New Year’s Resolution: Five Tips for Getting Out of Debt

Some of us woke up on New Year’s Day with a headache from drinking too much champagne the night before. But others woke up with a hangover of a different kind: a financial hangover. For some reasons that might not be immediately apparent to you, despite earning a high salary at your job in finance or law, you are still not able to live debt free. The recent hits to the stock market, layoffs at many financial services firms and paltry bonuses spinning off from the subprime crisis in the later half of 2007 don’t make this situation any better. In fact, if you are like many women you know, the double whammy of economic woes and holiday shopping splurges may have finally sent you into crisis mode.

Good. That means you are ready to do something about your debt problem. Earning a high salary is a great opportunity to gain financial security as a relatively young person, but its not the whole story. You need to take control of not only how much you earn, but how much you spend as well, and be willing to make the hard choices in terms of cutting back on expenses and luxury items in order to get a handle on your debt issues. Here, The Glass Hammer helps you get a jump-start on your New Year’s resolution with five tips to help you become debt free in 2008.

1. Make a budget – and stick to it.
   Come home early one night and put those Excel skills to work at home. The first step in making a budget, scary as it is, requires taking stock of the actual amount of money you spend in a given month. To do this, save all your receipts for a month – restaurant meals, bar tabs, cab rides, beauty treatments, impulse shopping trips, and especially ATM withdrawals. The true dollar amount might shock you into submission, but it is important to have an accurate idea of your “expenses.” Then, make a list of all of the expenses that you anticipate on a monthly basis going forward – rent, utilities, food, credit card bills, entertainment, transportation, etc. Write these down in an Excel spread sheet that has two columns for each month – “Actual” and “Expected.” The idea is to work towards making numbers converge.
2. Get a handle on your credit card debt. The same way that you just took stock of your overall expenses, take a very close look at your use of credit. For young women in finance, the lure of platinum cards and fancy rewards programs may have proved too enticing in the first few years of work. When you earn a high salary and work for a company that has relationships to major financial institutions, credit card companies are only too happy to loan you money at 25% APR. Though many brilliant women I know successfully manage millions of dollars on behalf of their clients, but when it comes to their own finances, they are a mess. They don’t realize that credit cards are really just high priced loans, and in some cases, they don’t even know what percent of interest they are paying or how it’s calculated. So, my advice is to read the fine print, and figure out what the balances are on each card you carry, what the payment terms are, how much you put on the cards each month, and how much you pay off. Start paying off the cards with the highest interest rate first. That will put you in a position to ….
3. Make a balance transfer if you are paying off a high-interest credit card. You will never get out of debt if you are paying 23.99% interest monthly on a $5,000 or even $10,000 credit card balance. However, many zero percent balance transfer offers are available if you search them out. Go to www.creditcards.com to compare offers on the market to transfer to a lower-rate card, ideally a 0% APR. Transfer your biggest balance at the highest rate, and then call your other credit card companies and ask them if they are willing to lower your interest rate on those cards, or set up a payment plan with you. You will be amazed at how far a little negotiation can get you. They don’t want to lose your business either. Then, impose a fiscal austerity plan and start paying it off over time. A few important caveats about this strategy: 1) Don’t close your old account, as this can be damaging to your credit. 2) Don’t repeat this balance transfer move multiple times, moving money from one low interest rate to another, as this can also hurt your credit. 3) don’t make new purchases on the card, as these are likely to be subject to a higher APR than the balance transfer. 4) Be careful not to make late payments, or your 0% rate will disappear. 5) Finally, pay careful attention to when the promotional low-APR rate expires, usually in less than a year, and make it your goal to pay off the balance before it jumps back up.
4. If you have money to save, don’t run to pay down your student loans. At first, this might sound counter-intuitive. For many of us who paid our own way through law or business school with a little help from mom and dad and a lot of help from Citibank, we know how it feels to open our student loan statements with trepidation as we watch the interest mount on a six-figure debt. However, the conventional wisdom that you should aggressively pay down your student loans is not necessarily correct. As my economics professor, David Johnson at Duke University, once explained to his students, a good rule of thumb is that, if you can find an investment vehicle with a higher rate of return than the percentage of interest that you are paying on your students loans, than you are better off making the minimum payments on your loans and putting the difference saved into higher-yielding investments. For example, if you are paying back your private loans at 7.5% and your government loans at 3.5%, and you have an investment portfolio in your 401k that has been yielding annual returns of closer to 9 or 10%, then you are much off putting the extra money you save each month into that account, instead of making extra payments on your federal loans. Instead, consolidate your loans at the lowest interest rate possible and make the standard payments, but use some of your savings to make investments with a higher rate of return, while you are young and relatively risk-tolerant.
5. Finally, think of realistic ways to cut back on expenses. Now that your finances are in order, and you know how much you are spending, how much you are saving, and have adjusted your interest rates and payment plans to something more manageable, its time to put the last piece of the puzzle in place. No new debt in 2008. That means cutting back on spending. First, take stock of your housing situation. This is the biggest expense for most people in big cities, especially New York. Do you work 80 hours a week but maintain a spacious one-bedroom apartment in a luxury building with tons of amenities that you have no time to use? Maybe its time to think about downsizing to a studio with fewer frills.

Next, think about what you splurge on, whether its clothes, fancy dinners, or big nights on the town. As we discussed in the previous Glass Hammer article called “The More You Have, The More You Spend,” lots of women in high-earning, high-stress jobs spend beyond their means to fill up for other deficits in their life. Try to think about ways that you can meet your emotional needs without overspending. Want to treat yourself to something delicious? Buy a pint of Ben & Jerry’s instead of dinner at Jean-Georges. Feeling like a little retail therapy? Take a pass on that Chloe bag on net-a-porter.com and pick up this season’s knock-off at H&M. Instead of spending money when you are stressed out, try going for a long run or taking a yoga class. 2008 should be the year of self-improvement – the deeper, more lasting kind which happens to be less expensive than the superficial kind.

Some of these tips fall into the common sense category (but then again, if they were that easy and obvious, you would already be doing it, right?) Others are generally sound practices for planning your financial future, which bear repeating, even if you’ve heard them before, and others are specific strategies to help you attack your debt head-on. These tips also owe quite a debt to the fantastic advice of finance guru Suze Orman, whose recent book, Women & Money (2007) is a must-read for all women. More detailed advice can be found on her website, www.suzeorman.com.

Whether you choose to start with number one and work your way down the list, or pick and choose the suggestions that make the most sense for you, we hope these tips set you on the road to achieving one of your most important goals for 2008 and for your life: financial freedom.