Ask The Matadore: “HELP! We have $61,000 in consumer debt!”

Matadore Mailbag Question: “My wife and I have gotten really behind on things. We have over $61,000 in consumer debt between three credit cards, two cars, and our tractor (which is almost paid off, with only $1400 remaining, also the smallest of our debts). We were doing really well a couple of years ago and I am super anxious and frustrated. My wife has an admitted spending problem and I haven’t been able to get her on the same page with this being an emergency! We have 4 children and everything continues to get more expensive due to inflation and the kids getting older. We live on my income alone and I do make contributions to my 401k every week, but I have considered taking money out of an IRA to pay off some of the debt! Please help, we need a plan!”

Oh boy! I hate hearing this. Believe me, my wife and I have been in debt before and it STINKS!

Your income is your greatest wealth-building tool, and you cannot build wealth when you are giving most of your income away to banks!

OK, a plan of attack. First, it sounds like you have more urgency or determination to get out of debt than your wife does. That is first and foremost what needs to be addressed. If you cannot agree on the problem and work together to solve it, you won’t get it done.

Have you told your wife how scared and anxious you are, being the sole monetary provider, and how this debt keeps you up at night? Have you made it clear this debt makes you worried about your shared future?

If not, I recommend being explicit and direct. The emotion of the situation is a powerful tool.

Do you have any cash savings? If not, I would try and save at least your insurance deductibles (home & auto). This provides you with some cushion should something else go wrong, which will happen, and keep you from adding to your debt.

Now, you said your wife has an “admitted spending problem”, so it sounds like you don't have a household budget.

If spending on wants is taking over your monthly spending, you need to get on a budget that you work on together. Sit down at the table when the kids are in bed and list out all monthly expenses starting with housing, utilities (including mobile service), insurance, food (groceries only, no restaurants right now), home, and personal supplies.

American household’s main cost drivers are transportation, food, and housing. Presuming you have a fixed-rate home mortgage, what you spend on food and cars should be examined. I know you have car debt, so figuring that out is a key piece to getting solvent.

But, dig into all your monthly needs and look at ways to cut back or negotiate changes on things like insurance policies and mobile service.

My wife and I have saved thousands of dollars by ditching old insurance and mobile plans for more cost-effective options.

If you don’t know where your money is going, getting out of debt will be that much harder.

Now, regarding your debt. I have covered debt payoff strategies on this blog before, and I like the Cash Flow Method (CFM) best.

Here is what the CFM looks like.

List all your debts along with their minimum monthly payments. Then divide each total balance by its minimum monthly payment. You will get a number. Under 50 is an inefficient debt and a major drag on your cash flow. The lower the number, the more inefficient the debt is.

Rank your debts by their Cash Flow Score (CFS) and pay the most inefficient debt first, throwing all extra margin at it. Continue to make minimums on the others. When that first debt is paid off, move the increased margin to the next debt on your list based on CFS.

This approach effectively restores margin and boosts cash flow promptly.

Regarding margin, you mentioned your contributions to your 401(k). I advise reducing them to meet the employer match only or considering a temporary pause on contributions altogether while you focus on addressing your debt.

The more money you have coming in to eliminate this debt the better. Carrying credit card balances is not a recipe for success.

If you can settle your car loans within a year, it makes sense to keep them. However, if that’s not feasible, it’s worth considering the sale of one or both cars, especially if the market value of a car surpasses its outstanding loan amount. Remember that nearly all cars depreciate over time, and Loans on them are stupid. While you likely require at least one car, this decision can significantly shift the balance in your favor and potentially result in some cash savings.

Most importantly, right now, stop spending on your credit cards. It sounds like maybe you aren’t credit card people if you aren’t paying off balances in full month to month. Don’t keep digging your hole.

When you are out of debt and have a Peace of Mind Fund (3 months of living expenses saved) you can revisit credit cards.

I don’t know what your income is, and I know you have four mouths to feed, but you can do this.

Partnering with your wife on a budget, seriously committing to one another’s financial future, examining wants and needs, and getting on a plan can have you in a radically different place 6 to 12 months from now.

Thanks for coming to The Matadore, and don’t hesitate to let me know how else I can help.

What tips do my readers have for this family? Can you relate personally and can you share wisdom and encouragement?

Thanks for reading. Be good stewards of your earnings.

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