When it comes to financial tales of woe and tragedy, there are countless stories from investors that constantly land in my inbox. The most common mistake is using too much debt.  It’s an endless source of financial misery.  Whether credit card debt, home mortgage debt, home equity line of credit debt, bank loan debt, business loan debt, car loan debt, student loan debt, margin debt, or department store charge card debt, Americans are hooked on debt.  Instead of paying cash, they promise to give up part of their future earnings to cover needs or wants today.  As long as they have a job, or investment income, there ordinarily isn’t a problem.  But when the unexpected happens – a company fails, jobs are eliminated, a surprise legal or medical problem arises – suddenly, they have no way to make good on the promises.

This then begins a cycle.  Panic sets in.  Savings are drained as they convince themselves, “it is only temporary” and maintain their existing cost structure.  They don’t cut expenses quickly enough.  Then, the 401(k) plan gets tapped, with huge tax bites and early withdrawal tax penalties, sometimes leaving as little as 50¢ on the dollar.  At this point, frantic negotiations begin with banks and other lenders.  Often, the person will blame their creditors saying, “if they would only work with me” or “they cut off my liquidity at the moment I needed it most”, fooling themselves by forgetting that the bank doesn’t step in until you breach your covenant, at which point their responsibility is to the depositors who have entrusted their savings with them, not to you.

Get your debt under control.  Other than working to get the free 401(k) matching money from an employer, it makes no sense to be shoving cash into a savings account or investment account if you are sending most of your paycheck out the door to creditors.  Pay off your debt.  Build your savings.  Then start investing.

This is not a radical idea.  A few generations ago, it was an accepted truism that you paid cash for your car or furniture.  It didn’t matter if you were a farmer, a butcher, a grocer, an attorney, or a teacher, you only bought something when you were able to afford it.  Today, people have been so brainwashed into believing that it is normal to be in debt, they are actually convinced it is impossible to do something like that!  They truly, honestly believe they could never pay cash for a car.  They have become victims, willingly enslaving themselves to financial institutions and then, what is worse, have the audacity to blame those very institutions for lending them money in the first place!