Credit Card Debt, Diversified Wealth
By: Andrew Rosen, CFP®, CEP®

You can tell a lot about a person by their finances.  Usually, I look at ones assets and make some pretty good assumptions about how they save.  However, a lot can be learned simply by someone’s credit card debts.  It serves as a glimpse into that person’s financial soul.

When I have the opportunity to meet a potential new client and they reveal some outstanding credit card debt, I ask the same two questions every time.  I want to know how they accrued this debt and why.  By their answers, I’ll know: A) a tremendous amount about them financially (and personally) and B) how to remedy this situation.

Below, I’ll list the 3 most common answers received and the recommended treatment.

Answer 1:

I’ll often hear the credit card debt was the result of a one-time occurrence they couldn’t avoid.  This ranges anywhere from needing a new roof to medical expenses they simply had to pay.  I sympathize and understand expenses occur that are unexpected and unplanned.  Thus, desperate measures result and credit cards are used.

What this tells me:

This individual is, most importantly, not chronic abusers of destructive debt.  They had a situation outside of their control.  After doing a cost benefit analysis, they determined fixing the leaky roof or seeking medical care was worth accruing some short term credit card debt.

The Remedy:

For starters, they should review where their current savings is going.  Most likely, they’ll want to adjust their monthly outflow to include a liquid emergency account.  This allows some cushion in the future when unforeseen expenses arise.

The other focal point obviously has to be paying down the current credit card debt.  They should research the viability of transferring this into a lower interest or zero paying credit card.   Perhaps, rolling it into their mortgage or getting a home equity line of credit is an option. They’ll need to create a budget to start chipping away at that principal each month.  Can they pay a extra few hundred dollars each month?  Perhaps they can take a big chunk of bonuses and put it towards this debt?  Whichever, sticking to the plan will be integral in breaking free of these shackles.

Answer 2:

The second answer I often get is every month they run in the red and aren’t sure how.  These are people who simply spend more than what they earn. They aren’t living extravagant lives, but there always seems to be something that comes up every month.

What this tells me:

That the right hand doesn’t know what the left hand is doing.  There is a lack of organization and transparency.  Most often, there is also no defined budget or understanding of where their money is going.  Sometimes one spouse doesn’t care or is just not engaged.  Whatever the reason, this needs to be fixed immediately.

The Remedy:

Start with an open dialogue of the issues.  Many times, simply including both spouses in the conversation gets everyone on the same page.  A real conversation must occur about what money is coming in and going out on a monthly basis.  Both parties need to be on board to get organized.

Once everything is on the table I’ll typically hear one spouse say, “Oh I don’t need to spend so much on that category.”  Sometimes, I also hear, “We spend THAT much on XYZ category? That’s crazy.”  Like many things, seeing and understanding the root of the problem serves as the best cure.

Once the monthly outflow expenses are rectified, then (and only then) strategies are built to pay these expenses down.  Much like in Answer 1, there are numerous ways to pay down the principal.  I suggest they work with someone to help figure out which way is best.

Answer 3:

This one is almost a combination of 1 and 2.  One (or both) of the spouses is irresponsibly buying things they know they can’t afford.  They are buying boats or “toys” on impulse without regard to any ability to pay it off.  This has been a long standing issue and one that needs addressing.

What this tells me:

Generally, I learn these people have poor financial habits (likely going way back).  Their parents may have been exactly like this perhaps, or even the complete opposite.  Ever since childhood; however, these people have an unhealthy relationship with money.

It also tells me they are a shoot first and ask questions later people.   That’s fine in many aspects of life, but not when it comes to your financial health.   Family finances require careful planning and strategizing, not “winging it.”  This behavior can lead to an insurmountable mountain to climb.  Often, it leads to bankruptcy or marital woes.

The Remedy:

This is generally the hardest to remedy.  Basically, the problem has to be rewired in their minds.  New habits must be taught and there is a discipline they may not want or reject. It requires tough conversations and a real commitment to change.

I find this works best by bringing in outside help.  Clearly, they need to work with a professional they mutually respect.  A person who can give the tough love, say the things that they need to hear, and show them the real world repercussions of their trajectory.  Once they wake up, the healing begins.

I generally tell these people to cut up their credit cards once payed off.  They can’t handle the responsibility, so from here on out they must buy everything with cash.  They must feel the pain of their spending.  By paying with cash, they’ll quickly realize they can’t purchase things they can’t afford. Hopefully, working closely with someone who holds them accountable for their actions can help them build a healthier relationship with money.

Final thoughts:

As a financial planner, I’ve seen quite the spectrum of client finances.  Nothing is more catastrophic to financial health than mounting credit card debt.  It creates stress, anxiety, and irreversible damage to a relationship and finances.  Quite frankly, these issues can happen to anyone, anywhere; from high earning executives, or busy professionals to your average income earning couple.

If you fall into one of these habits, my advice is seek help immediately.  Do so before it’s too late and don’t be ashamed.  Unfortunately, it’s all too common.  Remember by addressing the issues sooner, we can not only come up with a cure, but do so before any more damage is done.

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Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
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Financial planning and Investment advisory services offered through Diversified Financial Consultants, LLC, a registered investment advisor. Securities offered through Securities Service Network, LLC, Member FINRASIPC .  Associates of Diversified Financial Consultants are registered representatives of Securities Service Network, LLC, a registered broker/dealer, 9729 Cogdill Road, Knoxville, TN 37932. (800) 264-5499.