Debt is an interesting animal. Most of us get into debt because we WANT something we cannot afford. We want a private school education so we borrow $50,000 to learn something we can learn for free on the internet. We want to live a fabulous lifestyle in our 20s so we put everything from fine dining to designer clothes on our credit cards. We want to stop paying rent, so we leverage up 4:1 to own a property that will crush our finances if we need to sell in a down market.

Make no mistake about it. Debt is a manifestation of greed. Which means I’m one greedy bastard! I wanted to live a nicer lifestyle and I wanted to get rich as young as I possibly could. In my 20s and early 30s, the biggest risk I feared was not taking enough risk.

Some of you might be thinking you aren’t greedy for having debt. But deep down, you know what I’m saying is true. Not only are you greedy, you’re impetuous to boot. But don’t be ashamed. If managed properly, greed can often be good when it comes to reaching financial independence sooner.

In this post, I share with you my debt history followed by a debt optimization framework to help you build wealth faster while minimizing the chances of a financial blowup.

When it comes to money there are a couple rules I encourage people to follow.

The first rule is: Never tell anybody how much you truly make. You can share a portion of what you make, but not the entire number. Be particularly careful if your income is more than 50% higher than the median or average income for your age. A portion of people can’t help but become envious and despise you if you make more than them.

The second rule is: Never ask to borrow money from friends and family. As soon as you ask to borrow money from friends and family as an adult, you lose their respect and honor for you. And if you are a Financial Samurai, you value respect and honor above all else. Asking to borrow money from the people you care about can lead you down a deep dark hole.

Let me share with you a short story about how one man asked to borrow money from his close friend and girlfriend and what happened after. I’ll also share with you reasons why asking to borrow money is one of the worst financial moves you can make.

The worst type of debt is consumer debt.

One reason why consumer debt is so bad is due to people buying things they really don’t need: a fifth pair of designer jeans, another luxury watch, every electronic gadget imaginable, and so forth.

But egregiously high credit card interest rates are the main reason why consumer debt is the worst type of debt for your finances. If you keep revolving credit card debt, you will likely stay poor forever.

Let’s take a look at the current average credit card interest rate.

_{Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities.}

I don’t discuss too much about credit cards on Financial Samurai because I’ve only got two (a cash back rewards card, and a cash back business card) and nothing much happens except for racking up rewards points. Definitely use a credit card for convenience, safety, rewards points, and insurance protection if you can control yourself. But if you’re not careful, thanks to the ease of use and absurdly high interest rates, problems may ensue.

The following is a guest post by Financial Samurai reader, Debs, a middle income earning new grandmother who was able to amass over $140,000 in credit card debt! I asked her to share her story on how she did it, and how she is getting herself out of debt. Kudos to Debs for having the courage to share her story.

_{Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.}

It’s embarrassing to admit, but I tell this tale as a warning to all people like me who are on the bandwagon of lifestyle inflation, “I deserve” and family struggles that may cause you to take your eyes off the ball and wake up one day to say “How did I get here?”.

We weren’t addicted gamblers or smokers. We didn’t have a lot of fancy toys. We drank moderately and yes, we had four kids and a large home to boot (purchased in 1991). Maybe a few travels thrown in here and there, but not excessive. There was some shopping for work clothes and things for our home. Maybe a bit of stress relief shopping, but nothing extravagant. That is my first message.

Our debt crept up on us without even realizing it. At least I didn’t realize the size it had grown to. I wasn’t watching the finances. I was only working hard to contribute to the family income. That was enough, or so I thought.

Why We Got Into Big Debt

In retrospect, I can see how we made some mistakes that didn’t help us. We financed a swimming pool in 1995 because we wanted to have a backyard oasis while the kids were young enough to enjoy it. That (a) was not a smart idea and (b) increased our mortgage payments, which we thought we could afford. Apparently not, because our home equity line of credit (HELOC) started to grow after that.

We never budgeted, we didn’t track spending. We just figured that as long as we weren’t going overboard, things would look after themselves. If we didn’t have all the funds to pay our credit cards, the balance was paid with the HELOC. Then my husband lost his job. Income came down so we did a refinancing and rolled the LoC into the mortgage and off we went again, changing nothing about our spending habits, still not tracking, just living. Strike 1.

My husband went for training in a different career (real estate sales) but this was a lot of work compared to the return, especially at the beginning. A number of years went by, and we came back to the trough again. Strike 2. This was the “do or die” refinancing. We were never going to do this again. Yet, we did not change anything except to say we never wanted to be in that position. As if it would just magically occur because that’s what we wanted.

Again still no regular analysis or tracking of spending was performed, and certainly no targets set either. We were free falling. We didn’t take any second jobs or sideline work, the only thing we did do to bring in some extra income was rent out a room in our basement. After a few years, we had a freak storm and major flooding in our basement. This stopped the student renters for a period of time and once we had stopped we never got around to starting again. Generally, it felt like we were too stressed out from the day-to-day hustle to even realize what our problem was. Ignoring things, saying “I deserve”, people pleasing were all part of our psyche. I left all the family financing to my husband, and in retrospect that was a big mistake. It seems that he is “penny wise and pound foolish” but I am actually the frugal one in the family.

Repeating the same events is the definition of insanity, and I plead guilty.

Strike 3 gave me the shock of my life like I had the wind knocked out of me. It happened in March 2012 when I discovered that our family debt consisted of the following:

• $26,000 of original mortgage debt including the refinancing for the swimming pool (not bad)
• $71,700 of a second step mortgage (Strike 1) which probably started at around $100K in 2005
• $100,000 in home equity Line of Credit
• $100,000 in credit card debt that started from low interest rate balance transfers but eventually grew, especially when the interest rates increased to normal prevailing credit card rates
• $47,500 of normal credit card charges
• $27,700 remaining on a truck loan
• $20,000 remaining on a car loan

The grand total was $393,500. I was 52 years old and my husband was 59. It was a personal debt disaster story.

The First Steps To Solving Our Debt Problem

It was the shock I needed to take action and take things into my own hands. I considered divorce. I didn’t consider bankruptcy. I don’t know if that could have been a prudent option for us or not. It wasn’t a word in my vocabulary, given I was earning six figures. But first, I had to stem the bleeding, so we initially took the following steps.

Arrange alternative financing at lower interest rates

We marched into our bank to figure out the options. I needed to get that debt off the credit cards A.S.A.P. to avoid the continued high interest rates. We took out a $235,600 mortgage with the equity in our home at 2.79% for 3 years, which would wipe out our HELOC and the large credit card and most of the other credit card. The bank could not advance us enough equity to wipe out all existing lines of credit, so we were left with a LoC for $11,900 at 7.9%, which was too high a rate for my liking.

Create a detailed budget and track spending

I created a budget and tracked every penny of spending in an excel file. Eventually I moved to doing this in Personal Capital as well, but did not abandon my excel file. I need my excel for cash flow forecasting and it gives me a second check on what is going on. Before our debt crisis day, I used the excuse that I did not have the time to do this. Now that we know how important it is, I do not mind doing it twice. ;-)

Renegotiate service plans

We renegotiated phone, TV and internet plans. It is amazing how willing the providers are to reduce your rates when you tell them you are considering moving to the competition because the costs are too high. We reduced our cable by $80 / month initially. We have since reduced costs further in these areas (see below).

Conduct a detailed analysis

With some initial steps taken to reduce costs, I was still recovering from shock and trying to figure out if we could repair our marriage and rebuild trust. I needed to go back into history to figure out how the two credit card debts of $100K and $47K came about. How these amounts grew so large seemed unfathomable to me, since it certainly didn’t seem like we were living beyond our means. What I was able to piece together was that it these amounts grew just on a few hundred here or thousand there that could not be paid off based on monthly cash inflows.

Why wasn’t our cash inflow enough even with a six figure income? We were servicing a HELOC of $100K for most of those years, so were paying $6K – $8K of interest charges annually. Since this money was going to interest, there was no extra cash flow for home maintenance and other incidentals. Enter the cycle of robbing Peter to pay Paul. When I went back to re-tabulate, I arrived close to $100K in interest charges over about 18 years. Most of it was from the $100K HELOC , but towards the end, credit card interest started compounding as well. After that, I stopped following the money trail. I was sick of looking back and as bad as I felt, it wasn’t enough to throw away 22 years of marriage, so it seemed.

So I am here to say, this is how easily it can happen if you do not manage your money. Our combined income has ranged from $100K – $150K annually during this period of debt accumulation. At the start of our debt recovery in March 2012, our financial net worth excluding the value of our home was less than $100K. Our home is valued at about $500K.

How Did We Reduce Our Debt?

I can attribute this to tracking our spending against a budget and living reasonably frugally. In addition, we have deployed the following strategies to help reduce interest costs, reduce expenses , increase income or help with cash flow management.

1. We increased our amortization periods on our older two mortgages, to allow for some breathing room on cash flow. We didn’t pay less overall on our debt, we just paid higher interest debt first. We have deployed all available debt prepayment options on our mortgages with available cash including:
   1. annual prepayments (which don’t have to be done all at once with our bank, but can be done in pieces anytime up to a maximum annual amount per mortgage year)
   2. payment increases by 15% once per year (which means original mortgages that were lowered are now being increased again as we wipe out other debt and have increased available cash flow)
   3. match a payment (doubling of our payment which means the second payment goes entirely to principal and we can stop any time.) This feature, available at our bank, also acts as a type of insurance for lost income since we can miss payments in future if needed in the event of a job loss, and not be considered in default of our mortgage.
2. I have transferred vehicle debt or mortgage debt to a low rate credit card twice since beginning our debt repayment journey. Once to pay off our truck which was at 5.1% and once to make a large prepayment on our mortgage. I may continue to deploy this strategy, but only under the following conditions, because you need to take care of the low rate cash advance credit card pitfalls:
   1. when I’m sure I can pay off the balance in the time required before the interest rate hike. (Last one was an eleven month period at the low rate).
   2. I don’t pay a transfer fee and only consider 0.99% interest rate. The transfer eats up too much of the interest savings to make this worthwhile, even if only 1%. Since I pay off the balance over time, I see the interest costs decline over the term.
   3. I will not do this any time near a mortgage renewal date, which would require a credit check. Our credit utilization rate would be raised after doing the balance transfer and this could inhibit our ability to get the lowest possible interest rate for the mortgage renewal.
3. We use cash back rewards credit cards that pay 4% on gas and groceries. Our credit cards are paid off monthly by the due date. There is no carrying of credit card balance except in item 2 above.
4. We rent a room in our house for $460 / month.
5. We switched to a more reliable and cheaper internet provider and have replaced our home phone with a internet based system – savings $50 / month.
6. We have just recently cut cable and will save $83 / month.
7. We negotiated a better cell phone plan, saving at least $27 / month.
8. We limit our entertainment spending and travel, but have managed to take one trip using accumulated business travel points and some planned savings to attend a family wedding.
9. We’re currently focusing on ways to reduce our grocery/miscellaneous budget, which may involve simple tactics like keeping my husband out of the store and other fun games. :-)

The longer we live like this, the more we see opportunities to reduce our spending even further. It’s definitely a journey, putting one foot in front of the other on our march towards debt freedom. This year we have paid on average 61% of our net income.

Today we have paid off almost $147K in 2 1/4 years. We still have 4 years to go to reach debt freedom.

Many people with lower incomes may scoff at our ability to pay off $65K annually but I want to stress that it is all relative considering the size of our debt. Sure, I earn a good salary, but it is 64% of the $200K, Financial Samurai deems the right amount to be ‘happy’. In addition, my husband earns only 60% of the average Canadian wage of $48,250. Thankfully, his income is supplemented a little with a $321/month survivor benefits from his first wife who passed away.

Now, after more than two years of debt payment and good retirement portfolio equity market returns, 50% of our net worth is from our home, which we will renovate and sell after we are debt free. Some may say, why not sell now and wipe out the debt instantaneously and start fresh? It has been considered and is still a point of discussion from time to time. We delay because we would need to do substantial kitchen and bathroom renovations in order to get the best return for our home which is in a good location. We do not want to increase our debt load in order to make that happen.

I’m not going to say it’s easy with a long term debt cloud hanging over your head, but I am going to say it’s possible. We are taking twice as long than what is normally recommended as the maximum to get out from under it – six years versus three.

I hope that when we are done, we do not have any regrets about not downsizing our home during this period. I also think that the habits and skills we are developing now will serve us well in retirement, continuing to live frugally, and appreciating what we have and how far we’ve come.

The Best Cash Back Credit Cards

If you’re mature enough to utilize credit cards for your benefit by paying off the balance in full each month, then credit cards are a wonderful financial tool to improve your life. Not only do you get an interest free loan for a month, you get buyer’s protection, and rewards points. I think everybody should have at least one cash back rewards credit card. Here are the three best that I’ve found:

Capital One(R) Quicksilver(R) Cash Rewards Credit Card

Simple and straightforward, the Capital One Quicksilver offers flat rate cash back rewards. Cardholders earn 1.5% cash back on all purchases without any spending caps.

Key Benefits

• 1.5% cash back on every purchase
• Rewards are unlimited, ie no spending caps
• Zero foreign transaction fees
• No annual fee
• Get a $150 cash bonus reward if you spend $500 in the first 3 months

Read more and learn how to apply

Chase Freedom Unlimited

If you’re looking for a flexible cash back rewards credit card that isn’t complex, this is it. The Chase Freedom Unlimited credit card offers great flat rate rewards.

Key Benefits

• Earn a $150 bonus after spending $500 in the first 3 months after you open an account
• Get unlimited 1.5% cash back on all purchases you make
• Introductory 0% APR for first 15 months on purchases and balance transfers (3% balance transfer fee applies)
• No annual fee
• Redeem cash back with no minimums

Read more and learn how to apply

Capital One(R) Savor(R) Cash Rewards Credit Card

This is a tiered cash back rewards credit card by Capital One that offers an impressive 4% on dining and entertainment without any spending caps.

Key Benefits

• Unlimited 4% cash back on dining and entertainment
• 2% cash back on groceries with no spending caps
• Unlimited 1% cash back on gas and all other purchases
• Get a $300 cash rewards bonus if you spend $3,000 in the first 3 months
• $0 waived annual fee for the first year

Read more and learn how to apply

I hope everybody has at least one cash back credit card in their wallet. Just make sure never to carry a revolving balance. Use credit cards to your advantage for the rewards points, insurance protection, and one-month interest-free balance. Never let credit cards take advantage of you.

About the author: debtdebs is a fifty-something wife, mother and new grandmother, who admits to having her “head in the sand” about their financial situation until amassing $247,500 of consumer debt for a total debt of $393,500.  She shares her story with all those coping with poor money management decisions. 

_{Disclosure: Financial Samurai has partnered with CardRatings for our coverage of credit card products. Financial Samurai and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.}