307 | Don’t Fall for This Common Misconception About Paying Off Debt

Some of the most popular solutions for paying off credit card debt actually lead to a debt cycle that’s tough to get out of.

And too many lawyers are falling for them.

In this episode, let’s talk about why these common debt strategies don’t work and what to do instead.

• • Ramit Sethi’s YouTube conversation with a couple trapped in a debt cycle
  • the common solutions this couple used to pay off their debt
  • why these common solutions are actually a trap
  • how to get out of debt for good

• Ramit Sethi YouTube video
• Apply for a strategy session

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.

Today, we are talking about a common misconception that comes up with people around paying off their debt. I have mentioned before that I read the book I Will Teach You To Be Rich by Ramit Sethi. It was the very first personal finance book that I read.

Well, apparently Ramit has a YouTube channel because recently my YouTube feed showed one of his videos. In this particular video, he was talking to this couple, and they said something like they had gotten out of credit card debt two or three times in the past, but they found themselves back in the debt.

And so Ramit was talking to them about their situation and what’s been going on, and he asked them how they paid off the debt in the past, and they said that they took out a HELOC one time and they did a loan consolidation, like personal loan the other time.

What struck me was the way that they said with so much confidence and conviction that they had gotten out of debt in the past because they truly believed that taking out the HELOC to pay off their credit cards or taking out the personal loan to pay off their credit cards was getting out of debt. But in reality, they had never gotten out of debt. They simply moved the debt.

I wanted to talk about this because I suspect that this is a common way that people think about this. I know a lot of people think that personal loans and debt consolidation loans and stuff like that are the best solution for their credit card debt.

And I get it because seeing this high balance with thousands of dollars on your credit card and then all of a sudden seeing $0 on that balance feels really good. It’s a relief.

The credit card debt tends to weigh on people heavier, it seems, than other debts. Maybe it’s because of the higher interest rate or something like that, I don’t know, but it does seem like credit card debt tends to weigh on people more so than other types of debt, to the point even where this couple didn’t recognize the HELOC or the personal loan as debt. They specifically said they had gotten out of debt because they used this HELOC and this personal loan to pay off their credit card.

So you get this fresh start when you use those types of things and you get the $0 on your credit card. But the thing is, you can’t just ignore this other loan, this other debt that you’ve taken out, because there’s still debt there. You feel accomplished because you see the $0 balance on your credit card, but nothing has actually changed. You have not solved the problem. You haven’t paid off the debt. It’s just been moved.

And it creates this false sense of safety, this false sense of relief because people see that $0 balance, and now a lot of times they run that credit card balance right back up because they have $0 on their credit card, but they didn’t change the underlying behavior that caused them to have the credit card debt in the first place.

When that happens, then you are in this cycle, just like this couple was describing. They ran up their credit card. They took out a HELOC. They paid off the credit card, but now have this HELOC balance. Then they run up the credit card again, and now they take out a personal loan so they can pay off the credit card. Now they’ve got this personal loan balance on top of the HELOC balance, and now they’ve run up the credit card for a third time.

When you don’t create a plan for how you’re going to actually change your behavior, how you’re going to change your spending habits, how you’re going to pay down this debt, then you end up just racking up more and more debt. The HELOC, the personal loan, the debt consolidation, all of those are tools that can help you in the situation of paying off debt, but they are not the solution in and of themselves. And I know that they’re often talked about as if they are. They are not.

When you use one of those tools, it can help you to put yourself in a better position to pay off credit card debt, especially if your credit card debt has a really high interest rate. You haven’t been able to make progress. The minimum payments aren’t really touching the balance at all. Using one of those tools can help because typically, the HELOC, the debt consolidation loan, the personal loan, is going to have a lower interest rate than the credit card.

And this is not me saying you should definitely use one of those tools. If you want to use a HELOC or a personal loan or debt consolidation loan, that’s 100% your decision. But what I am saying is those tools tend to have lower interest rates than credit card debt, so I can see how they can help you to make progress.

But that’s only one part of your strategy. That can’t be the whole strategy, because then you’ll end up like this couple, where you just find yourself running that credit card right back up again. So if you use a tool like this where you can move your debt to a lower interest rate vehicle, fine. But you’ve got to implement the other pieces of the strategy, like planning your spending ahead of time. Deciding I’m going to spend on this thing, on that thing. I’m not going to spend on this thing or this other thing. And a lot of that is thinking about what’s important to you, thinking about what you value. And you can create plans in line with those things.

You also want to make sure that you are spending less than you make because when you’re spending exactly what you make or more than you make, it makes it impossible to get out of debt. You have to have some money that you can use to put towards your debt. So getting your spending under control to where you’re spending less than you make allows you to be able to actually pay off that debt and not just move it around.

And then you want to make sure that as you’re paying off the debt, you’re also keeping track of your progress. Because something that I see a lot is as you’re going through it feels like a slog. It feels like it’s not working. It feels like you’re not making progress as fast as you’d like to. If you’re not keeping track of that, then you’ll just believe that. But if you’ve been keeping track of your progress, you can see this month, I’m here, but six months ago, I was at this balance. I’m making progress. This balance is moving down.

Those are the tips that I have for you for creating an actual plan for paying off your debt, not just moving it around. You’ve got to break that cycle. And that means that maybe you implement one of those tools where you can take out the debt at a lower interest rate so that your payments go further, but you’ve got to change your spending habits. You’ve got to plan your spending, make sure that you are spending less than you make, so that you have money going towards paying off that debt, and that you are tracking your progress along the way.

One other thing that I didn’t mention is you also want to celebrate your progress, and this does not mean like, oh, I paid off $500 so now I’m gonna spend $500. That’s not a good idea. But you can treat yourself in little ways as you’re going along, and that helps to make the journey more sustainable.

Because it’s not just buckle down and do nothing and deprive myself until I get out of this debt. You can still enjoy your life along the way. The difference, though, is you’re going to do it in a more intentional, more measured way than what you were doing before that led you to the credit card debt in the first place. And if you want help with getting a plan together to pay off your credit card debt, head to rhothomas.com/apply. We can do a strategy session and talk about the best path for you forward.

All right, so that is it for this week’s episode. Thank you for being here.

Please take a second and share this episode with a friend or two you think could use this information. That is how we get this episode, get this information in the hands of more lawyers who can use it. 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.