Debt: The Last Social Taboo?

Social taboos have dropped left and right since I was a young man raising a family, but one is unlikely to disappear any time soon: holding too much personal debt. But debt need not be a personal tragedy nor a badge of shame. For some, it is simply a practical problem with practical solutions. For others, however, it isn't even the real problem.

In the last few year I've watched two friends handle debt quite differently, and those differences illustrate the real taboo about debt that we seem to ignore. I've changed names and tweaked a few details to keep peace in the world, but what follows are essentially two true stories: those of Joe Able and Tom Baker.

Both Joe and Tom are early baby boomers. During their careers, both had the external trappings of success: nice homes, luxury cars, and a good amount of other cool stuff. They earned good incomes and paid a lot in taxes along the way. They moved into their peak earning years during the Internet boom, and both of their companies flourished.

Nevertheless, neither Joe nor Tom amassed much wealth. Instead, they financed signs of wealth. Their justification: they made enough money to easily afford the payments. Neither Joe nor Tom had a problem with this approach.

In short, both enjoyed playing the role of big shot.

Well, the economy turned and their incomes were cut. Joe eventually realized he would never be able to retire because he had accumulated, well, basically nothing. This must have been terribly difficult for him.

Joe had to fess up to his spouse and family that he may have been "rich dad" for a decade or so, but things were going to have to change radically. Otherwise, he would become "poor dad."

Joe's wife had become quite comfortable with her life of luxury, so together they sought professional advice from his accountant and a qualified financial planner. Together they built a plan to get out of debt and accumulate some real capital. This was the only way they could ever enjoy retirement. Perhaps it would be more modest than they'd once envisioned, but that was OK.

To borrow Joe's words, "I decided to stop the world. I wanted to get off!" He described it as a never-ending treadmill: work hard; make a lot of money; pay off bills; buy more cool and expensive stuff; repeat, repeat, repeat. So they built a plan and refocused. Joe and his wife worked together and are quite happy today.

Tom took a different road. He, too, realized his lifestyle was unsustainable. Family and professionals convened in an effort to help Tom see reality. They encouraged him to change his behavior.

Tom discussed his mounting debts and reduction in income very rationally, but he was unable to change his behavior.

As I looked at these two men, I noticed differences. Joe lived in a large city. Tom lived in the small town where he grew up. Joe was the proverbial little fish in a big pond; Tom was the big fish in a small pond. Everyone in town knew Tom as the kid who grew up and obviously really made something of himself.

What the public did not see was this. Tom's business had a line of credit with the bank and was a good business. Unfortunately Tom maxed out his company's line of credit and used the money for personal spending. The particular business is capital intensive and his company began to suffer. Now he had to make huge payments to the bank for fear his company would shut down.

Eventually the banks were breathing down his neck. Tom had no leverage and gave the bank whatever they needed to keep the line of credit.

Sad to say, his friends told me he became very depressed. They called him the poster child for depression spending. He had several credit cards and bought designer clothes and new toys to make himself feel good. His children said their dad had a spending addiction.

About a year ago, Tom filed for personal bankruptcy. Of course, that notification hit the local paper in the little town he lived in. Six months later, Tom had a heart attack and died in his sleep. He was not yet 65, and appeared to be in good physical health.

For many, debt is not the real problem, but rather a symptom of a much larger problem: an addiction to a self-image and a way of life. Until you address the real problem, you cannot solve the symptom—debt.

While I am not a psychiatrist, I can pick out common traits from among those who walked the walk—retired friends who have accumulated wealth and enjoy retirement on their own terms. Perhaps it is not as lavish as they once hoped, but they enjoy the absolute freedom of being debt- and stress-free. Here are some tips I have learned along the way.

• Start with a financial checkup. I have written many times about the epiphany many of us experienced when we first sat down with a financial advisor to look at our fuzzy retirement goals. It can be just the dose of reality needed to change our behavior.
• Set real, measurable financial goals. As we get closer to retirement, it is no longer some vague event that we hope will happen in a decade or so. Set firm, measurable short- and long-term financial goals.
• Build a workable plan. Achieving those milestones along the way is exhilarating—almost like a preview of what being debt-free is all about. If you just keep doing what you are doing and stick to your plan, you will make it.
• Both spouses have to be totally committed. This was another major difference I saw between Joe and Tom. Joe's wife was a country girl whose real values in life are family and friends. Tom did not have that kind of support. He had remarried a younger woman who thought she was marrying a big shot. I guess she just married him "for better" because, when it became evident their lifestyle was an illusion, she left him.
• Realize you are not alone. As a member of Lending Club, every day I see hundreds of loan applications from people with great incomes who want to consolidate and get out of debt. It sounds funny borrowing money to get out of debt, but they want to consolidate and reduce their interest rates, which is part of the process. Many of these people are doctors and lawyers making huge amounts of money. Not only do they need to make the payments to reduce their debt; they also have to curtail their spending at the same time, something Tom was emotionally unable to do.
  
  Since 2008, when the interest rates on CDs and fixed income securities dropped to the point of not keeping up with true inflation, even folks who have managed to accumulate some wealth have had to make some tough choices when it comes to priorities. We have many friends who have owned a lot of luxury cars who are quite proud to drive up in their new Toyota and discuss how much they saved along the way.
• There is no shame in adjusting your lifestyle to the current environment. Simply put, you have to do what you have to do! While it may have been nice to feel rich during the boom times, adjusting your lifestyle and spending patterns to avoid being poor is not shameful; quite the contrary, it is prudent. Many couples tell us how they worked together and the process made their marriage even stronger. Shame? No way! Pride is much more accurate.

Once your goal is true, stress-free financial independence, it is worth giving up a lot of stuff. Unfortunately for Tom, he was such an addict he could never make the transition. Joe and his wife are happy, surrounded by loving family, and enjoy seeing their next generation grow and mature.

Being debt-free is a major step. You are halfway home. The next step is accumulating wealth. Instead of making payments to creditors, now you can start making those payments to yourself and prepare for the future.