It is hard to read a newspaper, listen to the radio, or watch TV these days without hearing about the level of government (state and federal) indebtedness. In the debate about how expenditures should be cut or if taxes should be raised, there is little discussion about why and how debt levels have gotten to these stratospheric levels. Therefore, it may not be surprising that those facing mountains of personal debt have difficulty knowing how to deal with their debt. Perhaps, a look at financial behavior and the choices to which that behavior leads is a good place to start when devising a debt reduction strategy.

A good place to start is with the concept of cash flow. Anyone who has ever received an allowance or had a job is familiar with the idea of cash flow. The routine process, and potential problems, of matching income with expenses is learned at an early stage in life. The problem becomes all too apparent when we want to go to the movies, buy clothes, get the latest bit of technology, or buy a new car now, but we don’t have all the money to pay for these items now. To help solve this timing problem, the financial industry created the concept of credit. 

For the last several decades, credit card offers, plentiful auto financing, and easy to obtain mortgages seemed to be everywhere. It seemed easy to sign up, and the low interest rates seemed like a real bargain. Moreover, the minimum payments on credit cards and auto loans were easy to make. The fact that the credit cards were used as a long-term financing source, and not a temporary bridge loan, was lost in the euphoria generated by the euphoria of the purchase. 

The use of the credit card was not necessarily a bad decision, but financing purchases of goods and services that have short periods of enjoyment with long-term debt created another timing problem. The strength of the desire for the item now overwhelmed our understanding of the financial consequences of not paying off the credit card balance. This happens at the personal level as well as at the governmental level. The only difference is that we can’t print money and the federal government can.

When the credit limit on our cards was used up, the financial services industry offered enticements to shift balances to other cards at lower rates. While doing so may have helped monthly cash flow pressures, it did little to reduce the ever growing level of debt. While a popular strategy for some time, shifting balances to lower interest cards did nothing to address the ultimate problem with debt accumulation. At some point the amount of debt accumulated becomes so large that it is very difficult to service the debt. When this point is reached, what can be done?

A first step that can be taken is to recognize that the root of the problem is timing. If there is insufficient money to purchase the item or service now, ask yourself if the good or service is a “need” or a “want.” The simple action of pausing to ask and answer this question will force your brain to consider additional factors other than the immediate pleasure of the purchase.

Once you are able to pause before purchasing, you can begin to establish a budget for various items. Creating a budget can be an unpleasant process if you look at it from the perspective that a budget “denies” you the ability to purchase what you want when you want. Instead, if you look at a budget from the perspective that you are granting yourself permission to spend a certain amount on a certain item, the budget becomes a reward and not a punishment.

Establishing a budget can be intimidating; especially if there is a lot of accumulated debt to repay. So, to simplify the process a bit, keep in mind the following simple ideas:

  • Determine the annual percentage interest rate on each of your debts.
  • Determine the minimum monthly payments for each of your debts.
  • Determine the amount of money you can “spend” on monthly debt payments.
  • Pay more than the minimum on the debt with the highest interest rate and a bit more than the minimum on the remaining debt.
  • Once the highest debt is fully repaid, using the same strategy, move on to the next highest interest debt until all debts are repaid.

This process can take time. To help, think of the act of paying off an outstanding debt as giving yourself a raise. At the end of the process, you will have given yourself a raise equal to the accumulated outstanding debt.

Finally, once your debt is paid off, try to live within the 70/20/10 budget. This budget structure requires that you save 10 percent of your income, limit your debt service to 20 percent of income (including paying off your credit cards monthly), and use 70 percent of your income for everything else.

While paying down debt may not be as satisfying as a new car, think of it as a pay raise. Everyone likes those.

FPA member Kevin Moore, CFP®, AIF®, is a principal at i*financial, located in San Antonio, TX. Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a registered investment adviser. Strictly intended for individuals in: CA, CO, CT, DC, LA, MD, MN, NC, OK, OR, TX, VA, WA, WI. No offers may be made or accepted from any resident outside these states due to various state and registration requirements regarding investment products and services.


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