Financial Poise
This shopaholic could benefit from lessons in debt management and credit card spending

Money Basics Series – Part 3: Debt Management and Credit Card Spending

Personal Finance Fundamentals Every Adult Should Know

When Kim graduated from college, her first job paid pretty well. Although she had lived on very little while in college, as soon as she started receiving bi-monthly paychecks, Kim was “sucked into” the world of credit card debt and entitlement. Debt management was no more than a fleeting thought.

Not really understanding, because no one ever taught her, Kim was lured into a “pre-approved” credit card. Not surprisingly, like her peers, Kim began to spend money before she earned it. Kim erroneously thought that because the bank had extended credit to her, she was entitled to use that credit for “free.”

On the dreaded 15th of the month, Kim glanced at her statements. Seeing the total outstanding balance growing from $450 to $850, and then to more than $1,200, Kim started to panic. Every month, starting around the 1st, she would have heart palpitations at the thought of receiving the statement. She would find herself obsessing about it at all times of the day and night.

In our society, we are faced with constant stimulation and pressure to buy and buy, and saving is boring and underrated. We are constantly subjected to advertisements and slogans telling us to enjoy life, take advantage of our youth and live! It is so unbelievably easy to get swept up in the excitement of entitlement and living for the day.

In the last two installments, we discussed banking and credit basics and the importance of a money journal. Now it’s time to tackle a more serious subject – debt. How do you avoid it, and how do you reduce it once it builds?

Time for a Reality Check

Understanding your money and spending it thoughtfully, with full awareness, will provide you the ability to make informed choices and take better actions toward debt management. Living independently requires a solid and working knowledge of your money and how far it can go.

To be successful and balanced, you need to identify your personal goals (financial and otherwise) and intentionally allocate your income to accommodate your current and future spending. That means frequently analyzing your daily living expenses. Your spending decisions must include your immediate needs (housing, groceries) as well as your unknown needs (unemployment, medical, and disabilities).

How Your Money Journal Can Assist in Debt Management

In the last installment, I began to address suggested steps to your successful relationship with your money. I raised some issues for thought and suggested you start with a money journal to clarify for yourself your own views about money, as well as to provide yourself with an opportunity to think about your life and money goals.

There are plenty of studies that confirm the benefits of journaling, and it can be done in a very loose way. Srini Pillay, MD, an Assistant Professor of Psychiatry at Harvard Medical School, explains the results of a study on 44 females who used expressive writing (journaling) to articulate their worries. He states:

“Compared to writing about things other than one’s worries, expressive writing about one’s worries did in fact reduce the size of the negative brain wave signal in people who worried a lot. This implied that ‘offloading’ your worries into free-form writing frees up mental resources that you can then use to complete tasks more easily.”

A money journal can do more than clarify your financial goals and map out your debt management plan. It can help reduce stress and keep you focused on your day-to-day tasks.

Address Your Finances Every Week

Make a written appointment in your calendar to sit down with your journal and address your money every week – the same day and time every week, for one hour. This is not the time for paying bills; this is the time to address what you are working so hard for. (That is not to say you shouldn’t carve out separate time to pay your bills and review your accounts, but that is not the subject of this article.)

To start with, and then every first week of every month, reflect deeply on your personal goals. Most people never do this. Rather, they live into their default future and feel helpless to change their situations. Give yourself this gift, monthly. Think intensely about what it is that you want to accomplish. Then write those (short- and long-term) goals down in your journal. Without getting overwhelmed, realistically estimate the literal cost (money and effort) necessary to achieve each goal and set an actual date by which you want each goal accomplished. Simple math (divide the anticipated goal amount by the number of weeks you expect to accomplish the same) will tell you how much money you need to save to be successful.

If you can, quantify the hours of “sweat equity” you will need to devote to your goal, and make a dedicated plan to come through for yourself. Of course some goals, like saving for retirement, will be life-long, but anticipating a certain amount of annual savings will be motivating.

Separate Your Needs and Your Wants

Kim saw that each month she was getting in deeper, yet she wasn’t making any additional money. It was hard to know how she was going to pay off the debt. At night, in bed, she would tell herself, “No more. I am not going to buy lunch out tomorrow. I am not going out to dinner with my friends this weekend. I am not going to buy more than the bare essentials when I go to the grocery store. I can do this. I am going to get this debt paid off!”

Sometimes Kim kept her resolve, and other times she gave in to her “inner devil,” shopping at lululemon and sabotaging any steps she had taken toward debt management.

In thinking about your goals and your lifestyle, make it a point to separate your needs from your wants. Your money is limited, and only you can decide what expenses are going to reflect your personal goals. If you want to buy a house, start a family, or pay down debt or retire to Florida, you need to thoroughly examine how to reach that destination – and enjoy the journey (hoping to win the lottery is not an option).

Once you have defined your goals, you will find it easier to pass on smaller expenses along the way. For example, if you know that you want to save $500 each month toward your goal, you may see a benefit in not going out for so many meals, reducing or canceling your cable bill, minimizing amounts spent on expensive hobbies or refraining from the purchase of immediately gratifying items.

The questions you should ask yourself are quite simple. Perhaps write them on a piece of paper to keep in your wallet.

  • Do I need this item to survive, or do I merely want it to feel good in the moment?
  • Can I wait 24 to 48 hours to make my decision?

By all means live, but live within your means. You can have a full and rewarding life without spending every penny you earn as soon as you earn it. It does take work, but if you are willing to sacrifice and strive, you will reap the rewards by attaining your true goals (not just material “stuff”).

Track Your Credit Card Debt by Checking Your Statements

Shortly before I met her, Kim’s latest tactic to deal with her credit card debt came in the way of automatic payments through her checking account. I was happy that Kim had taken that step (no more late fees to pay or damage to her credit score for missing payments). But, Kim’s comfort in knowing payment would be made directly from her account gave her a false sense of security. She believed that she no longer had to suffer through opening and looking at her credit card statements. Wrong!

Credit card errors are rampant. No one, and I mean no one, is concerned about the accuracy of your bills but you. Yes, occasionally you may get a call from your credit card company, because its screeners had flagged a blatantly obvious fraud. But generally speaking, only you know what you charged. If you aren’t examining your credit card statements, you are likely giving away your hard-earned money.

Do you find comfort in “knowing” that you are only responsible for $50, the maximum exposure under most credit card agreements, for unauthorized charges? Well, that only “works” if you notify the credit card issuer of your dispute within 60 days of receiving the erroneous statement. If you don’t make the complaint, you lose. Period.

So, here are five things I want you to do that could save you literally thousands of dollars:

  1. Open and read your statements. Line by line.
  2. If you see an error, immediately dispute it by calling customer service (the number is on the card and the statement). Be specific about the charge, including date and amount at issue.
  3. Follow up in writing (and keep a copy).
  4. Pay the outstanding, undisputed charges on time (at least the minimum amount). You cannot be charged for the disputed amount, nor can interest accrue on it, while the matter is under investigation. The credit card company has one month to acknowledge your dispute and two billing cycles to make a determination.
  5. Make sure to read your next statement, which should have an acknowledgment of the dispute. Once the credit card company makes a decision, you will receive notice as to how much you owe, the date final payment is due and when interest charges will begin to accrue.

Debt Management 101: Credit Is Not Cash

Credit is not cash. Credit is not your money. Credit comes with a hefty cost. The banks know it, the bankers know it, and now you know it, too. Do not spend what is not yours.

Grow your money so that you can have the freedom to make and spend your money in line with your true values, instead of getting caught in the “prison” of debt. Avoid compounding your credit card debt. Create a debt management plan.

Not spending money that is not yours is not being cheap. Not spending money that is not yours is being responsible.

Read More ‘Money Basics’

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Alpha, Beta & Other Key Concepts and Goal Based Investing – Planning for Key Life Events.]

About Michelle Gershfeld

Michelle Gershfeld is a bankruptcy attorney, debt negotiator and personal financial life coach who advises people who are in debt, or building wealth, by identifying and overcoming obstacles that lie in their path to securing worry-free, financial wellness. Michelle’s private practice, Law Offices of Michelle Gershfeld, provides services to clients on financial distress workshop with clients…

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