The roadmap to freedom from debt

JoAnneh Nagler and her husband know firsthand how destructive financial debt can be to a relationship.

“Our first marriage wasn’t able to withstand the financial pressure of [nearly $20,000 of] debt, so we divorced,” said Nagler, author of the book “The Debt-Free Spending Plan.” 

When she and her ex-husband remarried 14 years later, they made sure that a prenuptial agreement kept them from ever falling victim to the financial woes that destroyed their first marriage.

“We agreed that we would not engage in credit card debt, and if either one of us did, the other would not be liable. We made sure all the most important finances were laid on the table and that we employed a spending plan. Finally, we had it signed and notarized,” said Nagler, who lived for years in Los Angeles but now resides in the Northern California town of Burlingame.

Although notarizing a financial prenup might not sound like the most romantic gesture, Nagler insists that nothing helps intimacy like financial stability, trust and security.

“Relationships improve as a result of living debt-free. Your love relationship revolutionizes itself,” Nagler said. “You respect your partner more and feel more grown-up. And when you’re responsible to each other and the relationship, and honor it, then you bring more intimacy to your relationship because you’re freer with your love.”

The ascent out of debt

Many experts agree that good spending habits, as well as climbing out of debt, start with creating an easy-to-follow spending plan in the form of a chart.

Nagler recommends limiting your chart to just 10 categories to avoid making the process overwhelming. She suggests starting with the following, although you can add or delete categories based on your own spending habits: food, fuel and transportation, bills (rent, car payments, utilities, etc.), household/cleaning, clothing, beauty/grooming, drugstore, medical copays, entertainment and an extra $35 or so to cover costs if you go over in another category.

The first thing you need to do to create a spending plan is figure out how much money you have coming in each week after taxes have been removed. A general rule of thumb, according to several online financial budgeting tools, is that no more than 60 percent of one’s income each month — 50 percent, ideally — should go toward necessary bills.

The spending plan keeps track of monthly spending and sets individualized, pre-determined limits. If one category ends up costing more than anticipated, that’s OK — as long as that same amount is subtracted from another category, Nagler said.

Most experts also suggest creating an emergency fund, even when trying to pay off debt.

According to Robert Fleishman, a financial advisor at VALIC Financial Advisors Inc., in Orange, the first step of any financial plan is to create a fund for unforeseen expenses, such as major medical costs or damage to one’s car or house. Add to this fund every month, no matter what — even when trying to pay off debt.

“This is short-term savings invested in a money market account or checking account. It should contain no less than three to six months of monthly basic living expenses,” Fleishman said. 

But, it’s important to note that the savings figure varies, depending on the stability of income for an individual. “Someone who has a steady income, like a teacher or member of law enforcement, would require a smaller fund,” Fleishman said, “while someone who’s self-employed would require a larger emergency fund.”

The next step to getting out of debt — and staying out — is to write down every purchase, no matter how small. This includes the $2.50 you might be charged for taking money out of an ATM that isn’t affiliated with your bank. Writing everything down takes some getting used to, but it’s key to keeping track of and controlling your spending, Nagler said.

A common spending trap

Social spending is a common trap for those trying to save money or get out of debt. Drinks with friends, birthday dinners, late-night food truck stops and concerts can all add up — especially when you consider the cost of transportation, clothing and the requisite gift-giving that comes with some of these occasions.

Financial advisors stress that extravagant social spending isn’t worth the monetary headache.

“Yes, it’s possible to still have a social life while trying to get out of debt — it just needs to be done responsibly,” Nagler said. “Set aside some cash each month and make sure you plan, rather than spontaneously head out to drinks three times in a week. For example, my husband and I don’t go out too much if we have an upcoming dinner. And you can always do drinks instead of dinner if it’s necessary to get out of the house.”

Both Nagler and Fleishman agree that you also have to be honest with your friends and family about what you can and can’t afford.

“If you’re going out with wealthier friends, set a price limit on dinner. That way there are no hidden expectations. Most people are very understanding and supportive of friends and family who are committed to financial security. You just have to be honest and thoughtful,” Nagler said.

It’s also important not to be afraid of the stigma of being considered “poor” or “cheap.”

“People can take comfort in knowing that there’s no greater freedom and peace of mind than from being free of debt. That freedom will have a positive impact on a person’s health, longevity, family and social relationships,” Fleishman said.

Social spending gets trickier when it involves family. It’s important to set firm limits on spending and not fall prey to familial pressure to spend money on events  such as weddings and other milestones.

“People feel pressure to create the perfect ‘event of a lifetime’: weddings, anniversary parties, bar mitzvahs, quinceañeras — you have to get rid of that expectation,” Nagler said. “Don’t refinance the house for a kid’s wedding. It’s that simple.”

Cash or credit?

While there is no consensus on the best place to put your money, nor on the best way to pay for things, it’s important to spend consciously and responsibly.

“Placing large purchases on credit cards sponsored by airlines is fine on occasion,” Fleishman said. “The mileage perks can be truly valuable, but you must avoid falling into the trap of paying only the minimum monthly balance as you go.”

Nagler, on the other hand, believes in paying for everything in cash. “Of course, you can use a debit card — rather than carrying large amounts of cash — as long as you keep track of the balance, but in the end they will both keep you from going into debt.”

In the end, the most important tool anyone can use to get out of debt — and stay out — is a spending plan and the determination to stick with it.

“It’s not about deprivation,” Nagler said. “It’s like a diet — you can only completely deprive yourself for so long before falling off the horse. A budget says to people ‘constriction.’ A spending plan should include setting aside money to pay for things that make life meaningful, whether that’s a date night twice a month, a yearly vacation or money for art supplies. You have to be able to enjoy life.”