People come to my office expecting to talk about making and saving money. But more and more lately, the conversations we have are about their need to get out of debt.
I’m starting to see a trend of retirees, people in their early sixties and even mid seventies, who are in debt right up to their eyes. Some are to the point of having to sell their homes just to survive. Others are so stressed that they literally worry.
Poll after poll shows that the main fear most retirees have is that they will outlive their income. Many say they fear that they will not be able to maintain their current lifestyle or be able to meet health costs. These concerns are legitimate, not only because people are not saving enough, but also because many are carrying heavy debt until they retire.
What happened to the frugality of our grandparents and parents in the days of depression – the belief that you should pay cash, buy the things you need instead of everything you want , and save, save, save?
I call what we have today the “microwave mentality”. We cannot wait. We must have it now. Television says we need this to be cool and this to be successful. We have companies that sell us on the “low monthly payment” instead of the big bad balance. For just $ 9.99 per month, you can have whatever you want and only pay for it for 30 years! You buy it (whatever it is) it ends up wearing out and you always pay for it.
My office is based in Florida, and I see it all the time. People come here from the North thinking that life will be cheaper. Then they come up here and say, “Everyone has a golf cart. I have to buy a golf cart. I must have a new car. New furniture. A bigger house. There are couples who are 79 and 80 and have a 30-year mortgage. You have to admire their optimism, but these are the kinds of decisions that get people in trouble.
At my office, we run a software called a retirement analyzer that takes the income and expenses of an individual or a couple and shows how long their money will last in different scenarios. You would be amazed at how many people think they have enough money to last a lifetime, and it shows that they are going to burn out at age 75 or 76. And that’s mainly because of the debt.
So if you are in debt, what can you do?
Pay off your credit cards.
I firmly believe in getting out of debt as quickly as possible, but you also have to live. If you have enough money to pay off your credit cards, do it. Keep a card and cut out the rest.
If you have multiple cards and don’t have the money to pay them off, make a list of the balance and interest rate for each. Focus on paying more for the card that costs you the most first, then the next, then the next. If you have a low-interest card and can get a cash advance to pay off the other cards, do so. Once you’ve paid off all your cards, keep paying yourself. Don’t buy more stuff, put the money in the bank.
Pay off your mortgage.
People have been led to believe that if you buy a house you should have a mortgage so that you can deduct it from your taxes. This is the biggest myth since we were told there was an Easter Bunny. The tax deduction is so small compared to what you pay for the mortgage that it doesn’t make sense.
A client told me, “But I have an interest rate of 3.75%! It’s not your interest rate that matters; it’s your cash rate. How much money comes out of your pocket each month to pay off this debt? I multiplied the principal and interest payment times by 12 and divided it by how much they owe. Their cash rate was 8.5%.
They had a mortgage of $ 135,000 and had $ 400,000 in the bank, earning zero. They had come to me asking how to invest the $ 400,000, and I said to them, “Pay off your house. I was the third counselor they had seen, but the first to give them this advice.
Pay off your mortgage.
If you can’t pay off your mortgage, pay extra for the principal. Let’s say your monthly payment is $ 1,200; add $ 100 more each month. You will reduce a 30-year mortgage to 23 years. If you have a 15-year mortgage, you’ll reduce it to 10.
Pay attention to your drinking habits.
It’s crazy what people spend money on without realizing it. A little here, a little there. I mean, coffee is coffee, isn’t it? If you’re in debt and in trouble, do you really need a $ 5 latte? It might sound small, but cutting a latte habit a week for a month could put you $ 20 in your pocket – imagine that compared to a latte habit a day.
I see so many people who want to retire and are just not ready. The debt of the past is killing their future. But there is a way to make it right.
Be patient and persistent.
Remember: the easiest way to eat an elephant is one bite at a time.
David Blackston is a Registered Financial Advisor, Investment Advisor Representative and Insurance Professional, who founded the Blackston Financial Advisory Group. He lives in Florida.
Investment Adviser Representative and investment advisory services offered by Royal Fund Management, LLC, an investment adviser registered with the SEC.
Kim Franke-Folstad contributed to this article.
Founder, Blackston Financial Advisory Group
David Blackston is a chartered financial consultant, representative of investment advisers and insurance professional who founded the Blackston Financial Advisory Group. He lives in Florida. He and his son Drew are co-authors of the book Have you ever been bitten by an elephant: the definitive guide to a successful retirement.