319 | How to Break the Debt Cycle

If you’re a lawyer making six figures but trapped in a cycle of debt, you’re not alone.

However, you make too much and work too hard to be in this situation. Luckily, there’s hope.

In this episode, let’s talk about what keeps lawyers in the debt cycle and how to get out.

• • what the debt cycle is
  • how the debt cycle plays out
  • what keeps lawyers in the debt cycle
  • the step-by-step strategy to break the debt cycle

• n/a

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back, and happy summer. I am doing something I have not done in the six years I’ve recorded this podcast, and that is taking the summer off.

In place of recording new episodes, I’m sharing webinars I’ve done, trainings from private programs, and past episodes. So, please enjoy today’s episode, and I hope you’re having a great summer.

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All right, so let’s start with what the debt cycle is.

When it boils down to it, the debt cycle is just a result, right? It’s an output and the input is your money habits. So when you’re in the debt cycle, your money habits are leading to you spending the same amount as you make or spending more than you make, right? That is the debt cycle. That’s what’s leading to the debt cycle.

In my work with my clients, what I see most often is spending more than you make. And that’s pretty self-explanatory, right? Like you make X amount, you’re spending X plus.

When you consistently spend more than you make, then you end up using debt to cover some of your expenses because you don’t have income to pay for everything. You don’t have enough coming in to pay for everything. And so that means you also don’t have the money to actually pay that debt off. So either the balance keeps growing month after month or you pay it off, but then you end up not having enough for your regular expenses, so then they end up back on your credit card.

So I know this is a really common experience for a lot of lawyers because I’ve seen it so often. I see it with my clients all the time.

Let’s talk about spending the same amount as you make and how that leads to the debt cycle. That one’s a little bit sneakier because on the surface, it seems like you’re doing the right thing, right? Like you’re not spending more than you make. You get this amount and you’re not going over that when you spend.

But let’s look at an illustration to see how it plays out.

Okay, so let’s say every week, Lark gives me a dollar. Once I get my dollar, I turn around, I give it to Nesha. So we got this setup going where I get a dollar from Lark, I give it to Nesha, get a dollar from Lark, give it to Nesha, get a dollar from Lark, give it to Nesha. We’ve gone through four rounds of that, right? How much money do I have left after the four rounds of getting that money from Lark and giving it to Nesha? 0. Yes, 0. Exactly.

So now something comes up before I get my next dollar from Lark. Now I need to give Katie a dollar. I don’t have a dollar. So I go to Heather and I’m like, hey, Heather, can I borrow this dollar? And Heather’s like, yeah, sure. So, I borrow this dollar from Heather. I get my next dollar from Lark. I already have a setup where I’m giving it to Nesha, but now I also owe Heather, right?

I don’t have enough money to pay Heather back and keep giving my dollar to Nesha. So maybe I can figure out like, oh, maybe I can give Nesha a little bit less so I can pay a little bit to Heather, but I don’t have enough to pay both of them the full dollar. That’s what’s happening when you’re spending as much as you make. Like you don’t have room for those unexpected things that come up, right? So then it leads to this debt piling up. And when you’re spending everything you make on expenses, you don’t have cash on hand for unexpected things.

So now those things inevitably pop up because life, and you end up using debt for them. But because you’re already used to spending everything for your general expenses, you don’t have the money to pay off the debt. So the debt just sits there.

Or like we just talked about before with spending more than you make, you might go ahead and pay that debt off, but I actually needed that money or you actually need that money for your regular expenses. So then I got to put my regular expenses on a credit card. And it’s this loop that happens.

This is how this debt cycle plays out, where we’ve either spent more than we make and we’re using debt to supplement, or we’re doing what we think is the right thing. We’re not overspending. We’re not spending more than we make, but we don’t leave that room for unexpected things that come up.

So now let’s talk about what keeps lawyers in the debt cycle. The number one thing that keeps lawyers in the debt cycle is not creating a strategy to get out.

The cyclical nature of it means you’re doing the same thing over and over again, but we need something new, right? If you’re in this cycle and you’re not thinking about how to get out, you’re in the cycle of spending more than you make and using debt to supplement, or you’re in the cycle of spending everything and not leaving room for those unexpected things, then you’re just going to keep repeating that cycle.

So by not creating a strategy to get out, you’re just keeping yourself in that cycle, you need to create an intentional plan for how to use your money each month that moves you forward.

So a lot of lawyers are like treading water is how I think of it, right? Like month after month, you just stay in the same place and like we’re no better off than the month before. And sometimes we might even be worse off because sometimes maybe we’re ending the month with more debt than we started.

So the strategy can’t just be which this was my strategy, full disclosure, the strategy can’t just be, is there money in my account to buy the stuff that I want to buy? That was the extent of my strategy. It was just like, okay, do I have money? Yes, great. I can buy this thing.

My husband and I were making good money. We were able to pay all our bills on time. We were able to go out to eat. We were to buy things that we wanted to buy, but there wasn’t any strategy behind what we were doing, and so we were staying in the same place month after month.

Like there was no strategy there. We didn’t have any visibility into how we were actually doing with our money. We didn’t have any visibility into the debt that we had, like what was actually happening with our debt, all of that. There was no strategy. There was no intention. And so we were staying in the same place month after month after month.

So I like to think about finances as a game, where, you know, where I am right now, June 17th is the starting line. Really, I would be thinking about this at the beginning of the month, but, you know, so June 1st starting line. We want a plan that moves you forward so that July 1st, you’re not in the same place that you were in June 1st.

And for me, moving forward in the game means I have more money on July 1st than I had on June 1st and or I have less debt on July 1st than I had on June 1st.

And so the strategy is going to be the moves that you need to take to get to that point of having more money or having less debt. That’s how you’re going to break the cycle.

All right. So we’re going to talk about how to break the debt cycle. And it is a simple process. All right.

First, we’re going to figure out where you stand now. What is that starting line for you? Then we’re going to create a surplus between your income and your expenses. Then we’re going to build a buffer, something that helps to protect you from those unexpected things that pop up. And then finally, we’re going to start paying down your debt. All right.

So going through each step, first, we’re going to figure out where you stand now. Like we talked about a minute ago, looking at where you are now as a starting point, right? But we need real numbers. Like we can’t just say like, oh yeah, where I am now is a starting point. We need to have the real numbers to know what that starting point actually is, right?

So if we think like granularly about this, it’s how much you make each month. And that’s not just what’s my salary or what’s my gross pay divided by 12, how much do you actually see? A lot of lawyers don’t know this and if that’s you, no judgment, that is very common, right? But you need to know how much you actually see in your account. Not like, oh, I make X, and so if I just divide it by 12, then I make about this much each month. No, how much are you seeing in your paycheck each month that gets deposited into your account?

How much are you spending each month? Where is that money going? So like I’m spending this much for my rent or mortgage. I’m spending this much on groceries and this much on my car payment and this much on, you know, credit card payments and this much on going out to eat, like whatever those things are.

Bonita says our budget should be but based on net income, not gross income. Exactly. Because you don’t see your gross income. Right?

That’s one of the things this is completely outside the scope of today’s workshop. Like that’s one of the issues that I have with the like traditional advice for buying a house where they’re like, oh, it should be like X percentage of your gross pay. Why? Because I don’t see my gross pay. So if I’m basing it off my gross pay, then it’s going to be this huge percentage of my net pay. Right?

So yes, we want to base your budget on your net pay. How much are you actually seeing? Because that’s the money that you’re actually going to be able to use for your expenses.

So when you have all that information available, right? Then that’s gonna tell you what’s going on with your cash flow, and it can show you where you need to change things right? So like there might be…perfect example- I have a client and when we did this exercise, he realized he was spending like $1,000 or $1,500 or something like that just on eating out. And it was just him. And he’s like, I like food. I don’t like food that much. And so he wanted to change that. And so part of his strategy was figuring out different ways to get that cost for eating out down.

Or I’ve had situations where people realize that the amount that they were spending on their rent or mortgage was like this huge percentage of their income and it was hindering them from doing other things that they wanted to do. So they made changes in that regard. But having all that information is how you’re able to make those kinds of decisions.

So let’s figure out where your starting point is right now.

Then we want to get all the details of your debt. So how much you have, the current balances, the servicers, the companies that actually own the debt that you’re paying, the minimum payment, the interest rates. And having that information available will give you a really clear picture of what’s going on with your debt and allow you to make strategic decisions about how you want to handle it.

And then finally, you want to know how much you have in savings, if any. And that tells us whether you’re living on the edge or not, or how much of a buffer or cushion that you already have.

So, that’s our starting line.

All right. So then step two, we’re creating a surplus between your income and expenses, which means we are making it so you’re not spending everything you make, right?

We talked about the debt cycle is a result of spending more than you make or spending as much as you make. What we want to be doing is spending less than you make. right? And that can be on both ends. You either make more or you spend less.

I think typically we, like we focus in on the cutting expenses side of the equation, but there’s two parts to it. So you can make more or you can make less, or you, I’m sorry, you can spend less. And we did both. So like my husband got a second job for a while. I sold stuff around the house. I started this business on the side initially, although it wasn’t specifically for paying down debt, but like I was making extra money from my business, right?

And because we weren’t used to having the money from those additional income sources, we were able to put it right toward paying down our debt. So this is a great strategy. It doesn’t always have to be about cutting expenses, although you can do both, right? So you’re getting more of that, that surplus going because you’re making more and you’re spending less. But it doesn’t have to be a long-term strategy.

So like I’ve had clients who get a second job just long enough to make some money, pay off a few debts so that they can not have those minimum payments anymore, which then brings their expenses down.

The same with my husband, like he got that job for a few months. It wasn’t all about paying off debt. Part of it too was just him wanting to have some experience of practicing medicine without the supervision, but he did that for a little while and it was a huge boost for us early on in our journey.

So if you do this strategy, if you do get a second job or you’re bringing in additional income, it doesn’t have to be a long-term strategy if you don’t want it to be.

And that brings me to the next point about your expenses, right? This is the part that people are used to thinking about. And the key with managing your expenses, with cutting expenses, is you don’t want to cut to the point that you deprive yourself of all the things you love, which is a common mistake that people make. But if you do that, then you’re not going to stick with it. You’re going to hate it, and you’re eventually going to give up. I often liken this to crash dieting, where people will do this crash diet, I’m going to eat kale and drink water, and I’m going to lose all this weight.

You might do that and you might lose a bunch of weight, but then eventually you’re going to want to eat again. And like once you get to that point, like you have to figure out how to manage your money, how to manage your diet, like whatever, in a way that’s sustainable.

So like this, let me just strip everything and eat nothing and spend nothing like that might work for a little while. It’s not sustainable, right?

So one of the key things that I teach my clients is how to balance the things that are important to them with their goals. So we make sure that you’re still able to have room for the things that are important to you, the things that you enjoy, the things that you value. How do you have room for those things, but still also make room for paying off your debt, for saving, for that kind of thing.

And you want to plan your spending in a way that allows you to do the things you enjoy, because when you have that kind of plan, then you’ll be much more likely to stick with the plan, and being able to stick with the plan long-term is how you break the debt cycle, right?

If we’re able to do it just for a month or two, like that’s great. You were able to, you know, pay off a few things in that month or two, but we want the long-term sustainable thing so that you can continue to pay that debt off and you break that debt cycle.

All right. So step three, this is the step that many people miss because the focus is so much on paying off debt and people will skip straight to that part and they don’t think about the buffer. So step three is building a buffer of money.

So you need a buffer between you and any unexpected expenses, any emergency situations that come up. And I teach my clients to have like a multi-layered buffer. So there are multiple lines of defense in these situations, but the biggest part is the emergency savings.

So you need to build a buffer to protect yourself in case of an unexpected expense in case of an emergency, you’re gonna use the surplus that you created in the last step to start building that buffer. And that way you don’t find yourself in a situation where something comes up and you end up having to rely on debt to cover it.

And then the final thing is where we get to paying down your debt. Once you get all the stuff set up, then you’re gonna use the money from the surplus and start targeting your debt. You want to be strategic here. So you don’t want to pay extra on all the debts, which I see people do often. That’s a big mistake.

You want to pick one debt to focus on. And so some people will pay off their debt from smallest to largest balance. Some people do largest to smallest interest rate. For some people, it’s a more personal decision. Like one of my clients had a loan that her mom had co-signed on for her. And so she was really adamant about paying that one off first because she didn’t like having that burden on her mom.

But whichever way you choose to tackle it is fine. The main point is you want to focus on one at a time. Focus on one to completion, and that way you are not diluting your efforts.

If any of you got my ebook, The Five Mistakes That Keep Lawyers in Debt, I talked about this, the fact that so many people will make extra debt payments on all of their debts. And it’s one of the biggest mistakes in my book because you actually are in a position to make real progress with your debt, but you’re diluting your efforts by trying to, you know, pay so much on so many different ones.

So, you know, for example, if you have $1,000 surplus and you’ve got 10 different debts rather than paying $100 on each one, you could pay $1,000 on one and make $1,000 of progress. When you focus on one debt until completion, then you make sure that you are actually making faster progress because you’re able to pay so much more off on whatever debt you focus on. And then once that one’s done, you also free up the minimum payment. And that minimum payment plus whatever surplus you have can go toward the next debt.

So that is all you need to do. Now figure out where you stand now, create a surplus between your income and expenses, build a buffer, and then pay down your debt.

The reason that this is the system, this is the way that we do it, is first having clarity into what’s happening with your finances and what the actual numbers are, take away the fear and the overwhelm that a lot of people feel about their money.

So like I often say, it’s like a kid who is afraid of the monster in their room, but when you shine a light on it, it’s their jacket on a chair, right? Often the picture that we have in our minds of what’s happening with our finances is scarier than what’s actually happening.

Second, you’re creating a plan that you can actually stick with because we’re deciding where your money is going to go and we’re making sure that we are including those things that are important to you and you’re not just cutting everything out in the name of paying off your debt as quickly as possible.

Again, that does not feel sustainable, it’s not going to feel fun and you’re going to end up. You’re not going to keep going.

So because you don’t feel deprived and you’re not trying to power through to reach your goals, you actually enjoy your money more, and so you’re able to stick with it.

Third, when you have a buffer, you are able to withstand unexpected expenses without having to rely on debt, which is a big reason why so many lawyers have trouble breaking free. And then finally, when you pay your debt off strategically, you make faster, more tangible progress, and because you see that it’s working, it motivates you to keep going.

So as you implement this strategy, you know exactly what’s happening with your money. You’re more in control. Um, you don’t worry about it anymore. And you set up your, you set yourself up to like have that more enjoyable experience of your finances so that you can actually achieve your goals.

You also will see your bank account increase and your debt balances decrease as you’re building up your buffer and paying down your debt. And you do it all without giving up the things that you love. So like, I literally bought my first pair of luxury shoes while we were paying off our debt because of the system that I used.

My clients still go on vacations and still shop at their favorite stores and go out to eat and all of that kind of stuff. This is not a situation where you just sit in your house and do nothing until you pay off your debt. You figure out how to do both, and it just takes a more balanced approach.

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Alright, I hope you enjoyed today’s episode and got a lot out of it. If you have not done so already. Please subscribe to the show, leave a review, and/or share this episode with a friend or two who you think could use this information. All of that is how we get this podcast in the hands of more lawyers, and as always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.