The average American owes thousands on credit cards. We have less equity in our homes and owe more on our cars than ever before. And if interest rates continue to rise, monthly payments could skyrocket. The unfortunate result is that many of us can't save or invest—or sleep, for that matter. Research shows we worry more about money than about any other aspect of our lives: our jobs, children, marriages, and friendships.
Over one million people have tuned in and downloaded Oprah's Debt Diet. So O, The OprahMagazine asked David, Glinda and me—along with Dr. Robin Smith, the show's resident psychologist—to check in with three couples who'd been following the plan, either online or in the studio audience, from the beginning, just to see how it's working. We wanted to find out where these couples were succeeding, but even more where they were struggling, so we could help them over their "diet plateaus."
They owed money to banks, credit card companies and student loan organizations—and believed there was no end in sight. Today these three couples are lean, mean, debt-free machines. How did they do it? What could they do better?
Carla and Eric
Carla and her husband, Eric, never worried much about money. After they married in 2000, with combined incomes topping $110,000 a year, they made smart financial decisions: buying a house and stuffing $34,200 (over six years) into retirement accounts.
In 2003, they had a baby and decided Carla would work part-time. The next year, Eric and two partners opened their own physical therapy clinic; he invested $28,000. In 2005, the couple had another baby. Now the family of four was looking at life on $90,000 a year. The monthly bills ($780 for the mortgage, $125 for the home equity loan, $400 for the SUV and $1,081 toward their combined student loans) that were so manageable when both Carla and Eric worked full-time became overwhelming. As their credit card balance grew to $6,000, then $10,000, then $14,000, tension mounted.
When Carla first saw Oprah's Debt Diet, she began tracking where her money went . Her Achilles' heel turned out to be bargain hunting. She'd go into Wal-Mart three times a week, intending to buy what the family needed for dinner; she'd come out with groceries, plus a cute outfit or two for the kids, and maybe a planter for the house. Each trip cost an average of $100. Immediately, Carla trimmed her shopping back to once a week and bought necessities only. That saved about $800 a month.
While it was a good start, it wasn't enough. Their student loans were killing them. The couple tried to lower their monthly payments by consolidating loans, but they couldn't find a bank to help them—or even to explain why not. "We've never defaulted on anything, but no one was willing to work with us," Carla says. The couple's problem was that they had mainly private, not federal, loans, and until very recently, there was no practical way to consolidate these debts. I knew that Sallie Mae, the largest student lender in the country, was rolling out a program that would do the trick. By working with Sallie Mae, the couple was able to cut their monthly payments in half. This gave them room to breathe, with a cash flow of about $1,000 a month. They also got a $3,000 tax refund. In years past, "our automatic response would be, 'We've got extra money? Let's go eat,'" Carla admits. Dr. Robin Smith helped them root out their self-sabotage by looking at how their childhood role models affected their attitudes toward money. Eric realized that although he didn't come from a family of savers, he desperately wanted to do better for his kids. With that in mind, the couple decided that rather than eat out more often, they'd take Glinda Bridgforth's suggestion and use $2,000 of the refund to bolster their emergency fund. They put the remaining money from the tax refund into Carla's Roth IRA.
As for the $1,000 monthly cash flow, Glinda asked Eric and Carla to use it to start chipping away at their debts and building savings. Although most people should focus on their (expensive) credit cards before their (cheaper) housing debts ( Step 3 of Oprah's Debt Diet ), the Stevens's situation is the opposite. Because they always paid on time, they had negotiated for a really inexpensive credit card, with a 2.9 percent fixed interest rate. Their variable rate home equity loan costs almost three times as much. Glinda advised them to make the minimum card payments, keep a lid on new charges, and put an extra $575 a month toward the home equity loan, which should enable them to pay it off completely within 30 months.
The fact that Eric never stopped funding his 401(k) at work frees the couple to put $250 a month into Carla's Roth IRA. If she continues to contribute $3,000 a year through age 65 at 8 percent annually, she'll have $630,000 at retirement. Eric's account should be double if not triple that. This leaves roughly $175 in wiggle room each month for whatever little things crop up. Carla says the arguments over money have pretty much stopped. "We're more on the same page than we have been in years."
Nicole and Ben
To say that 2005 was a financially stressful year for Nicole and Ben would be an understatement. Married since 1998, the couple, who live in Zionsville, Indiana, with their two kids, had nearly $650,000 in debt. Of that, $90,000 was student loans from Ben's dental school, $515,000 was mortgage debt from a house they bought with no money down, and $40,000 was credit card debt.
"We bought the house because we knew Ben would be joining his father's dental practice and earning a nice income by June," Nicole said. But by December, even with him bringing in somewhere between $4,000 and $6,000 every two weeks (his salary varied based on the number of patients he saw), they couldn't budge their credit card debt. "We'd pay off new purchases but nothing else," Nicole said. "It was really depressing."
In mid-December, she went online hoping to get tickets for The Oprah Winfrey Show . She saw last-minute seats available for a program on debt. The catch: You had to be willing to share your story. Nicole called Ben, who agreed to open the door on their finances. That put them in the audience for the first Debt Diet show.
When they went home, they called their credit card companies to ask for better rates and were able to cut payments by $500 a month ( Step 3 ). Putting the brakes on spending was much harder. "Ben and I grew up in families where we had our fair share of what we wanted," Nicole said. Unfortunately, when they got married, they continued to spend as if their parents were footing the bills.
In addition, Dr. Robin says, "Nicole had lost her sense of identity as a meaningful contributor to the family because she was a stay-at-home mom." But when Nicole took charge and initiated the couple's involvement in the program, "her personal stock went up in her own eyes." After their talk, Robin says, "she was able to see her marriage as a partnership of equals, each doing a different job but both necessary to bringing down debt and creating connection."
Nicole came away with a clear sense of the need to set limits. "Ben and I have to decide what matters—the day-to-day spending or a secure future." Rather than seeing a budget as something restrictive that prevented them from having fun, they could view it as an opportunity to choose the most important use for their hard-earned cash. "The fact that we were paying $100 a month for a gym membership when we owed $40,000 was insane," she said.
Nicole and Ben set three goals: Get rid of the debt, start saving, and buy a piece of his father's dental practice (a six-figure investment). David Bach suggested saving automatically, by funding a high-interest (5 percent or more) account directly from payroll deductions. Putting money into an online savings account from emigrantdirect.com or home.ingdirect.com would help them maximize the interest they could earn. He urged them to throw any additional free cash toward that $40,000 in credit card debt. They did—and after five months on the diet, it was gone! "Now we charge only what we can pay off each month," Nicole said. "It feels like a huge weight has been lifted."
Finally, if Ben's earnings increase as expected, the couple will have enough money to save for retirement. David recommended they use deductible IRAs (you deduct your contribution and pay taxes upon withdrawal) until Ben qualifies for the retirement plan at work two years down the road. Even after that point, Nicole should continue to fund a deductible IRA of her own. "I feel that we can enjoy life, just knowing we're on the right track," Nicole said. "We have freedom that we never had before."
Victor and Michelle Blackful
Victor Blackful, a Chicago DJ known as "the Diz", made a nice living as half of the Bad Boyz, a hip-hop and R&B radio duo on WGCI-FM. But every month without fail, he and his wife, Michelle, who stays home with their two young children, spent more than they were earning. Roughly $5,000 was coming in. Roughly $7,000 was going out. By the time Victor decided to try Oprah's Debt Diet, the family had more than $7,000 on plastic.
On March 1, he tucked a small notebook into his back pocket so he could track every penny spent ( Step 2 ). Each Monday, he'd pull it out and report to his show's listeners. Between gas and parking, he was paying $32 a day to drive to and from work. That was a staggering $640 a month, or $7,680 a year. Plus, eating on the run was adding up. "I'd walk in [to a convenience store] to get a bottle of water," he said, "and come out $8 later." The Blackfuls went to restaurants every night. "In this house, it was Chinese on Monday, pizza on Tuesday, Subway on Wednesday, and McDonald's on Thursday." Victor sat Michelle down and explained that he was going to start taking public transportation and that the family's weeknight restaurant outings had to stop.
Michelle feared the debt diet would be harder for her than for Victor because she was running the household. She suggested online grocery shopping, which she heard would be cheaper because you'd stick to your list. Although the Blackfuls are always on the go, Michelle, like Victor, cut out fast food. Instead, before she leaves the house with the kids, she packs grapes, carrots and sandwiches. "We're eating better and we feel better," she said.
Change their habits was only a start. Michelle wanted Victor to agree to move ( Step 7 ). They could get the same size property across the lake in Indiana for 30 percent less than in their Chicago suburb, she said; they'd pay half the taxes and could send the kids to excellent public schools. Victor was having a very tough time with that idea, so Dr. Robin tried to help him understand that "consistent sacrifices lead to big, lasting payoffs financially and in marriage." Victor recognized that he was reluctant to leave the house because it had once been his bachelor pad, and selling it represented a clear end to his carefree days. However, says Dr. Robin, "he was transformed by the knowledge that what he thought he needed to survive was draining his bank account, his marriage, and his joy." In May, the Blackfuls put their house on the market for $90,000 more than Victor paid for it in 2001. Within a month, they were getting nibbles.
Victor's commute now costs $9.60—a savings of $22 a day, $440 a month. By shopping for groceries online, they've trimmed that bill by $400 a month. Not eating out on weekdays has cut several hundred dollars more. They've reduced their $7,000-plus credit card debt to $2,500, and Victor lost 16 pounds without trying.
The Blackfuls are looking forward to the future. "I made an appointment with a financial planner," Victor said. "If we're not going to have to pay private school tuition, we can start putting money away for college."
Printed from Oprah.com on Thursday, December 12, 2013