Case Study: Changing Spending Habits to Eliminate Consumer Debt

Millions of Americans are dealing with consumer debt. Of course, some debts such as mortgages are healthy because real estate is typically a very strong long-term investment with great tax benefits. Then you have student loans and car loans, which are used to pay for something practical. However, too many people are irresponsible with credit cards. Even those who make good money often rack up credit card debt that hinders their ability to save for retirement or achieve the goal of financial independence.

With this in mind, I’d like to share a true story about a young couple I met recently who was dealing with overwhelming consumer debt. They needed to change their spending habits and put together a smarter financial plan to enjoy a better future together.

Their Financial Situation

In total, they had about $35,000 in consumer debt racked up. It was spread out amongst 12 credit cards. The good news is both of them made a pretty healthy income. They simply weren’t managing their money wisely and they realized the debt had become a major problem. They were going on vacations and putting all the expenditures on their credit cards without really thinking of the debt they were building up. Before long, just keeping up with the minimum payments had become difficult as part of their monthly bills. In fact, they had to borrow money from a family member just to pay their rent one month.

A New Financial Plan

They knew it was time for a change, so they completely altered their spending habits starting in January of 2019. They put a specific focus on paying off their consumer debt. Here are some of the specific steps they took to achieve this goal:

• Selling items that they no longer used and clearing out their storage unit (another unnecessary monthly bill).
• Taking their tax refund and using it to pay off debts, rather than using that money for another vacation or frivolous purchase.
• Stopping use of credit cards altogether. Instead, they paid cash for everything to keep their spending in check.
• Cutting back on unnecessary lifestyle expenses by not going out as much and finding less expensive options for everyday needs and entertainment.

The Results

Within only 6 months, this couple had completely paid off their credit card debts. Now, the money that was going toward debt relief is going into savings. They completely altered their spending habits and the way they look at money, in general. And though they did cut back on some of the more frivolous spending, they really didn’t have to change their lifestyle that much.

What are the takeaways from this cautionary tale? Here are a few financial tips you can consider:

1. Have a Spending Plan

When you want to be smart with your money, it’s vital to have a spending plan. Understand your necessary expenses and review your unnecessary purchases. Having a little discipline can go a long way!

2. Be Aware

The best way to effectively manage a personal spending plan is to have awareness of what’s going out versus what’s coming in. Track your spending for a few months using a spreadsheet or a personal finance application. If you are spending more than you make, then you are destined for failure.

3. Look for Productive Ways to Invest Money

Rather than buying things you don’t really need, use your extra money to put into savings, contribute more toward your 401(k) or put it into investments. Consider buying a home rather than renting, so you can build equity and also benefit from much better tax savings. Use any extra spending cash toward your mortgage principal payments each month in order to pay off your mortgage quicker. Work with a financial advisor to get the most out of your finances.

4. Find Balance

We’ve been talking about this a lot on the Illumination Wealth Blog this month. You don’t have to live like a hermit and put every extra penny toward retirement. Find ways to enjoy your lifestyle now while still investing in your future. This is what we call a win-win scenario that allows you to have a more fulfilling life for many, many years to come.

What’s Your Financial Plan?

For help managing your finances, saving for retirement and developing an effective spending plan, contact Illumination Wealth today. No matter what your financial goals, our team is here to help you get where you want to be.