13 Ways to keep debt from holding you back

I have tons of debt after launching four companies. There has never been a launch that didn’t mess up my personal finances. Most entrepreneurs have no credit – I am like that as well – so I have learned to live with debt and without credit. This is what has enabled me to take risks, set lofty goals, and go after dreams that lots of people tell themselves their debt precludes.

How do I do it? It’s all mental. Here are thirteen ways to think about debt to keep it from ruining your life.

1. Compartmentalize.
When you’re saving for a house you still buy food.  When you go on vacation you still expect to buy a car in the next ten years. That’s compartmentalization. We compartmentalize our financial requirements to enable us to have a long-term goal and fulfill short-term needs too.  Get a money-allocation system in place that will keep creditors from calling all the time, and then stop thinking about it. Do that system and any money left over put toward your bigger goals.

(For a visual explanation of compartmentalization, see the photo up top. Last year I set aside the fact that our house is missing siding and I used that money to build a new section in my garden so I wouldn’t miss spring planting.)

2. Make deals and stick to them.
You can negotiate with anyone. Most creditors are used to negotiating payback plans – it’s part of the business of lending money. So propose one you can manage without too much duress. If they say no, then tell them to take you to court. They rarely will. Instead they’ll likely just accept what you’re offering. Even if it’s the IRS, if you show that you are offering what you can pay without ruining your life, they’ll take the offer. Then stick to the agreement. Consider it a tax for living. And then you can go on with your life.

3. Give up the idea of retirement.
Retirement is an idea from the 1950s when people hated their work. Today you can find fulfilling, engaging work with no need ever to stop doing it. Most baby boomers could not retire, but it ends up that not retiring is a better way to live the end of your life – you remain engaged and relevant and involved. We do not need to aspire to having a pile of money at the end of life, so then continuing to pay back debt at the end is not that bad a situation.

4. Realize you can take back the debt’s power.
At big milestones like graduation, marriage, kids, we can choose to feel optimistic or we can choose to focus on our fears. When it comes to our outlook, 70% is driven by our genes. But you control the other 30%. Practice being optimistic and happy-go-lucky with your debt. When you practice optimism in one area it ripples into other areas in your life.

5. Don’t stop taking risks – the price is too high.
One of the most common regrets people have at the end of their life is that they didn’t take risks. They played it too safe. Most of your life will include some form of debt. If you put off doing what you want because of your debt you are way more likely to have regrets than if you pay your debt off really slowly, or if you never even get it paid off.

6. Talk to your friends.
When people started talking about what sex they were having, they understood both sex and themselves better. Lots of people try gay sex who aren’t gay. Lots of women ejaculate during orgasm. Lots of men can’t keep an erection. We didn’t know all that until we talked freely about it. Talking about something enables everyone to cope with their problems. It’s true with debt, too. Lots of people have personal loans, lots of people owe their friends money. If you find out what other people are doing and how they are feeling you can get better ideas for coping with your debt.

7. Forget about the dream of zero debt if you want kids.
I don’t know anyone in their 40s who has kids and no debt. Well, I know one person: she hired me to coach her because she is pathological about saving money and she never feels secure. Otherwise, people who have kids have debt because it’s human nature to want to give your kids what you can give them. And it’s human nature to be willing to go into debt to do that. Once you know that, you can free yourself from the need of being debt-free before you have kids, (or don’t have them).

8. Achieve financial security as a mental state.
Financial security is all mental. Science says it has to do with the people around you: do you have the same amount of money as the people around you? If you do, you feel okay. Which means a lot of financial management in life comes down to doing a good job of deciding where to live. If you live in NYC with college debt, you feel poor since the millionaires around you could pay cash to get rid of that debt. If you live in Appalachia with college debt you feel rich since you could leave and get a job, and your neighbors cannot. Put yourself somewhere so you can get to a good mental state.

9. Don’t use debt as an excuse.
A risk-taking mentality is not a result of good finances. Entrepreneurs take financial risks all the time, even after they have ruined their personal finances. Don’t tell yourself you’ll take risks after your debt is paid off. It’s simply not true. If you are not taking risks when you have tons of debt you are probably not a risk taker. For better or worse. Debt is not actually bad in itself, but entertaining false beliefs about yourself and debt is.

10. Stop putting so much money toward your debt.
Negotiate the minimum amount you can put toward the debt. It might feel like you’ll never pay it off, but it doesn’t matter. Paying it off does not actually change your life, and  financial stability comes from something deeper than paying off debt. So put the least amount of money possible toward the debt and then use your money to do something that will change the trajectory of your life. Good money research: if you put your money toward experiences, money can make you happy.

11. Just tell people you don’t have money.
Look, we don’t have debtors prison anymore. If you don’t make enough to pay your college loans, you can put them in forbearance. Forever. It’s not against the law to not have money to pay your taxes. It’s against the law to lie about it. You have to tell the government how much you owe, and you have to tell the government why you can’t pay. If you do that, the IRS is actually pretty nice about it. I know: I’ve done it. And credit card debt goes away after seven years (three years in Kansas!). So you might be able to wait it out. (I’ve done that, too.)

12. Declare bankruptcy.
You’d be surprised how many people declare bankruptcy. In fact, a very big group of people declaring bankruptcy are medical students who don’t want to be doctors. See? You’d never guess, right? There is a false belief that bankruptcy is somehow dishonest. It’s not. It’s admitting that you made bad financial decisions. People who gave you money expecting to get it back took a risk. They are professional risk takers. And they took into account everything they knew about you. So, they bet wrong: you couldn’t pay back the money. They are gamblers, and it’s part of their business to get stung by bankruptcy sometimes.

13. Wait out the terrible feelings instead of panicking.
Debt is like depression. It feels big or small at different times in your life. And sometimes if you wait, it will go away. College debt seems insurmountable in your 20s, but the average college debt is $26,000, and the earning power of someone in their 40s makes that debt seem manageable. Paying for two teenage kids to get all the way to college while you’re paying a mortgage and buying a car and paying for summer camp sounds impossible. But the kids will grow up and then your cash needs will decrease.

There is no point in being the most financially responsible person you know. You will not be rewarded. It’s like being the kid who gets a better score than everyone else on the test. Being that much better than everyone else serves no purpose but to skew the curve.


108 replies
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  1. Bobby
    Bobby says:

    Some of the worst financial advice I’ve ever seen. Seriously awful article. Instead of excusing bad behavior and poor choices, you guys should find some better role models. I lived like this in my early 20’s , but thank goodness I woke up and changed. You can certainly have a good life with kids without debt, and well before 40 years old.

    • Mikal
      Mikal says:

      Agreed 100%. this is crap. Horrible advice. It mainly seems to be, borrow money and not pay it back, don’t plan ahead, don’t save, screw the IRS, screw your banks and responsibilities, and just work till you drop dead.

      No thanks!

  2. Jenn
    Jenn says:

    This is decent advice for someone who has not defaulted in their debt and has adequate funds to keep the monthly payments. This doesn’t help me b/c its not so much that I’m in debt, it’s that I defaulted on my debt and have no income to pay for it right now. When I do have income, I have to make amends to my creditors in order to keep my house and car and to rebuild my credit in order for me to have it for emergencies such as auto and home repair. In short, I must make paying my debt a priority until I’m no longer in imminent danger of losing major assets.

    I do want to give some advice on those who want to pay down their mortgage. I’ve been in the industry for 10 years. I suggest you don’t unless you are certain you will have a job to pay for it until its paid in full or you are saving the money in an interest bearing account in order to make one full payment. If you lose your job and you have 80% of your mortgage paid and you are now defaulting on your mortgage, the mortgage company doesn’t want to work with you to save your house from foreclosure as opposed to someone who has 60-70% left on their mortgage b/c, on paper, they have acquired enough income on that property for the property to be considered paid and the 20% left to be “written off” on their accounting books and they stand to make more by selling it since the house was lived it all the way up to foreclosure which usually means its in good shape to sell for a profit. I’ve seen it happen too many times.

  3. Stephen Anderson
    Stephen Anderson says:

    Frankly, I have never heard anyone talk about debt in this manner. It is simply a different viewpoint of the world. I am not sure I want to live like this, but in fact, there is no reason why anyone can’t simply choose what to do with their own lives.

    This is a great post for common sense and for helping people to create hope out of despair. Thank you.

  4. Amy
    Amy says:

    I read this originally, and then read the comments. And then stayed away for a week, came back and reread again. Still say nope – irresponsible, unhealthy approach. http://www.daveramsey.com – this is the way i got to financial freedom, as a formerly in-debt single mom. Paid off debt, college for 2 kids, breast cancer treatment, 2 weddings and my house. Hard work, budget, saying no to impulse buys – old school values that still work. And I have NO regrets and no fears for the future.

    The idea of ‘never having to stop working’ is incredibly naive. People get old, sick, weak, confused. To count on working until you die is not a good plan.

  5. Anna
    Anna says:

    Money is a tool, not a proxy for a value system. In American (and global) business we expect a certain amount of risk from companies; the airline industry has practically made filing bankruptcy part of their business model. When the system bends too far we adjust it through the disciplinary action via lawsuits or changes in laws and regulations, or both.The entrepreneur and family have no reason to feel compelled to operate on a different playing field. Penelope is right. Those nearly usurious credit card interest rates are the lender’s security against default; they’ve done the math. MasterCard and Visa are hugely profitable.

  6. Lisa
    Lisa says:

    Ok someone just posted about Dave Ramsey and not expecting to work til you die…

    Obviously we should take care of our elders and people who can’t work. Are you kidding me? That’s what we used to do! Why is that naive?

  7. Karen Hanretty
    Karen Hanretty says:

    Perhaps I’m reading into #3, “Give up on the idea of retirement,” but that is terrible advice about long-term planning. Those of us in our 40s expect to work longer than 65 – if we’re lucky. The economic crash has had devastating effects on workers over 50 years of age. They got laid off, and employers eventually replaced them with younger workers who cost less (if they replaced the laid off workers at all). Not everyone is an entrepreneur. Companies give Golden Handshakes to get rid of expensive employees. You can live a life of Better Safe Than Sorry and still take the risk necessary to succeed in life. This entire post seems to deny personal responsibility. If I can’t pay for my commitments, someone else will. Great attitude. I think it’s partly the cause of the financial collapse.

  8. RL
    RL says:

    Nearly 50, married with one kid in college and another on the way next year. $35k in medical and credit card debt and getting downsized at work and…? Upside down in our mortgage. Oh yeah…and our cars are also breaking down.

    I alternate between depression, panic, and self-loathing for being so damn lousy with money for so long. And my marriage of 27 years (to a woman I’m madly in love with) is faltering badly. (Who would want to stay married to depressed/anxious/self-loathing man who is simultaneously losing his faith and his earning power?)

    I have no idea how this is all going to turn out but I can say that this column was the most encouraging thing I’ve read in a very long time and for the first time in many months, I actually feel a little hope.

    Thanks for writing this, Penelope. It’s what I needed to hear.

  9. Amanda - Amanda Douglas Events
    Amanda - Amanda Douglas Events says:

    I definitely don’t agree with everything you said (I’m sure not many would because there’s so much variation, and most people feel so strongly in one direction or the other) but I loved all the stuff you had to say about taking risks. It’s true, we hold ourselves back because it means we have to take out a loan, or it might not work out etc. etc. but who wants to live with regret? I started my own event planning company while on EI with no loans or money in the bank for it. The risks couldn’t have gotten higher, and I couldn’t have already been in a lower spot. BUT I wouldn’t change a thing and am so in love with what I do (and how well it’s going!)

  10. Wendy
    Wendy says:

    You have given an honest analysis about debt and not letting it hold you back. I agree that having kids inevitably means going into debt. I also think retirement is not a modern goal. The key is to find something you like to do and enjoy doing it for the rest of your life. We had claimed bankruptcy years ago and it was the best decision we ever made. It got us through a tough time and now our credit is back to normal. Sometimes you have to think outside the box to forge ahead in life.

  11. Brandon Wise
    Brandon Wise says:

    I think it is very easy to blame risk taking for debt when the cause of debt is really ridiculously wasteful, uncontrolled spending. I have never personally known anybody in bad financial trouble who did not piss away money in a thousand different places. One way to free yourself to to take risk is to live a lean, low cost life. Feeding a desire for luxury is a time consuming endeavor. This is the reason I get my haircuts in Norwood Ohio instead of Los Angeles.

  12. Jess Harper
    Jess Harper says:

    I can only speak from an Australian perspective on this one, but for a long time it was popular for entrepreneurs to start up Pty Ltd companies, take huge risks, pay themselves large amounts of money but shift all their assets into the names of their kids and their spouse ASAP. So if the company went bust, their liability would be limited to the value of their share in the company (then and now, it’s usually $1), but they still retained all the benefits from the profits. However, because it was so common for entrepreneurs to strip a company of assets before it went bankrupt, the laws changes about 5 years ago. Now if the company goes bankrupt, if the receiver can show that there was evidence of asset stripping or poor management, then the Director (s) can become personally liable for the company debts.

    I don’t know what it is like any where else, but if you are bankrupt, your credit rating is shot for 7 years. That means no credit of any kind, no mobile phone, impossible to get a rental property, impossible to get a landline, impossible to get a hire car, impossible to get anything that requires a credit rating.It means you can only hold a non-interest bearing bank account, you can’t be a member of any company board, you are on the banned list of directors so can’t re-form a company or open a trust. You cannot have an ABN, which means in Australia, you can’t work for yourself. And if you work for someone else the Taxation office will have been notified and ‘garnish’ all of your pay once you earn over a certain amount and forward it to your creditors.

    And if it is shown that you took unnecessary risks with the companies money, you can be fined a HUGE amount by the taxation office, and face up to 10 years jail.

    It also means you are restricted from leaving the country without the permission of the receiver/administrator, and your passport is flagged to stop you from doing so for 7 years.

    However, if the company is simply dissolved and assets are distributed accordingly and debtors paid off, there are no such worries.

    Finally, if you are a sole trader in Australia and go bankrupt, you don’t have the protection of a Pty Ltd company, so depending on the size of your debt, you can say goodbye to you house, car, and everything you own.

    So taking the sort of risks Penelope is talking about in Australia, can lead you down a very rough road indeed.

    I don’t personally know of any entrepreneur that has not taken significant risks witt heir own money and ended up in huge debt. Certainly I did, and it was incredibly stressful. But there was always a prospect of success driving them (and me), that ultimately repaid this money at some point.

    And the ones that went bust did so with debts that were manageable with the sale of company assets. Or in a manner that was transparent, involved no mismanagement and they were protected by the Pty Ltd aspect of the entity.

    So, take risks, but don’t include bankruptcy as a contingency for your own poor planning.

  13. Will Bowlerton
    Will Bowlerton says:

    This is the first post of Penelope’s I’ve read, and I have to ask: surely, surely no one takes this advice seriously.

    Being bankrupt in some countries is an appalling and crippling label. You can’t get credit, and with that a rental property, mobile phone, bank account, credit card etc. Some countries you cannot leave if you are bankrupt until your debt is cleared.

  14. Dyson Breece
    Dyson Breece says:

    Irresponsible advice, and if taken and your financial status goes south, you may have a very good case to sue Penny for compensation.

  15. Ray Mills
    Ray Mills says:

    Possibly some of the worst financial advise I have ever read… The best way to not let debt hold you back is to NOT HAVE DEBT.
    1)Pay the minimum… just plain dumb
    2)Declare bankruptcy… over Indulge your children, run up debt then declare bankruptcy… what a life lesson for you children..

    This post is more about not confronting the mess I’ve made…
    Shame on you.

  16. Anna
    Anna says:

    This article is not a satire and Penelope is right — for a certain type of person. Risk-taking entrepreneurs should absolutely have this attitude about money or they will forever be dreamers, not doers. If you can’t live like this don’t but for some of us it’s life, at least sometimes, and it works.

  17. OMG_This_Can't_Be_Real
    OMG_This_Can't_Be_Real says:

    You are the antithesis of someone who should be running blog purporting financial guidance, and the epitome of what is wrong with our society.

  18. Vincent Pugliese
    Vincent Pugliese says:

    I just found this blog after reading an email from author Donald Miller, and I am so disappointed by this post. We are 42 & 36, have three boys (8,6,2) and are 100% debt free, house included, and have a wonderful life and are not money obsessed, pathological about savings or feel insecure. I was excited to check out this blog and I am completely let down by the message of this post.

  19. Mike Z
    Mike Z says:

    I remember being at an industry conference where the head of a professional group was a speaker. He had an amazing resume, rose to the top of his profession, achieve a level that in all odds I will not rise to. I don’t know how much money he makes, but I be comfortable to say it’s over $250k/year.

    At the end of his speech, he reference the bank that was sponsoring the event and commented that he had got his car loan with them.

    What a failure! You worked so hard for 30+ years and achieve so much and you can’t write a check to buy a car?

    How can someone calibrate their work as being successful if they can’t build a meaningful savings?

    Risk taking? If the results are ruined credit and a load of debt, how exactly is that something that a rational life calling?

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