There's nothing like a little hard-won experience. Personal finance expert Lynnette Khalfani got out of $100,000 in credit-card debt in three years. Now the author of books like "Zero Debt: The Ultimate Guide to Financial Freedom," she writes and speaks about how others can follow her example. BusinessWeek's Ben Steverman recently spoke to Khalfani about the "bling-bling lifestyle" that leads young people to borrow more than they can handle, her own experiences with heavy debt, and her strategies to help people get out from under.
Why do Americans end up in so much debt?
There are two primary ways. One is through overspending and poor money management. No one really teaches us about financial literacy in this country. A lot of folks learn through trial and error and the school of hard knocks. What they learn from their parents tends to be wrong-headed. It's easy to get caught up in that spiral of debt.
The other is when people fall victim to circumstances. I call them the six Ds: downsizing, divorce, death in the family of the main breadwinner, disability, disease, or disaster. Whatever your personal disaster, if you're not financially prepared, you can find yourself deep in debt.
How did you end up with $100,000 in credit-card debt?
I was overspending. I was earning a six figure-salary, but I was spending as if I earned seven figures. I bought time-shares in the Caribbean, not one but two. I had my kids in a very expensive private school. I would buy gifts for the family and treat my girlfriends when I went out for dinner.
You paid that off in three years. When did you decide to start doing that?
I was fed up. I was maxed out on all my credit cards. I said to myself: "This is ridiculous." I was actually doing a lot of things correctly with my money. I was socking away money in my 401(k). I was saving for my kids' college education. I had life insurance. I had disability protection. I created a will. But when it came to my spending, it was out of control.
Does getting out of debt require a big attitude shift?
Yes. We all get caught up in this consumer-driven culture. I call it the "bling-bling lifestyle." Especially when you're young, there's this push that makes you want to keep up with the Joneses. You want to demonstrate that you're successful, that you've made it.
You have to make the mental shift: No, things are not going to make me happier. What's going to make me happier is not being stressed out about money.
So it's not that young people are necessarily in debt because they're poor. Many young people start making some money, and only then they start overspending in a big way.
When you're still in school, everybody's bumming it. You're wearing the sweatshirts and jeans.
When you start working, appearances have to be kept up. You want to dress the part at work. You don't want to say you live in an apartment with four people. Once you start out on your own, you want to prove you're an adult. Young people tend to want to maintain the lifestyle they grew up with. But you're just starting out. You don't have that kind of money.
There are two classic mistakes that recent college graduates make: They underestimate how much everything is going to cost: Rent and food, car, re expenses, clothing, connection for utilities, furniture. Everything costs way more than you thought it would starting out. Compounding that situation, most people earn less than they think they will. Even if six-figure salaries are the norm in your career, don't think you're going to make that.
So how did you start paying off your debt?
You kind of get to a point where you think there's got to be a better way. One of the decisions I made was that I was going to stop the travel. And I love to travel.
I shifted my mindset. I don't have to have the latest and greatest clothes to wear. I don't have to be the person who plops down the Visa and American Express whenever we go out. I started taking windfalls that I received and throwing them toward credit-card debt.
I negotiated a lot with my creditors to help make the debt more manageable. I had more than a dozen cards, but because I hadn't missed any payments, I had some leverage with those creditors. Credit-card companies know it's a competitive market. That gives all of us some negotiating power.
So what kind of advice do you give in your books to people trying to get out of debt?
I suggest you attack your own area of pain. Whatever is bothering you, that's where you get most aggressive about paying off your debt. Some people are frustrated that they have enormous amounts of debt. But sometimes having multiple credit cards can also be stressful even if you don't have high dollar balances. It becomes an immense juggling act. You have to remember to pay everybody. This is a paperwork nightmare.
Opt out of getting all those credit-card offers. When you're deep in debt, that's extra temptation you don't need. Make a personal commitment to stop digging. This is about you recognizing you have a problem.
In your latest book, Zero Debt for College Grads, you take on the topic of student loan debt. You at one time had $40,000 in student loans. When is it worth going into debt to pay for education?
One mistake is taking on loans too quickly without exhausting all other financial alternatives. Student loans are the path of least resistance. Exhaust every other way to finance a college education -- scholarships, grants, work study, paid internships, and then, of course, contributions directly from the student and his or her family. And doing these things can't just be a one-time effort. Get your hustle on. Otherwise you're really going to pay the price later.
Also, make sure your borrowing bears some semblance to what your income is going to be. When you borrow at excessive levels that bear no sense of reality, then no, it's not worth it. Those student loan payments are going to be killing you.
How important is it for young people to keep an eye on their credit scores?
Most people who are in college think the most important number is their GPA. It's not. The single most important barometer of their financial health is their credit score. It impacts you in ways large and small.
You save a tremendous amount of money simply by having good credit. You can save hundreds of thousands of dollars on mortgages, auto loans, student loans, and even things like life insurance rates. You should just jealously guard your credit rating.
Many employers are looking at your credit rating to decide how responsible you are as a person. Right or wrong, fair or not, the thinking is that if you honor your obligations, if you pay your bills on time, chances are you'll likewise be a good employee.
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