252 | The Danger of Rushing to Get Out of Debt

Rushing to get out of debt leads many lawyers straight into an even worse financial position.

It’s one of the most common mistakes I see lawyers make, and it’s completely avoidable.

In this episode, let’s talk about why rushing to get out of debt causes financial problems and what to do instead.

• • a common mistake lawyers make with their debt
  • the problem with rushing to get out of debt
  • good debt, bad debt, and the fear of debt
  • a sustainable debt strategy that works

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’re talking about rushing to get out of debt.

This is one of the mistakes that I see over and over again with the lawyers that I work with. It is a situation where you get your tax refund or you get a bonus or some other lump sum of money and what happens is people will immediately put it on their credit card or their loan or pay down some debt. And worse is when they split it across multiple debts.

So I’m gonna pay this card down a little bit, I’m gonna pay that card down a little bit, I’m gonna put a little on this loan. And they don’t pay any of those things off completely.

And you might think like, “oh, well, you’re getting this money and you’re putting it on debt. That’s a great thing. That’s responsible.”

But the problem is they don’t have savings. So there is no emergency fund, there’s no money to fall back on. And what inevitably happens is there is some unexpected expense or some cashflow issue or something like that that comes up and because they don’t have savings, they don’t have money to fall back on and they end up having to put expenses on a credit card.

They’re relying on this debt that they’re working to pay off and so basically they end up going backwards in their debt journey. And it’s all because they didn’t slow down a little bit and make sure that they set themselves up first.

The reason I think this happens, why people rush to get out of debt, is society has this pervasive view that debt is bad. And we get so many messages about, especially if you have something like credit card debt or personal loans or stuff like that, that’s supposed to be bad debt.

That whole good debt, bad debt conversation really bothers me because there isn’t a such thing as good debt or bad debt.I believe that debt is just debt. It doesn’t have to be categorized in this way because I’ve seen so many people internalize those categorizations and they feel bad because they have “so called” bad debt and they make it this moral failing.

Like I have done something wrong as a person because I have so called bad debt, but really that whole conversation was made up. Somebody just decided one day that we’re gonna call these types of debt good and these types of debt bad. And if you’ve got good debt, you can feel okay, but if you’ve got bad debt, you should feel bad about yourself. I just think that’s garbage. I don’t like that at all.

But because of the way that we view debt in society, the messages that we get about it, people have a lot of fear around having, especially credit card debt or personal loans or this consumer debt. People have a lot of worry or anxiety around it.

And so they feel so bad about having it, they want to get out of it as soon as they can. So when they decide that they’re going to improve their finances, typically one of the first things that people want to do is get out of debt.

And I don’t think that that’s a bad thing because debt is often the thing that’s eating away at people’s income the most. When you’ve got all of these different minimum payments coming out, it significantly reduces your cash flow. So I don’t think that wanting to get out of debt is a bad thing, but I think the better strategy is to make sure that you have a safety net before you start working on your debt.

So you want to have some level of savings and it doesn’t necessarily have to be the fully funded emergency fund. Typical advice says to have three to six months of expenses in an emergency fund. I don’t think you necessarily have to have that before you get started with your debt, but you want to have something.

You want to have that cushion that you can fall back on when those unexpected expenses or other surprises pop up because they will pop up. Even though we call them unexpected expenses, we know that we can’t expect them. We might not know when, but we know that we can’t expect them. So you want to have some money that you can fall back on, so when those things come up, you are taking care of. You’re not having to rely on debt to cover them.

For the majority of our journey, we had about a month’s worth of expenses in savings. Like we kept that month’s worth of expenses in savings and we directed the rest of the money toward paying down our debt. But we knew that because we were directing money toward paying down debt, if necessary, we could also use some of that money to cover unexpected expenses. And then we also had the savings to fall back on as well.

So again, you don’t necessarily have to get to your full emergency fund, but you want to have some money in savings that you can fall back on.

And it might take you a little while to build that up. It might take a few months to get there, which means that that’s a few months that you’re not actively working on getting out of debt. But having that safety net means that when you get started on your debt journey, you’re not going to end up going backwards because you don’t have money to cover unexpected things that pop up. Or if you’ve got some sort of cash flow issue where maybe you didn’t make as much as you thought you would or things like that.

You’re going to have that money that you can fall back on because you took the time to save.
That’s the first part. But then from there as you start paying down your debt, I don’t want you to just spread your payment across all the different debts and start making payments on this one and that one and whatever else.

You want to be strategic with how you do it and you want to focus on one at a time and put all of your extra funds toward whatever one you decide that you want to focus on. That allows you to make progress faster. So instead of making $80 of progress on 10 different debts, we’re making $800 of progress on the one that matters most, meaning whichever one you decide you want to focus on first.

I personally like the debt snowball method, which is where you pay your debts off from smallest to largest balance, because you get quick wins, and you start shrinking the number of debts that you have faster, and it motivates you to keep going. But I’ve seen people do all different things.
Another popular method is the debt avalanche, where you pay your debts from largest interest rate to smallest interest rate. I’ve seen people that have a certain debt that bothers them the most and they focus on that one.

It really doesn’t matter which one you focus on, the main thing is I want you to focus on one at a time.

Okay, so whatever you decide to do, don’t be in such a rush to get out of debt that you don’t take care of home first.

Make sure that you build a safety net before you get started on paying off your debt.

And then focus on one debt at a time.

And when you do that, you’re going to avoid that back and forth roller coaster that a lot of people find themselves on when they’re working on getting out of debt.

Alright, so that is it for this week’s episode. Please take a second to subscribe to the show and leave a review. Both of those things help more people to get this information to be able to manage their money better and learn how to build wealth.

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So thank you so much for that review. That is exactly my goal. I want you all to see how simple managing your money can be, because once you have that control of your finances, you have more freedom. So if you have not done so yet, take a second and subscribe to the show, leave a review, get this information in the hands of more lawyers. 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.