It is painful for me to watch people make the same ignorant and stupid mistake time and time again when getting out of debt. And what is the number on mistake that screws up their financial future in an effort to repair their financial past? Keep reading to find out.
People make all sorts of emotional decisions when faced with not being able to make ends meet. But without a doubt the most damaging and saddest mistake people make could have easily been avoided if they had assessed their situation with clarity instead of listening to the wrong assumptions from people that don’t know any better.
Rather than deal with the reality of their financial situation, people waste time and money doing what will hurt them most in the long run. They go out of their way to do the worst thing possible.
What is that horrible thing they do? They place the emotional desire to repay their debts ahead of the necessary requirements to protect themselves moving forward.
If you want to stop reading right here, do yourself a favor and keep going.
It you don’t listen very carefully to what I’m about to share with you, you will retire poor, trying to make ends meet, and worried about how to feed and care for yourself.
This is serious stuff. Park your preconceived notions and assumptions at the curb and buckle up. This could be a very bumpy ride for your beliefs.
I think you would agree saving money is critical to your future financial health.
But here is something you don’t know yet if you are reading this, You absolutely must save money when you are getting out of debt or we need to take bigger action to deal with your debt.
There are two types of savings that are a priority in your life.
You Need a Boring Savings Account
When getting out of debt you need to save while you are paying down the balances. You need a regular old savings account where you can put money away each month to build an emergency fund you can dip into in case of an unexpected financial surprise. These surprises happen. It might be a flat tire, a needed engine repair, or school fees. Regardless what it is, without the emergency fund to reach into for that money it will land back on credit and erode your progress and path out of debt.
This savings account can be tied to your checking account. To make saving easy you can setup an automatic deposit into the savings account each month and let the money build. You can even check with your employer and see if they can divide up your paycheck when they automatically deposit it and put a set amount in savings for you.
Recent studies say that half of Americans could not get their hands on $2,000 in cash within 30 days. You absolutely need to be in the half that can.
At the very least your savings account should have a minimum of $2,000 in it, more preferably, and build it from there.
But if you starting from zero you would have to save $167 a month for a year to reach $2,000. If you can commit to depositing $167 a month or $83.50 a payday that’s what you should do right now. But this plan only works if you don’t deposit the money and then take it right back out. If you take money out you need to put it back as soon as possible and continue your regular deposits.
This boring old savings needs to be a priority debt. You need to be able to structure your financial life so you are putting it in and not taking it out except for a true, rare emergency.
Depositing it on Friday and taking it out on Tuesday is not saving. That’s a financial lie instead.
Along with building your emergency fund we also need to put aside a different type of savings.
You Must Save for Retirement
We are racing towards a future retirement crisis. Those same folks that can’t save money to build and emergency fund are not focused on building retirement savings.
Many just feel they can’t afford to do that and pay their bills at the same time. And they probably can’t. But retirement savings is probably the highest priority debt of all.
Retirement savings is really money you set aside to care for you when you are unable to work, to keep yourself safe, and provide for needed food, shelter, and clothing.
You either need to have a retirement savings plan implemented now or plan to be a financial burden on your kids.
If you don’t save for retirement today, I guarantee you that your 82 year old self will be pissed off and living in low income housing while trying to get some food from the food bank. Hey, it’s happening right now today.
And as studies show, those born after 1966 will now have less for retirement and be much less prepared for retirement than generations before.
One out of four families in America does not have enough food to feed themselves now. What do you think it’s going to be like when those folks are old, ill, and unable to work?
Retirement might seem like it is so far off it does not matter. But the fact is today is critically important for a safe retirement savings plan.
Every dollar you put away and leave tucked away now, will grow and grow to become something that will support you when you need it most in retirement. And I’m not even talking about a luxury retirement and globe trotting. I’m just talking about keeping yourself warm or cold, fed, and able to purchase medication and health insurance.
Let’s look at the difference starting early makes. A stock index mutual fund can return more than 10% but I’m going to use a 10% return and assume you are going to retire at age 75. If you save $300 a month it will grow into the following amounts.
Start at age 25 – $5,197,317.24
Start at age 30 – $3,144,750.51
Start at age 35 – $1,897,223.87
Start at age 40 – $1,138,991.42
Start at age 45 – $678,146.38
Start at age 50 – $398,050.02
Start at age 55 – $227,810.65
Start at age 60 – $124,341.10
Start at age 65 – $61,453.49
Now I hope you work for an employer that provides matching funds for your retirement savings. If you do and you are not saving enough to get the full benefit of the matching funds, you are throwing free money away. Throwing it away!
Let me be clear. If you don’t save for retirement you will retire poor, broke, hungry, and cold.
Maybe you think Social Security will be there to help you when you retire in 35 years. And maybe some form of it will. But people today can’t live on the little bit Social Security pays now. Do you think it’s going to pay more per month in 35 years? Hell no.
Right now the U.S. government is trying to find ways to cut back on benefits like Social Security and Medicare. People who retire in the future will have to pay more for food, shelter, clothing, medication, medical insurance, and just getting by.
By not making retirement savings a priority obligation now you are betting your future on that decision.
Your Absolutely Enemy is Time
The one commodity in the equation to get out of debt that is the most precious, is time. Time is your absolute enemy.
Every day you put off saving for retirement means you will need to double or triple your monthly savings to get caught up.
Here is a real example.
Above I showed you that if you started saving $300 a month at age 25 you’d have $5,197,317.24 at age 75.
Let’s say you delay. To have that much money when you retire at 75 you’d have to save the following amounts each month if you started saving later.
Start at age 35 – $821.83 per month
Start at age 40 – $1,368.93 per month
Start at age 45 – $2299.20 per month
Start at age 50 – $3,917.08 per month
Start at age 55 – $6,844.26 per month
Start at age 60 – $12,539.66 per month
Start at age 65 – $25,371.95 per month
The longer you delay in getting a fresh start and a legal second chance, the more money you literally take out of your mouth when you are 82.
And these numbers don’t even include how much you need to save each month to keep building that emergency fund.
Wake Up and Smell the Coffee – Let’s Get Your Priorities Realigned
When getting out of debt you MUST plan your monthly budget to include emergency fund savings and retirement savings. Those amounts must be added on to any other necessary monthly expense before you even consider if you have any money leftover to repay your debt.
If you don’t have enough money left over to repay your contractual minimum payments after expenses and savings then the answer is logically and mathematically clear. You need to file bankruptcy.
“But Steve I don’t want to file bankruptcy,” some say.
And while that might be true, you may not want to file bankruptcy, it does not change the pure math involved. If you don’t save now you will retire poor. If you don’t save now you will have to save much, much more per month later to make up for lost ground. And let’s be honest, you won’t.
The honest and logical truth is the choice you need to make is between trying to repair your financial past or your financial future.
“But it is immoral to file bankruptcy. I need to honor my promises,” you may say.
But the logic doesn’t compute with that statement. So if it is more honorable to pay your back debts now and put off saving, will it be more honorable to live on food stamps when you retire and live in taxpayer subsidized housing later?
You either discharge your debt tax free now and get to saving or pray to your God that some financial safety net will be around when you are old, broke, hungry, and poor.
You can rebuild your credit score after bankruptcy. You can get a mortgage, a job, and a car. You’ll get credit again. But what you will never be able to get is the time you wasted in getting back to saving and the money you lost in retirement by not making the right decision during a tough time.
Just because a decision is tough to make does not mean it’s wrong.
Use This Formula
The right formula to understand what choices you need to make:
Your Monthly Basic Living Expenses (not including your debt) + Emergency Fund Savings + Retirement Savings = Total Expenses
Income - Expenses = Available Money for Repayment
If Income – Total Expenses does not leave enough room for you to make your minimum payments, the answer has been made for you. You SHOULD strongly consider bankruptcy and get back to saving as soon as possible.
If you don’t the only thing you risk is the financial safety of you and your family in an emergency and your future safe retirement.
If you qualify for a chapter 7 bankruptcy, as most do, your debts will be discharged in about 90 days. You can get your savings program launched and start rebuilding your credit immediately.
Please, I beg you to click here to find a local bankruptcy attorney and talk to them for free about your specific situation. Get the facts and then you can make an informed and educated decision if bankruptcy is right for you to get you back saving again as quick as possible for your future.
Let’s get you moving in the right direction and creating a solid foundation for a safer financial future. Your 82 year old self will thank you for it.
But I’ve met a lot of people that said they should have listened.
Which one do you want to be, the choice is absolutely all yours to make.
You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.
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13 thoughts on “The Saddest Avoidable Mistake People Make When Getting Out of Debt”
Elizabeth Warren once wrote that for every individual who files bankruptcy there are 7 more who would do so if they the proper advise. Your article is such advise.
Very good content, thanks Steve. I do have a question though I believe is related to this topic (will require some background information):
I am trying to start my own business, but currently have about $4k in credit card debt. I need about $5k in start-up costs. I am saving about $500 per month from my surplus income.
Should I save up $5k and use it to start the business and then pay off my cc debt OR should I save up $4k to pay off my cc debt and then get a loan from the bank to start my business?? I am leaning towards the first option since my credit rating is pretty shot right now, but it seems like everyone always says pay your debt first.
If you’ve never started a business before you will learn expenses are always a surprise. It seems to cost twice as much and take twice as long.
If you paid off the card and then used the card to finance the business it would land on expensive credit card rates.
So to minimize the cost of starting your business I would suggest you start it as debt free as possible and look for less expensive money, as in a loan from your bank.
The less debt you start with the more time and flexibility you’ll have to make your new business successful.
As an educated 30 year-old woman I make roughly 48K a year (after taxes it’s a lot less). With student debt, car insurance, health insurance and rent I roughly have enough to get by let alone save $300 a month. It’s unheard of with anyone I know to be able to put that kind of money away. No one makes that kind of money anymore especially if you are single or a parent (or both). It’s a nice thought to be saving responsibly for the future but totally unrealistic to sacrifice that much money every month.
I guess Steve didn’t get a chance to answer, but as I am facing similar dilemmas I see that you are a grad student and you mention student debt. Can you defer the student debt? Can you reduce your medical insurance premiums in any way? The same can be asked about your car insurance. If you divert those premiums to savings by increasing your deductible or reducing your premiums, you will find that you will get a better value out of the money if you ever need it. Insurance companies are trying to make a profit, so you likely will pay 2 to 3 times or more (way more) your actual costs for that particular item when you claim, and sometimes in the case of medical insurance, your out of pocket copay can be more than what the discounted self-pay rate is for things like medicines and some doctors. I have to tell the pharmacy I have no insurance to get a better price on some of my medicines.
Dave Ramsey has it part right when he mentions the “4 walls” Food, Shelter, Transportation, clothing. Well the 5th wall should be savings, then everything else can be added later.
Thanks for catching that missed comment on my part. I think this is a great starting point to get things refocused on what is possible. See https://getoutofdebt.org//52478/get-out-of-debt-guy-easy-steps-eliminate-debt-checklist
Excellent article Steve. You are exactly right when you say:
“What is that horrible thing they do? They place the emotional desire to repay their debts ahead of the necessary requirements to protect themselves moving forward”. Your math formula is right on also. It is my opinion that people who are not saving for both the raining day and retirement MUST not pay thier unsecured creditors (soon you will see my plan on how this can be done by those for whom BK is not an option). I don’t want to go down too much of a rabbit hole on the moral issue of debt payment, but would like to pose two questions: 1) is it moral to have the state (your neighbors) pay for your retirement? 2) is it moral for creditors (who currently run our banktocracy state and control all money and rates) to make huge profits in a fixed system? Please do as Steve suggests.Do it for your kids. Your creditors will survive without your payment, and so will you.
Creditors factor in a certain percentage of accounts will default. People never do.
Creditors take calculated actions based on math. People make blind choices based on assumptions.
Great post Steve. It’s tough stuff, but the reward you receive for making the tough decisions and taking action provides benefits for years and years to come.
Thanks. Yep, just because a decision is hard to make does not mean it’s wrong. I’ve just watched far too many people have to decide between air condition of medicine. I’m tired of it.
I hear you. I call it “what I want to tattoo on my forehead.” 🙂
I wonder if anyone has ever stood in a soup line and said, “But I paid all my creditors!”
If they did, the response from the creditors would be, “thanks”, right after they swallowed their mouthful of lobster.