If You Really Want to Kill Off Your Debt, Do a Debt Autopsy

Geoff Williams

Autopsies aren't just for corpses.

Post-mortem examinations can be helpful for looking at anything that went wrong, be it a business deal or a soufflé that went south. But pinpointing where you erred in money management can be particularly useful. After all, you aren't going to ruin your life if you never learn to bake a soufflé. But you may find yourself in dire financial straits if you never improve your money management skills.

So with that in mind, see if your life's situations match up with any of these. Perhaps you can learn from these people who got in over their heads before you get too deep into debt.

1. Your life is changing quickly and dramatically.

Why mistakes are made. You haven't learned the rules and ropes that go along with your new life. You go to college, or leave college, and that's a big adjustment. You marry. You have a baby. As a general rule, people who enter new chapters in life adjust by purchasing the tools they feel that they need, whether it's a futon for a college dorm or a house because you're married. Whatever you're buying, it probably costs a lot.

Amanda Collins, who lives in Phoenix and owns a content marketing firm called The Grammar Doctors, says her finances started going awry when she began hitting some life milestones.

"It started to go south when I got married in 2005, with a baby quick on the heels of the 'I do's,'" Collins says. She and her husband wanted a house for their baby to grow up in, and so they bought one in 2006, with an adjustable-rate mortgage.

"We all know what happened in 2008," Collins says, referring to the recession and how many homes with ARMs had interest rates that shot up. She and her husband furnished their house, a pricey endeavor, and they each bought a car.

By 2007, they were divorcing. Collins says she was sharing $20,000 in credit card debt with her ex. She still owed $10,000 on her car and had $70,000 in student loan debt. "During the divorce, my ex signed our house over to me, so I had to short-sell it, which dinged my credit," she says.

Life has improved. Collins says her credit card debt will be paid off by the end of the year, and she has a new plan for paying off what's left of the $50,000 she owes in student loans. More importantly, she says she has learned from the experience: "Now, I only buy what I can afford and don't even have a credit card. I never want to be in that position again."

The takeaway lesson. Don't fool yourself thinking that you have to spend money when you hit a new milestone. You don't -- or you can at least buy what you need on the cheap, such as a used car and used furniture.

2. You're young, inexperienced and in over your head.

Why mistakes are made. The fact that you're young doesn't mean you're incapable of making good financial decisions. But if you're a young adult, you probably don't have a lot of life's money management lessons behind you, and therein often lies the problem.

At least that was the case for Hannah Gbahy Aboussou, 27, of Ridgway, Pennsylvania. She fell into debt when she was attending Dixie State University in St. George, Utah.

Aboussou doesn't mince words about her college experience. She didn't take her classes seriously and partied too much. "I had the brains but wasn't focused at the time," Aboussou says.

But her worst error in judgment was taking some of her student loan money and using it to shop.

Aboussou says she simply wasn't mature enough back then to be given a huge sum of money and know how to handle it. "The money was spent quicker than a drive-through order at McDonald's," she says.

Because of failing grades and exhausting her student loan money, Aboussou had to drop out. She now is working 12-hour days for an automotive company and is a student at University of the People, a tuition-free, accredited online university. She has a 3.7 GPA and is earning a bachelor's degree in business administration.

The takeaway lesson. If you're in college and spot a personal finance class, seminar, workshop or all three, take them. Learn everything about money you can before entering the real world.

"As a young college student, it's hard to realize that in a few years, everything moneywise adds up," Aboussou says.

3. You splurge on a major expense and then can't pay other expenses.

Why mistakes are made. Sometimes it's a lack of knowledge of finances. Sometimes it's brainwashing yourself into believing an expensive purchase isn't that expensive. Then there's just bad luck.

For Lauren Bowling, a marketing content strategist in Atlanta who writes a personal finance blog called "L Bee and the Money Tree," she probably experienced a combination of the latter two factors.

Throughout her adult life, she has battled credit card debt, boomeranging between racking it up and paying it all off. Then in 2013, after graduating college, the trouble really started.

Bowling bought a house with a 203k renovation loan. As she explains it, "a 203k renovation loan is the name of the loan product that lets you lump renovation costs into your mortgage, so you don't have to put up too much money upfront. It's a great way for people to renovate homes that need work without [the cost] coming out of pocket."

So far, so good, and Bowling's 1941 home was only $65,000. The loan allowed her to take out another $58,000 to make some much-needed repairs.

"It was a 1941 brick home, in foreclosure, and had sustained a lot of copper theft," she says. The house needed new plumbing, electric wiring and an HVAC system, among other improvements.

Unfortunately, she says, the contractor apparently underestimated the costs and the time it would take to renovate her home. Instead of the renovations costing $58,000, it was closer to $73,000.

"The bank won't allow you to take out more money after you've submitted the estimates for the renovation project," Bowling says.

So she raided $7,000 from her savings and took on $8,000 in credit card debt to get the renovations finished.

At the beginning of this year, she still was carrying the $8,000 in credit card debt, although Bowling has been aggressively paying it down the last few months.

The takeaway lesson. Even if you do everything right with a major purchase, things can still go wrong. Don't get overconfident. Look for any potential pitfalls.

Factoring in the renovations, Bowling was buying a $123,000 home, not exactly the type of home one can call outlandishly expensive. She also took out a well-regarded loan product among bankers, who only allow the renovations to go toward necessary repairs that add value to a house. Still, even in Bowling's case, a debt autopsy led her to some lessons learned.

"As a first-time buyer, I shouldn't have taken on such a massive renovation project," she says, adding that if she could do it over, "I would have found a different house, maybe one that only needed a little bit of work, and I definitely would have spent more time researching what goes into a renovation and spent more time vetting my contractor."

By conducting a post-mortem of your financial missteps, you may discover ways to prevent future issues. Bowling, for instance, isn't likely to get in the habit of buying more houses with 203k renovation loans -- at least not anytime soon. But that's the thing about a debt autopsy. Conducting one can't hurt. You won't be any poorer, but you will be wiser.