Investor Alert: Boiling Frogs and Avoiding Debt

By: Dowdy White, Spring 2018 IAC Student Intern

There’s an old fable that says if a frog is suddenly dropped into a pot of boiling water, the frog will jump out, but if a frog is put into a pot of lukewarm water that is slowly brought to a boil, the frog will not become aware of the danger and will be cooked to death. Poor frog. You may be wondering why this backyard bayou experiment is relevant to the world of investing. Well, that answer is simple: anyone who takes out a loan or opens a credit card account can quickly become a frog in a pot of boiling water. What may seem like an insignificant credit card charge for a quick dinner at Chick-Fil-A or a small loan taken out from a friend can quickly add up to what could be insurmountable debt.

Anybody from your neighbor, Karen, to famous athlete Mike Tyson can tell you that one of the easiest things to do in life is fall into debt. Luckily, our friends at FINRA and the FINRA Foundation have developed SaveAndInvest.org, which is an online tool to help “all investors make informed financial decisions.” On this website, the FINRA Foundation gives investors a wide variety of ways to manage and avoid debt. Let’s check some of these out and see if we can get you on the right financial track or if needed, help you pay off some bills.

First, FINRA recommends that everyone complete a personal financial inventory. Specifically, finding out what you own and how much money you are spending on a regular basis is the fastest way to find out how you got into debt and find the right solutions to get out. By compiling this information, you can also figure out how to cut out your wasteful spending and build up money to use in order to pay off your bills. To get started with this inventory, FINRA recommends that you calculate your net worth and build a spending plan.

Second, you need to put away your credit cards. It’s impossible by to save money if you are constantly spending more than you are putting away. Additionally, it’s hard to manage your finances if you are steadily racking up credit card debt with your Amazon Prime Day purchases. Just like Jack in the movie “Titanic,” if you’re over your heard in debt, you’ll find yourself sinking into the cold abyss if you continue to pile that debt on. You know you can live without that air fryer, so just cool it with the credit cards for a while.

Third, FINRA recommends that you call your creditors before skipping payments and talk with financial counselors about your payment programs. If you think that you will be unable to make a payment, it’s okay to call the company to which you owe money and ask for more time. Most often, these businesses will likely be happy to work with you to help you with your payments because in the end, it helps the company out too. Additionally, speaking with financial counselors can be helpful because the counselors can assess your financial situation and offer advice to help you get out of debt. These counselors can also connect you with debt counseling services.

Fourth, FINRA states that you need to pay your high interest rate debt first. Specifically, you need to work on paying down the credit card or loan that charges you the highest interest rate first. To accomplish this task, set a goal to pay a specific amount toward that debt each month, while also putting minimum payments toward your other credit cards or loans. When you get that high interest debt paid off, apply your newly acquired extra money to the debt with the next highest interest rate. You’ll eventually pay off your biggest debts and save a significant amount of money in interest. Interesting, right? Get it? Interest…ing? Sorry – I couldn’t resist.

Fifth, if you can afford it, FINRA recommends that you mail your payments early in order to ensure that your payments are posted to your account on time so you can avoid late fees. If you consistently make late payments or miss payment deadlines, you can end up falling even further into debt as late fees wreak havoc on your balance and cause major damage to your credit history.

Next, you should take great care to avoid settlement or credit repair scams. No matter how many times you see the advertisements on television, there really is no such thing as a quick and easy fix to getting out of debt or increasing your credit score. FINRA says that you should stay away from services that require “up-front fees” or “voluntary contributions.” Additionally, if a company guarantees that they can make your debts go away or promises that you will only pay “pennies on the dollar” to your debt, just run away as fast as you can. You should also be skeptical if a company tells you to stop communicating with creditors or ask you for your personal and credit card information before they offer to help you.

Finally, consider bankruptcy a last resort. Over the past two decades, people seem to think that declaring bankruptcy is their only option when their debts become too large for them to manage. Before you even think about declaring bankruptcy, talk with a financial counselor who can give you tailored advice to help with your debt situation. Bankruptcy should always be the last resort self-destruct button for you because it has long-term consequences and it may not provide the debt relief that you seek.

While you are falling into debt, you may feel fine. You may not feel panicked and you may not feel like you are getting yourself into trouble. You know who else feels like this? Frogs that are put into a pot of tepid water. If you don’t take the measures to be smart with your money, you might be turning the heat up on the bottom of the pot and before you know it, you might be floating in boiling water. You don’t want that.

If you would like to learn more about FINRA’s suggestions for managing your debt, please visit:

  1. https://www.saveandinvest.org/tools-and-resources-games-quizzes/moneytopia-managing-debt-problems
  2. https://www.saveandinvest.org/video/manage-your-debt
  3. https://www.saveandinvest.org/military-credit-and-debt/improve-your-credit-score