our results we see. We are more productive when we are energized. If our energy is directed elsewhere (e.g., getting angry at credit card companies), we have less energy to give to achieve our goals.

Thus if we look at numbers as just numbers, we could think about debt and set up a plan of action to get out of it without getting trapped by feeling overwhelmed. It is easier said than done. However, this is the difference that we see between a company going through bankruptcy and a person. A person gets caught in shame and holds off taking action until the last minute hoping that things get better, only to make things worse. A company on the other hand, sees debt as an opportunity for reorganization that they closely look into at the initial signs of trouble and are ready to pull the trigger when it is appropriate. Therefore, companies have a much easier time to succeed after bankruptcy than most people do.

How do we get to this state of mind, seeing numbers as just numbers?

• Avoid seeing a cutback as a loss

Many people have a hard time cutting back on their purchases because they see it as a loss, another failure. We need to see money as a flow of life (like a tide). Sometimes the tide is higher than at other times. Yet, the ocean does not see low tide as a sense of its weakness. Rather, it is the nature of life where sometimes things are higher than usual and other times where things are lower than normal. Thus, as incomes fluctuate so should expenses. However, we tend to try to hold onto what we have and get into trouble by doing so.

• Take a business approach to money

See numbers from a perspective where you can look at the positives and negatives objectively. We need to overcome the feeling of guilt if we can not take our children to Disney World this year. When guilt gets into the equation, we have a harder time making decisions that are in our best interest. For example, by getting out of debt now, we may have to give up a vacation for a year or two. If we wait, we take a risk of needing to give up vacations and many other things for a much longer time because things got worse.

• Watch our words

Many times how we talk about money has a large impact on how we view money. For example, do you catch yourself thinking?

• How can I do this?
• It is impossible, or
• We need to sacrifice?

These words are creating an image of struggle that again robs us of energy to get out of debt. Who wants to give their whole effort when things appear to be impossible and we think we will get nowhere in obtaining what we want no matter what we do? I know that I would be less likely to struggle through a lose-lose option. Alternatively, we can shift our words to see that there are options:

• I am open to all possibilities?
• Everything is possible, or
• I am choosing to let go of some things now, so that they can return later

• Be open to possibilities

The more open we are, the less we are stuck in one way of thinking that debt is an overwhelming burden. When we see possibilities, we transform the burden into a challenge that has less negative feelings of guilt, shame, anger and others feelings and thus are able shift more towards optimism and hope. As we start to see the light at the end of the tunnel, hope and optimism shifts towards a knowing that we will (and can) overcome our debt, just like millions of others have over the years. It all starts to shift with seeing possibilities rather than doors closed.

• Breathe when discussing a budget or debt

When we open the credit card statement or see the budget (how far we are behind), we start to feel a tightening in our stomach. The tightness continues to grow as we think about our situation. The best way to relieve this is to breathe knowing that everything will be o.k.

It is not that we think about debt that gets us into trouble; it is how we think about it. The more objective we can be about our debt; the easier it is to deal with it effectively.

Why is Getting Out of Debt so Hard?

If we did a survey of why getting out of debt is so hard, some of the more common reasons would probably be:

• High interest rates
• Debt is just too big
• Not getting paid enough

Thus, people feel overwhelmed and burdened in their debt obligation wondering if they will ever get out of it especially when they are looking at reasons that they have little control over. However, these may not be the real reasons for having such a hard time to get out of debt. If we go deeper, there may be other reasons that are keeping people stuck that we can affect.

Set our sights on breaking even

When we look at debt, we commonly look at what it will take to get out of debt. Because our goals are set on just debt, we cut back our spending just enough to pay back our debt. We then wonder why people in debt appear to be falling further behind. It is because when we set our sights to a goal that is easily achieved, we set our sights too low. This is because as we get ahead in our goal, we start to let up thinking it is within our reach. We think that we can coast to the finish only to find a pothole in the way that makes us fall behind in achieving our goals.

We have a tendency to set our goals too low where failure is achieving them because we could have achieved much more. We need aim not only to meet goals but also to break through them. In businesses, there are things called stretched goals. It is something that is achievable, yet it is usually appears just out of our reach to make us reach higher. It is like a rocket ship programmed just enough to reach space (just 1 mile past gravitational pull). If it comes up short, it will fall back to earth because it lost all its momentum. If it reaches a safe altitude, even if it falls a little short, it still reached its main objective (staying in orbit).

In debt, a limited goal is cutting our spending just enough to get out of debt. Yet, then we have a hiccup along the way and we fall short. We end up believing that getting out of debt is unachievable because we set ourselves up for failure. Instead have a goal to get out of debt include a goal of setting up an emergency fund and/or investment fund. You will need to adjust your budget accordingly. However, if you fall short, at least you will most likely have achieved your main goal to get out of debt. You can use this momentum to motivate yourself to meet the rest of your goals (emergency fund and investment fund).

Focus on the little things

The fad these days is to cut out the little things in life (going out for lunch, cup of coffee, etc.). When we focus on reducing our debt, this action step seems to meet our goal. However, by cutting out the small things, we are only able to achieve so much. We may be able to take a dent out of our debt, yet these cuts alone may not be able to push us over the edge to save money (in addition to cutting debt). Cutting back on the little things only goes so far. You can either save or get out of debt, but not usually both. If we create a bigger goal of getting out of debt and saving, we may need to take a step back and look at the bigger picture, including looking at some of the larger items in our budget.

As an analogy, a car may only need to make a minor adjustment if the driver finds himself drifting over the center line. Yet, the car that is way off course (totally off the road) should stop and find the best way back onto the road by looking at the bigger picture (it may take more than a minor adjustment). When we focus on little things, we will need a lot of minor adjustments to get back on the road again (if we are way off course). The constant maneuvering may wear us out by constantly looking at our budget because we left no room for error. Alternatively, looking at the bigger picture and making adjustments once (set up a budget to handle what you need to do to get out of debt and save with having room for error) is easier to carry out by taking a little extra effort up front. You may need to adjust your car and home payments, yet it is easier then constantly trying to cut back further because there is only so much fat to trim on the little things.

Trying to cut back on upkeep and repairs

An easy place to cut the budget may appear to be telling the mechanic to wait on replacing the brake pads that have 10% left or to duct tape the leaky pipe to avoid the $70 service call fee for a plumber. We may be able to push off painting our deck for another year because we do not have the $100 for supplies. By cutting back here, we may have enough room to keep some of our wants in our budget. Yet, cutting back on repairs and upkeep may only be putting us further behind. We may save a $250 this year by delaying repairs which we can use to pay off our debt. However, in the following year, we may have $200 or more of additional repairs because the brake pads needed to be replaced because they were started to grind due to having no pads left. The duct tape may have helped for a few months, yet now our bucket under the leaking pipe is constantly overflowing. And worse yet, because we skimped out of having our heater checked out, we had to call the repair man out for an emergency because the heater did not turn on one Saturday in January. Thus, instead of $80 check-up, we have a $250 emergency repair bill.

Cutting back on repairs and upkeep only works in the short-term before it catches up with us. Actually, waiting will put us further behind because we did not cut back in other areas of the budget because we thought we could find the money to cut in upkeep and repairs.

Delaying action

When we start to slip behind, we try to hold on to what we have, hoping our situation will turn around. Where companies head off their debt problems when they first appear (nip it in the bud) by working out a plan with their creditors, consumers tend to hold off talking with their creditors. We may not feel powerful enough to change our situation, so we tend to sit back and wait until we are hit by a 2×4 to take action (e.g., foreclosure notice). Waiting makes the situation worse. Instead, when we have the first hint of financial problem, we should be looking at our budget and possibly begin talking with our credit card companies and mortgage lenders to find options. We may just need a minor adjustment at this point. However, if we wait, it turns into a bigger problem where we need a major adjustment to get back on track.

Avoiding Shame

One reason that we wait to take action is that we do not want to address our shame. We want to keep our outward appearances going so that others do not know that we hit hard times. Thus, we stick with our budget hoping for a big enough pay raise to handle the problem or for a decline in the higher prices (e.g., gas and health care) to give us some breathing room. Yet again, waiting is not going to change our situation for the better.

Not seeing the reason for our debt

We may point to the final event that pushed us over the edge (hospital bill or credit card interest rate). However, without addressing the issue that put us on the edge (living paycheck to paycheck), we will only set ourselves up for failure in the future by keeping ourselves living the same way (paycheck to paycheck). Until we can see the need for looking at our whole financial picture, we will not find the main event that put us vulnerable position to a financial hiccup that pushed us over the edge.

Going back to the car analogy, we can adjust our steering when we meander over the center lane and brush it off thinking it was a bump in the road that pushed us towards the center lane. However, if our alignment is off, we may not see that our car naturally is pointing us towards the center lane (off course). So adjusting the steering becomes a constant chore because we refuse to go to the mechanic to get the alignment checked out (the source of the problem). Financially, we need to see if our budget (normal living) is pushing us into financial ruin. We can blame a bump in the road for our debt instead of how we live, yet it will not help us correct the problem if the problem is with our budget.

Tackling everything at once

Because we were hit by a 2×4 to make adjustments, we try to fix the problem as soon as we can before being hit again. However, doing everything at once is the equivalent of trying to go from not working out to working out 2 hours a day. It can not be done because we are not use to it. We need to pick the 2 or 3 key things to concentrate on each week and build up to our ultimate goal.

A friend of mine is graduating from college next year. She felt overwhelmed with making a decision on what to do next (go to work or go to graduate school). Instead of taking action, she was paralyzed imagining the long list of things to do (to see which option was better and to pursue it). We discussed the few key things that she could do right now and made a list. She agreed to break up the list into 2 to 3 to do items each week. Before she knew it, she was on her way on improving her resume and deciding what she wanted to do when she graduated.

Avoidance of guilt

I have been hearing more and more about how our job as parents is to make our children happy. Thus, parents feel pressure to keep up with the Jones’s so that their children have the best opportunities (activities) to succeed in the world. Many parents would feel immense guilt if they feel that they let their children down. The fear of this guilt overrides the guilt that we feel for having debt. This is because we become numb to guilt of debt while fearing new guilt, so we try to avoid the new guilt at the expense of the current situation. Yet, sometimes being responsible is doing what children need not what they want. To do this we need to move through the guilty feelings.

I saw over the weekend a dad taking his two daughters out for dinner. I noticed that their dinner consisted of 3 huge deserts (note the dinner part was an assumption because it was 5:30). My wife pointed out that the dad may have been treating the daughters after a day of shopping for their mom who may have been cooking dinner at home. I pointed out that he did not have a wedding ring on, so it was more likely his weekend with the kids where he used treats to make the weekend special (to avoid the guilt of not seeing them during the week).

In financial terms, we keep on spending to avoid feeling guilty of letting those around us down (whether it is our children, our spouse or us).

So, look at your hurdles to getting out of debt beyond the normal reasons we give (not enough money or too high of interest rates). This way we can deal with our part of paying off your debt more efficiently.

The Blame Game

This month, I will be taking a closer look at how to overcome debt. One of the biggest obstacles to overcoming debt is moving past blame. Many times, people focus on how they got into debt including due to higher credit card interest rates, higher health care costs, job loss, etc. The list is endless. Yet, the more time we look at the past, the more it creates a strangle hold on us that is hard to get out of. We become so caught up with why we got into our situation especially when we are blaming others that we have less energy to get out of it. In other words, the more we blame others, the more we remain stuck in the situation. Instead of being focused on the past where we are bound to repeat it. We need to become focused on the future, using the past as only a quick history lesson. Yet, if blame keeps us stuck, why is it so prevalent in our society?

Why do we stay stuck in blame?

1) We get justification that we are right

When we talk to others about our story, we start to believe it even more. We get nods of approval/support for what we are going though and we even get pity for how bad it must be to be in our situation due to what others (e.g. credit card companies) are doing to us. When we get others in our corner, we become more set in our beliefs that the problem is with someone else and not us. Thus, the barrier to get out of our situation strengthens.

2) We want to push the blame to others in order not feel guilty

Part of blame is about transferring our guilt to others. To avoid looking at our part of the issue, we blame others to avoid feeling guilt of realizing that we made a mistake. Since we were children, we are always been looking for ways to avoid of facing punishment whether it was coming or not. When our parents asked us who did this (e.g., wrote on the walls), we look around to see if our little brother was close enough to point the finger at him. Because we did not know what our parents would do to us, the fear of the unknown made us want to avoid it. It is similar with people who are stuck in a situation they do not think they can get out of, they fear what may be around the corner and want to avoid it. Even though we can not always avoid what is around the corner, we can avoid feeling even worse by realizing we caused it. Thus, we avoid our anger by blaming others.

Our desire to push the blame on others, reminds me of the saying that when we point the finger at someone, we have three fingers pointed back at us. We can get rid of our anger on others, yet there is a piece of us that unconsciously knows that we had a part in the situation.

3) We want to prove that we are right

From school days on, we have feared seeing red marks on our work since school days. We do not want to be wrong. We see being wrong as a mistake that we are punished for. Thus, we do not want to be wrong and hate to admit it when we are.

Have you ever had the feeling half-way into an argument that you may be wrong? Did you stop to figure it out or do you continue with your argument with even more conviction because you do not only need to prove to the other person that you are right but also need convince yourself?

4) We can continue with our actions

By blaming others, we do not need to change how we are spending. If we did not get into this mess by our actions, then why should we change our actions to get out of debt? We do not want to give up what we have (our cars, our house, our lifestyle, our dinners out, etc.) because it is another sign of failure to us. Thus, we avoid it and continue our behaviors hoping for the best (hoping we will win the lottery to pay off our debt).

How does blame robs us?

1) We do not see our part of the issues, or at least minimize our part

By looking elsewhere for what is wrong, we do not really see the impact we have. Without accepting our part of the situation, we are not opening our eyes to all the possible ways to get out of it. If we do not recognize our way into our mess, we do not see the easiest way out.

We have also given away our power away by minimizing how we got into the situation. It may sound strange, yet we have more power to change the situation knowing that we created it rather than a situation we got forced into by others (e.g., credit card companies, hospital expenses, etc.) because we are the helpless victim. By owning that we had the power to get ourselves into the situation, we have an easier time seeing that we have power to get out of it as well.

2) It is harder to get someone else to change than changing ourselves

When we focus on blaming someone else, we are focused more on changing them rather than changing ourselves. Because it is harder to get someone else to change; we spend a lot more energy to change others than trying to change ourselves. We can argue with Congress to do something about credit card companies for years before something is done or take immediate action on paying off our debt. We are just making the situation worse by waiting for something out there to change than changing what we can now.

3) We do not look for solutions

In the end when we do not see our part of the issue, we do not look for solutions because it is not really our problem is it? We may focus on one or two solutions (credit card companies lowering their fees or prescription drug companies to lower their costs), yet we stop short of brainstorming all the solutions.

How to get out of the grip of blame?

It may seem as easy as telling ourselves to stop blaming and take action. Yet, if we are really tied into the blame, it is easier said than done. The keys are:

1) See our part in the situation

The first part is to take ownership of how we helped got into our issue. Without taking ownership, we are setting ourselves to fall right back into the situation when we get out of it. If we do not learn our lesson, we are bound to repeat it. We may not have had power to change the event that caused the downfall (the hospital expense, the loss of job, etc.). However, we may not have been as well prepared as we should of to stay out of the situation. Many families are living on the edge (living paycheck to paycheck). Thus, we (as a society) just need one event to push us over the edge. The event that led us into debt may be due to hospital or credit card expenses. Yet, we could have had more impact earlier by setting up an emergency fund or making sure we had the appropriate insurance.

2) Become curious why they are doing what they are doing

To understand the other side of the story we need to see it from their side. Yes, interest rates and credit card late fees may be higher than they need to be. Yet, this is a business that is trying to make money. If we were in their shoes would we do things differently? It is easy to say we would be kinder and more understanding sitting where we are. Yet, we want to charge the highest rate for our services whether we own our business or we work for a company (via our salary).

3) Forgive them for their actions

Forgiveness does not mean what the other person did was right. All that it means is that you are moving on from the incident. It is not allowing ourselves to remain stuck in blame rather to move forward in action.

It means understanding that the other party does what they do. This does not mean that you need to give up negotiating a lower price or lower rate. It just means that you understand that they are who they are and move beyond the blame to find a solution to the issue at hand.

4) Know that you can get through it

When we are blaming other people, there is a small piece of us that believes we have been harmed in some way. Why else would we be complaining about it unless we feel that we have been harmed? Remember the saying, no harm, no foul? If there was no foul, we would keep on playing instead of trying to convince the referee there is a foul. So switch from having the situation seem like a catastrophe to seeing a way out.

There is a saying from Henry Ford, if we think we can or we think we can’t, we are right. When we have a knowing that we can handle a situation, we have more persistence, energy and creativity to get out of the situation than we would if we thought we were stuck in a rut with no way out. Thus, if we know we can get through the situation, the less harm we would see and less blame we would cast onto others.

5) Look for solutions (take actions)

To see a way out, we need to first brainstorm ideas and then find the best one and take action on it. The key is to take a step back and see the whole situation. When we are in the mist of the craziness of life, we see few options. We further limit our options when also find fault with ideas instead of really looking at how the ideas may work. We want to immediately say “no way” to ideas such as cutting back on particular budget items. The initial reaction is that there is nothing to cut. Yet, if we take a step back from our initial response, we may see that the options are not as bad as we initially thought.