Leslie Linfield is founder of The Institute for Financial Literacy in Portland, Maine, which provides credit counseling and financial education to people before and during bankruptcy. An attorney who previously worked as a stockbroker and debt counselor, she is a public speaker and author of several books including Budget! It's Not a 4-Letter Word.
A lot of Eons users say they want to be debt-free.
It completely makes sense. What we have seen is a generation of older people who have accumulated high rates of debt. Traditionally they would be debt-free and almost mortgage-free by age 60. This is a big issue - it can prevent them from retiring.
Here's a diagnostic: No more than 20 percent of your monthly gross income should be devoted to debt outside your mortgage. That would include car loan, boat loan, credit cards, etc. It's a warning sign that you can use when deciding if you can afford something.
If someone found they were at or over that 20 percent, they should commit to not incur any more debt, and get a plan in place to reduce it.
What are the options when debt starts to get overwhelming?
1. Self-help. Work out a plan, do a budget, and dedicate money to repaying your debt load. You might contact creditors on your own and ask for lower interest rates or fees.
2. Consider a Debt Management Program. In this, you work with a third-party organization to renegotiate concessions from creditors. It's important that you work only with a properly licensed organization in your state. See www.aadmo.org for a list.
3. Debt Consolidation. In this, you repay debt with debt, and it's important to understand that. You must be committed to not incurring future debt, because there's a risk to your home (secured debt) if you can't repay.
4. Debt Settlement. Again, you work with a third party. This is a largely unregulated industry. They try to negotiate X number of cents on the dollar. Whatever they negotiate, the difference between what you pay and what you owed is taxable income. This also has a very negative impact on your credit rating.
5. Bankruptcy. This is a legal process where you seek protection from a court. Chapter 7 is a complete liquidation of all but "exempt assets." Proceeds go to the creditors and anything else owed is just washed away. Chapter 13 is a workout that depends on your financial circumstances, and can protect assets like your home and your retirement accounts.
What are some of the emotions that get in the way of dealing with debt?
Dealing with debt is such an emotional issue for people, especially in this age group because you may feel like time is working against you. It's important to pull back emotionally and view yourself as a business. If this were a company, would it be solvent?
Is being debt-free an attainable goal for people 50 and over?
Absolutely, it is attainable. You're competing against commercialism, the "I wants," the constant messages of "have it now" rather than "save for it and buy it when you can afford it." It's a generational issue - people now in their 70s have a very different attitude than people in their 50s.
But if you're 50 now, you can say "I've got 15 years, that can be done." If you work hard and become debt free, then at 65, the choice to work becomes just that, a choice.
What gets in the way of people dealing rationally with debt?
A lack of understanding of how the process works, how creditors price debt.
I think financial literacy education is a lifelong process. We should constantly be learning, no matter what our age. Our financial systems in the last two decades have gotten increasingly complicated. If you go into a bank now, the person you deal with has to get out a three-ring binder with all the products. It's not just choosing between a checking and a savings account.
It's not that we are not smart, it's that it's gotten so complicated. If you dedicated one hour a week to keeping abreast of basic finance and goal-setting, you'd be far more knowledgeable than your neighbor.
What do people do that gets in their own way?
It becomes so overwhelming that they shut down. They don't even know the total of what they owe. It's just that they're afraid to put the numbers on paper. Knowledge is power. Everyone has the same menu of choices, and one option is not better than the other - but it might be more or less appropriate for you.
You don't need to know Quicken or spreadsheets to manage your money. Your most powerful tools are a pad of paper and a pencil. I know people who are doing very well with the old envelope system our mothers used in the '60s.
The fact that you're doing it is more important than how you do it. Do you know what's coming in and going out? That's all a budget is.
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