Chapter 1
Recognizing the Debt Loop
Ah yes, the Debt Loop. The battleground on which you will throw down your enemy (your debt) and smite it to ruin (sorry, I really like fantasy novels). Regardless of your age, type of debt or income level, your Debt Loop will likely continue until you learn how to stop itâforever. In order to stop the loop, first you have to understand what it is, how it works and how itâs affecting your daily life. Then youâll stop taking on debt and be in a position to start hammering it down like a boss. This is your first step to living debt-free.
So what is the Debt Loop? Iâm glad you asked! The Debt Loop is the annoying thing that keeps you owing money.
The Debt Loop
Life throws you curveballs, or as I call them, Financial Tripwires. Things like a friendâs wedding, summer camp for the kids, unexpected physiotherapyâexpensive things that you didnât plan for financially and that you feel your only option is to pay for with credit. Then you have a new bill to pay: your minimum monthly payment. You have to pay it, whether you like it or not, so now you have less spending money each month but still have to financially survive the same things you did before.
So you make a plan to pay off the debt, but itâs probably not all that realistic. You rely on goals like I wonât spend money on clothes for the next six months or Iâll pack my lunch every day. But then life throws you another Financial Tripwire. You feel like you have to use credit to survive, and then you end up thinking of yourself as a failure, even though youâre not!
This is the Debt Loop. It repeats and repeats until you reach a point I call the F*ck-It Moment. Thatâs when youâre just so done with feeling broke and like a financial failure that you simply throw in the towel. F*ck it. When you owe $5,000, whatâs another $100. Right?
The Debt Loop
Financial Tripwire
Debt Happens
Unrealistic Debt-Repayment Plan
Failure
Shame-and-Blame Mentality
F*ck-It Moment
Each stage builds off the one before. The good news is that each stage of your Debt Loop also offers an opportunity to change your behaviour and stop it from looping. Thatâs the beauty of it. The Debt Loop is the problem but also the solution.
Financial Tripwires
Financial Tripwires are spending triggers. Whether itâs a weak moment at the sale rack, university tuition for your kids, or a sick parent, life will throw you some financial lemons and opportunities that are ripe for overspending, guaranteed.
There are two types of Financial Tripwires: those you can avoid altogether and those you canât avoid at all. The Financial Tripwires you can avoid are the ones you have control over personally: routine or emotional Tripwires. We break these down in Chapter 3, but essentially routine Tripwires are spending triggers that happen in specific places or during specific events. They are almost habitual. You make spending decisions every day, and some of them happen without a lot of thought or mindfulness. They are just part of your daily life, your routine. Often those routine spending triggers are whatâs causing you to overspend without even realizing it.
Emotional Tripwires are a bit different. These are familiar feelings that make you want to spend more money than you should; they include both positive and negative emotions. Feeling like crap? Treat yoâself. Out celebrating? âDrinks on me!â Emotional Tripwires are spending triggers that are unique to you.
The Financial Tripwires you cannot avoid are usually something I call setbacks. A job loss, a health scareâsome sort of emergency where you have to spend the money whether you have it or not. The only way to protect yourself against setbacks like these is to have adequate insurance or Short-Term Savings such as an emergency account. We break down Short-Term Savings in Chapter 6.
Debt Happens
If luck is what happens when preparation meets opportunity, then debt is what happens when lack of preparation meets a Financial Tripwire. Iâm sure youâre not stoked when you swipe a credit card or borrow again on a line of credit that you know you canât pay off. But debt happens because, in the moment, it doesnât feel like thereâs any other choice. Thatâs how Tripwires work. At the time, that swipe felt like the only way forward.
Once you take on debt, there is immediately less money in your pocket, because now you have to deal with minimum monthly payments, either payments on your existing debt that youâve increased or payments youâve taken on for the first time. The worst part is that in order to pay it back, youâll need to dip further into your spending money so you can not only make the minimum payment but also put money towards the principal. No matter how you look at it, new debt means less money for your daily life. Boo-urns.
This is why debt sucks so much. You still have to financially survive your daily life, but now on less income. In the beginning, the amount of money you had to spend each month in minimum payments was probably nominal. Oh, itâs only fifteen dollars. But thatâs exactly what makes it easy to sink slowly into the debt hole.
Every time you overspend, the amount of money you have left over for your daily life is reduced more and more, eventually reaching a point where youâre stuck. Thereâs no give in your budget anymore. You canât move, you canât breathe. Like water slowly filling up a room, itâs not so scary when itâs at your ankles, but without action it will rise up to your chest. Thatâs when it gets terrifying.
Unrealistic Debt-Repayment Plans
This is usually the point at which people start making unrealistic debt-repayment plans. If you type âhow to pay off debtâ into a search engine, the first thing that likely autofills in the search bar after your question is âfast.â Fast, fast, fast. How to pay off debt FAST!
I usually hear things like âShannon, I need to pay everything off in three months.â Or âI hear you, but if I donât buy anything for a year, I know I can pay off my credit card.â And worse still, âI read about a person who paid off $60,000 in three years. I should be able to do the same!â
Listen, I know you want this debt off your back. Youâre tired of feeling frustrated and maybe even scared. You want to feel safe, hopeful and in control as fast as possible. But hold the phone. Slow down. When you get spooked by the amount of debt youâre carrying, panic sets in, and that is the worst possible time to make a debt-repayment plan. Panic breeds failure.
The problem with overly aggressive debt-repayment plans is that the timeline until you are debt-free is often very short (and arbitrary) and requires you to make unrealistic reductions in your spending. They doom you to fail.
Failure Happens
Failure happens because life happens. If youâve reduced your spending money by so much that you have to be on your best spending behaviour all the time, going without even small pleasures day in and day out, failure is a given. Eventually there will come a Tripwire that forces you to spend more than youâve allocated and youâll set the Debt Loop into motion again.
Take, for example, my client Shauna, who in six months wanted to pay off $3,000 in credit card debt with an interest rate of 19 percent. With a salary of $30,000 a year, Shauna made $2,040 a month after tax. Per month, her share of the rent was $800, her phone bill was $80, her transit pass was $110, and the monthly minimum payment on her $3,000 credit card was $90. This left her with $960 for any savings and spending money.
Shauna usually spent around $700 a month for groceries, clothes and the rest of her life. If she wanted to pay down her credit card in six months, it would cost her an extra $478 per month on top of the $90 minimum payment. That meant she would have to reduce her spending money to $482. That just wasnât enough for her, given the usual cost of her regular life.
She was able to sustain this level of austerity for three months, but then she had a job interview and needed an outfit. She found one that made her feel really confident and comfortable in her own skin; it cost $65. She purchased it with cash but then didnât have enough for groceries that week. Naturally, she brought out her credit card and swiped. She had failed at her debt-repayment plan.
Of course she failed, but not because sheâs bad with money, a shopaholic or out of control. She failed because the plan was not realistic for her life. Not someone elseâsâher life. Unrealistic debt-repayment plans and time horizons and spending abstinence lead to failure. Iâve seen it happen time and time and time again.
The Shame-and-Blame Mentality
The Shame-and-Blame Mentality is the headspace you occupy when you feel like a total failure after your debt-repayment plan falls off the rails. You couldnât pay down your debt or stop using your credit, and you feel like itâs all your fault. âI just feel like such a loser,â Shauna said, âlike I didnât try hard enough.â
Shame and blame perpetuate the fear that you will have debt forever, regardless of what you do to stop it. If you tell yourself that you are âbad with money,â eventually, over time, youâll start believing it. I think the Shame-and-Blame Mentality is the worst part of the Debt Loop, and I believe itâs the main reason why that Loop persists. Shame and blame are not good motivators; in fact, they breed more debt.
Typically, the Shame-and-Blame Mentality leads you to keep secrets, from yourself and from others....