When Amy Kroezen, 29, graduated from the Art Institute of Atlanta in 2008, she couldn't find a job that took advantage of her interior design degree. "I was turned down for job after job, and even advised to go wait tables by a design firm until the economy got better," she says.
To make matters worse, she soon had to start payments on her student loan debt. She and her husband, a dance instructor, owed about $116,000 in student loans and $2,000 in car payments. "I had no idea how we were going to spend the next 10-plus years paying $990 a month in debt. How would we ever own a house, have a child and have any quality of life?" Kroezen recalls asking herself. %VIRTUAL-article-sponsoredlinks%She felt physically ill, just as she had as a child when she heard her parents talking about money.
So Kroezen and her husband, a native of Australia, decided to do something about it. In April 2009, they committed to paying off their debt within four years by dedicating one of their incomes entirely to paying off debt and then living off the other income. At the time, Kroezen and her husband were each earning between $32,000 and $35,000. Now a growing family with a 2 and a half-year-old daughter and another baby on the way, they are very close to achieving their goal -- and they say their strategy could work well for other families, too.
According to a December survey of more than 2,000 adults from Think Finance, an online financial products company, about three-quarters of Americans will carry debt into the new year, including credit card debt (36 percent) and car loans (28 percent). Here are six strategies that can help those Americans -- and you -- climb out of debt in 2014:
1. Downsize. Not only did Kroezen and her family start living off only one income, but they moved into a cheaper apartment that was minutes from each of their jobs, which meant they could also save money on gas. That also made it easier for them to live off just one income.
2. Use the envelope system. Whenever Kroezen got her paycheck, she turned it into cash and then distributed those bills into envelopes dedicated to different costs, including food, rent and other essentials.
3. Get ready to work and get support. "It's not easy," Kroezen acknowledges. "You need a good support system whether it's family, your spouse or a friend." She adds that aiming to get out of debt, not become rich, will help keep you from feeling overwhelmed.
4. Be super frugal. Kroezen and her family cut out all spending that wasn't absolutely necessary. That meant repairing broken items instead of buying new ones, skipping restaurants and making her own coffee. "There will be times you feel depressed over it, but remember the end result is going to outshine all that," she says.
Her family still lives on about $19,000 a year, so they can save the rest. She even built her own furniture when her family moved into a new house, and asked family members for power tools as gifts for Christmas. She's since built a king-size bed, dining table and toy box. She also makes her own cleaning supplies and grows some of her family's food, too.
5. Pay off the most expensive debt first. Not everyone abides by this approach, and instead prefers to pay off the smallest debts first to build momentum and a sense of accomplishment, but many financial advisors recommend paying off the most expensive debt first. That helps reduce interest and fee payments. Credit card debt is often the most expensive debt that people carry, followed by auto loans and student loans. Any debt with a variable rate can go up quickly when interest rates start to rise.
6. Stay inspired. Certified financial planner Jude Boudreaux learned how to stop overspending with the help of a vision book -- a collection of images of financial goals, which helped keep him and his wife focused and on budget. Boudreaux's vision book includes images of where they want to vacation and their condo, which they want to pay off. He flips through it when he needs to remind himself to avoid spending on unnecessary items.
Now, Kroezen and her family live in Nashville, where Kroezen is a stay-at-home mom and her husband works in the insurance industry. Kroezen has paid off $103,168 of her student loan, and she says she would have completely paid it off were it not for the birth of her daughter. She and her husband also bought a home and put down a $20,000 down payment on it. They pay off their credit card bills in full each month.
"We will attack the mortgage in the same way as the student loan, although we may take a month off and buy some clothing, which we haven't done in years," Kroezen says. Her family is also growing, with another baby on the way.
If going debt-free is one of your goals for 2014, these strategies might help you get there.
Nearly one in four people say they don't have money to contribute to retirement after all the bills are paid. It might feel that way sometimes, but if we can find the $50 to go out to dinner every Tuesday night, we can find $200 a month to put in a retirement account. Make this happen, even if you have to do it one dollar at a time over the course of the month.
And if you think putting away $50 a week won't make a difference, consider this: Contribute just $200 a month for thirty years, and if your money grows on average 8% a year, your total contributions of $72,000 will grow to almost $300,000 if put away for 30 years. When you think about it that way, skipping that regular Tuesday dinner doesn't seem so bad, does it?
This is one of the most seductive retirement lies. For a good long while, it is true that retirement is a ways off. (Even if you're 55, it's still at least ten years away.) But the longer you put off saving for retirement, the less interest you'll earn and the more difficult it will be for you to save.
An example: Alex and Jordan both put just over $90,000 in their retirement accounts over the years, but Alex began saving ($2,000 per year) at age 22, while Jordan began saving (about $3,500 per year) 20 years later at age 42. Even though they both put in the same total amount, Alex will have over twice as much money at retirement as Jordan will when they reach age sixty-seven (assumes a 6% annual rate of return). That's because her money had more time to grow, so it was able to make more off of itself than Jordan's.*
Seriously, you have two people who put the same dollar amount into their retirement funds. The one who started twenty years later contributed the same amount, but ended up with less than half as much.
As someone who cares about making my money work for me, this speaks volumes. It turns out that one of the smartest things you can do is simply to get time on your side. This is how you shortcut the hard work-by taking advantage of the power of compounding interest and the fact that you will only have an increasing number of financial obligations pulling at your purse strings as the years go by. So, this is not something you can keep putting off. This is something to tackle today. The time is now.
* Note: This is illustrative and is not reflective of guaranteed profits over time. Actual results may fluctuate based on market conditions.
I bet all the married people reading this are having a good laugh right now. Marriage does not automatically make your financial life easier. The effect of marriage on your finances depends on a host of factors: Do you both work? Do you both make enough to support yourselves? If one or both of you got laid off, could you still afford your rent or mortgage? Are you honest with each other about your spending? Do you agree on your financial goals? Will you have children? If so, do you make enough that one of you can stay home with them? Bottom line: This is an outrageous excuse, and now I am drinking wine.
I hear you. But saving for retirement versus enjoying life now is not an either/or proposition. You can do both. Also, let me put it this way: Yes, you deserve to enjoy
your money now, but you also deserve not to count pennies when you're old.
This is a case of counting chickens before they hatch. You never know what could happen to the inheritance (it could be devoured by medical bills, it could dwindle away in a financial crisis, or you may need it to pay off debts or taxes of the estate). Sure, it would be nice to inherit a windfall and be able to put it toward your retirement, but counting on doing so is not a plan-it's a gamble at best. It's far safer to plan to fund your own retirement and then enjoy your inheritance as a bonus if you do indeed receive one.
Yes, the market is unreliable from year to year, and yes, the value of your investments will dip in a down market. But downswings don't last forever, and historically, over long periods of time, the market has shown solid returns. While past performance doesn't reveal future returns, the S&P 500, for example, has averaged 9.28% annual returns over the last 25 years.
Alternatively, let's say you leave your money under your mattress or even in a savings account bearing 1% interest: You're going to lose the purchasing power of those dollars due to inflation (which is estimated at 3%). Yes, with the market, you're opening yourself up to some risk -- but with risk comes reward.
No one can predict the market. No one. So while it's true that you cannot time your investments perfectly so that they only ever go up, history has shown that if you invest regularly over decades, your investments should experience more ups than downs. So invest for the long haul, and don't fret over minor dips now. If you do, you'll be missing out on an opportunity to amass money later.
Sure, selling your home will free up lots of cash ... but then where will you live? And what if the market is down when you want to sell that home? Remember the housing crisis a few years ago? The one where tens of thousands of near retirees were left without nest eggs after the values of their homes plummeted? This is not your smartest game plan.
Yes, college is a big expense, and you should definitely save for it-that is, once your own retirement needs are taken care of. If you're a parent, it's a natural instinct to put your children's futures before your own. But think about it this way: If you don't save the full amount for your children's college education, you can always fall back on financial aid, grants, scholarships and student loans to help pay your children's way. When it comes to your retirement, however, there are no loans. Let me repeat: There are no loans. All you'll have to live on is what you've saved. For that reason, saving for retirement should be your top financial priority-always. I get that you don't want to saddle your kids or future kids with loans- what parent would?
But remember that if you pay for your children's college and then cannot afford your retirement, you will end up burdening your children all the same. They will feel obligated to help you out-at a time when their own families need them financially.
You may love your work, and it may be the kind of work you can even imagine yourself doing well into your seventies or eighties. But while that's easy to say now, what if you can't find work at that point in your life, or what if you have health problems or family obligations that prevent you from working? While there is nothing wrong with hoping for a best-case scenario, it isn't wise to plan around one. Sock away some money now so you're ready for whatever may come your way. The last thing I ever want you to deal with is a health issue and money concerns at the same time.
Reprinted from the book "Financially Fearless: The LearnVest Program for Taking Control of Your Money" by Alexa von Tobel, CFP®. Copyright 2013 by Alexa von Tobel. Published by Crown Business, an imprint of the Crown Publishing Group, a division of Random House LLC, a Penguin Random House Company.