Isn't it amazing that after decades of an economy running on consumer spending that everyone wants to get out of debt in this downturn. While that might lengthen the downturn and postpone eventual recover in the short term, in the longer term it will probably be better both for individuals and the general economy in the long run. But how do we reduce debt, and what does building wealth have to do with it?

First of all, remember that wealth has nothing to do with your income. It's easy to think that people who earn a million dollars a year are wealthy, but not if they spend a million dollars or more a year! Wealthy people live on less than their income. They save some money and give some money to help out other people and/or some cause they consider important.

Is your debt more or less than it was this time last year? If it's more, you're spending more than you make. That's dangerous. I don't mean to be critical or judgmental about anyone's situation, but no one can sustain spending more than they earn for very long. In fact, it is impossible to build wealth and debt at the same time. The only way to build wealth is to get out of debt and start saving. It's certainly easier said than done. It helps to have a plan.


How much do you spend?

  • on mortgage or rent?
  • on utilities?
  • on transportation?
  • on groceries?
  • on eating out?
  • on snacks?
  • on clothing?
  • on movies, games, books, and other forms of entertainment?
  • on medical and dental expenses?
  • on child care?
  • on pets?
  • on credit card bills and other debt reduction?
  • on whatever else?


What can I cut to reduce spending?

  • Do I have to move to a cheaper place?
  • Do I need the cellphone package or cable package I have, or can I get by with less?
  • Can I plan errands more efficiently to drive less?
  • Can I walk, take a bicycle, or take a bus instead of driving?
  • Would it save money to drive instead of flying? Do I really need to go at all?
  • Can I eat at home or carry lunch to work instead of eating out?
  • Can I cook from scratch instead of buying prepared foods?
  • Do I need as many snacks?
  • Can I be satisfied with store brands instead of name brands?
  • Whatever I think of buying, do I really need it, or just want it? Can it wait?
Home cooking


These are just a sample of the kinds of questions to ask. Everyone has to ask their own questions. Even if you ask the same questions as someone else, you will not necessarily have the same answers. Maybe what your neighbor can cut, you need to keep doing, or vice versa. The key to cutting expenses successfully is to be very honest with yourself.

Once you free up some money in the budget by cutting expenses, you will be able either to put that money in savings or use it to pay down debt.


How to get out of debt (not including your mortgage)

  • Never pay just the minimum on a credit card. Pay at least the minimum plus the service charge. Preferably, add whatever you have charged since the last bill.
  • Pay off your smallest debt as soon as possible.
  • When that is gone, apply the same amount of money to your next smallest debt.
  • In other words, consider debt reduction as an amount in your budget and don't reduce that total amount until you have paid off all debts.
  • From then on, be sure to pay off credit card charges in full every month.



If at all possible, do not wait until out of debt to start savings. At the time you begin to apply your debt reduction strategy, put some money into savings and promise yourself to leave it there.

More and more, employers are requiring direct deposit of pay checks. That's great for saving; instruct your bank to put a certain amount in the savings account every month.

Once you are out of debt, then of course you can reward yourself by using some of what you had budgeted for debt reduction in order to spend more, but be sure to save at least a significant chunk of it.

Savings accounts are great, but they pay pitifully little interest. Once you have about a month's gross income saved, open a money market account, or something else that pays better interest and perhaps is less easy to raid. This account will fund large purchases (if, for example, your refrigerator goes kaput) and emergencies.



Once your savings grow and your debt does not, you have begun to build wealth. I love the line from The Matchmaker (and its musical version Hello Dolly): "Money is like manure. It doesn't do any good if you don't spread it around." And don't spread it only by spending on yourself. If for no other reason, giving will provide a great sense of satisfaction and help persuade you that you are now secure instead of at the mercy of bills and emergencies.

Also, one important part of saving is to prepare for retirement. Various kinds of bank accounts will not be adequate for that purpose. You will need to invest money to build that kind of wealth, which is beyond the scope of this article.

Remember: wealthy people are not those who make a lot of money; they are those who make more than they spend. Haven't we all heard stories about people who inherit wealth--or make a lot of money from sports--spend it all foolishly, and wind up on the street? Haven't we all heard about people who work at menial jobs and live in a poor neighborhood, but when they die leave surprising amounts of money to some charity?

When all is said and done, the one who dies with the most toys is as dead as the one who never had many toys at all. Whoever lives in a fancy house and drives a fancy car and spends his or her entire income every years has no real wealth. That person is a pauper with a fancy house and car. Whoever spends less than his or her income, saves, and gives generously is wealthy no matter how fancy or modest their house and car are.

So, if you're in debt, get out of debt as quickly and efficiently as possible. Cut whatever costs you can to get out of debt faster. Begin to save as quickly as possible. Look for ways to give. Once you are out of debt and your savings begin to grow, you have begun to build wealth, even if you have a very modest income.