Debt by Stealth – this is the cause of your Debt

Mar 292008

In my opinion based on first hand experience the majority of people who have large debts have sleep walked into them. I’m not saying it’s their fault but what I am saying is society is set up in such a way that it’s hard not to incur large debts. Some people might argue that it is the individual’s responsibility to look after their own finances and I would agree but from a young age in the society we now live in we are all primed and conditioned to take on unnecessary consumer debt. Now don’t think I’m saying all this to be controversial but the simple fact of the matter is that most debt is by stealth. Debt by stealth. Let me explain.

As we make our way through life there are certain expenses we need to incur to help us on our way and there are other smaller discretionary expenses that we don’t need to but feel obliged to incur.

Let’s first take a look at the bigger debts we face in our lives.

Student Loans:

To get you through college you probably had to take out student loans. The loans needed repaying and as soon as you left college so the pressure was on to find a nice stable job so that the banks could stake their rightful claim on your income. I suppose at the time it made sense – a trade off between getting a good education and good job versus taking out a small student loan. If only it was that simple – yeah sure you needed the money at the time and college is very expensive but the problem is it sets the tone for the rest of your life. The banks hope to get you into the borrowing habit at a young age so they have you as customers for life. Pretty smart eh?

Mortgage Debt:

Mortgage debt can be justified by the need for somewhere to live right? I mean that’s a no brainer. Ok but think about it for a minute – the global property market has rocketed for the last 5 years. You bought because everyone else was buying right? You had a family to support and the banks were literally throwing money at you. Everyone else was doing it right? You were secure in the knowledge that ‘we were all in it together’. You took the plunge and things went your way..for a while. The value of your house grew in double digits for a couple of years and you thought that you were on easy street. What the heck? You thought, lets just drawn down some equity and go on a nice holiday.

Consumer Debt:

So now you have the house – well wooden crates for tables just won’t cut it. So off we go to the furniture store to rack up some more debt. The guy in the store seem to be offering a great deal with his low monthly repayment options on that sofa. The 28 inch screen TV that you had looks a bit dated so you got one of the new 40 inch plasma screens. On a lease plan of course. More debt! So far the debts look fairly easy to spot. They don’t seem to have much stealth but let’s continue.

The debt bite

The house, the TV, the furniture – all funded with debt. Nothing new here you say. Now we are in a situation that most people with this lifestyle find themselves. The monthly payments start to take a big bite out of your monthly take home pay. This added to the college loans you are still paying off leaves you with very little to spend on the ‘necessities’. Here are some of the so called necessities of life – that new outfit, the morning decaffe latte, the nice gourmet sandwiches for lunch, the expensive two week holiday, the latest ipod, the trendy trainers and the list goes on. If you sat down and analysed the outgoings on these ‘necessities’ it would not be hard to see how they all add up to a whole pile of debt because the chances are that most of the items on the list (and a whole lot of other items) were paid for using your credit cards.

Credit cards can be very useful if used properly but that’s the focus of another article.

Looking at your expenditure on a single day basis the expenses don’t seem to add up to much. True, on a daily basis these expenses look small and manageable but taken over the period of say a month then they don’t look so small and manageable. What is even more telling is that these expenses are not taking into consideration the loan repayments. So if you like you have the long term debt – i.e. debt that has a repayment schedule that is greater than one year for example mortgage, car loans, college loans etc. then these little ‘necessities’ that add to your short term debt situation. By being a drain on your daily finances these little things all add up to take a big chunk out of your monthly take home pay.

If you compound this spending behaviour over a year then the real impact starts to show. You end up either hitting your overdraft every month or adding any excess expenses on to your credit cards. Take this behaviour over a number of years and you have a problem situation. The problem is that unless there is a shift in behaviour then there is serious trouble ahead.

As you are probably beginning to see Debt by stealth is an ever present threat. You turn on your 40 inch plasma screen TV and you see the adverts bombarding you with information and trying to seduce you into buying. On your way to work listening to the radio or checking out the billboard advertisements, same thing again they all want a piece of you or more accurately they all want a piece of your money. Everything and everywhere there are debt threats. Western society is built on consumer spending, it’s the keystone of capitalism. Spend or die. But wait a minute, who says that you have to overspend? Where is it written that we have to keep up with the Jonses?

Keeping up with the Jones

Oh no not that tired and hackneyed phrase. I’m sick of hearing that – you say. Well sure it is a tired phrase that people seem to throw about but it does hold a lot of truth. Instead of the Jones if we used the word peers or friends then I think you would appreciate the sentiment in the phrase. Too often we find ourselves forced into a race to keep up in monetary terms with our friends, neighbours and relatives. It gets to the stage that we are running just to stand still. The neighbours have the latest car – we feel obliged to match them. Our friends go away on a two week vacation to the Far East. We have to go one better. Ultimately we end up in a competition that we just cannot win. We get stressed from the constant need to keep up, the need to maintain our social standing by spending.

Sure its nice to have nice things but where is the glory in having nice things yet being kept awake half the night worrying about how your going to make next months car payments? So what to do?

Wake up

As I said at the start of this article, it is my opinion that the majority of people sleep walk into debt. Then one day they realise that the money they are making is no longer enough to cover the bills. What usually happens then is denial. It can’t be that bad. If I ignore it, it will go away. And so the spiral continues, downwards, until they are faced with foreclosure and bankruptcy.

There is another way. It doesn’t matter how bad your situation may seem, no matter how little income you currently have, no matter how many creditors are calling. There is another way out.

You want to solve your debt problems? Then WAKE UP! I’m serious its time that you WAKE UP and took a long hard look at your debt situation. No one else is going to help you but YOU! Since this is the case then you need to take control of your finances and reign in your spending, look to pay off your loans early and maybe even consolidate your debt. There are numerous strategies to eliminating debt but you have to first realise the hard cold facts about your current debt situation. Its up to you – you are your only hope. All that the likes of this website can do is to provide you with information, tools and guidance but it is up to you as you go about your daily business to make the small and eventually the big changes to your spending and saving habits.

So saddle up for the ride. No its not going to be easy and yes it will take time but if you are will to change and are committed to the fight and are willing to learn and work hard then there is no reason why you will not be successful!! Go on I dare you.

How to stop debt before debt stops you

Mar 272008

To stop debt before it becomes an all consuming issue in your life is not an easy thing to do. Debt only becomes a problem when it has gone beyond the point where it should have been stopped. How often have we only looked at something when it goes wrong. Logically it makes sense. Why stop debt if it is not causing problems? It’s like going to the doctor when nothing is wrong.

But if you think about it you should go for your annual check up with the doctor. You take your car in for a service every six months right? The same applies to debt management. To stop debt we need to have our annual check up but in some cases annual is simply not enough. We need to check our financial pulse every month.

If you’re in a hole stop digging.

The simplest way to stop debt is to stop everything.

Stop eating out

Stop buying luxury goods

Stop living beyond your means

Stop whatever it is that is causing your debt

To really stop debt you need to effectively stop living for however long it takes to get you back into a frame of mind where you are not worried about debt. No I’m not suggesting you join a monastery nor am I saying you should starve yourself.

Here’s an example of what I mean.

A friend was trying to sell his house. The mortgage had become a large burden and his plan was to sell the house and move into rented accommodation. The problem was the buyers for houses in the area had dried up so he could not sell it.

When times were good he lived the highlife, he bought a top of the range SUV and lots of other expensive gadgets. All of which were bought on credit. The house he bought was far from where he worked and as a result spent almost $100 a week on gas. This all added up to a lot of debt.

Realising he had a problem he decided to try to sell his house and rent a house closer to where he worked. He was also determined to sell his SUV and get a smaller car and sell whatever else he could.

So there were no buyers for the house which he had on the market for about six months. He decided the next best alternative was to try to rent out the house. He knew that he would not get the whole of the mortgage covered but he reckoned that between the rent he received along with the reduced car payments on the smaller car and the savings on the gas he could have a small net positive gain on his cashflow.

He was lucky. A family new to the area want to rent a house before they bought so they could get a feel for the neighbourhood. So with his house rented, one part of his plan was in place. Now where was he going to live? When he sat down and thought about it there was only one realistic option – he moved back in with his Mom. She lived in the same town as he worked. His Mom charged him a seriously reduced rent rate. This meant major savings for him but it also meant a loss of a certain amount of freedom.

Finally he sold his SUV (and lost money on it!) but he was glad to be rid of it as he no longer needed such a big car.

Here’s the moral of the story. My friend wanted to stop debt ruining his life. He had had enough and decided to take extreme action. He took the following steps.

1. Made the decision that he was going to stop his debt in its tracks before it sent him to the poor house or worse still the mad house.

2. Tried to sell his house. Not deterred by the lack of success he decided to rent out his house and with a bit of luck he did.

3. Sold his SUV and bought a smaller car. This was a particularly tough thing for him to do as he loved his car but again it was either the car or his sanity.

4. Moved back in with his Mom – now come on this has got to be the toughest thing a single guy in his twenties can do. I mean he loves his Mom but come on.

The story doesn’t end there. My friend plans to stay with his Mom for one year and then reassess the situation in relation to his house. If the market is still bad he thinks he may just rent a room in a house and move out from his Mom’s. The best part of this new arrangement is that since he is not travelling so far to work he can do more overtime. He reckons that in about 18 months if he keeps it up he will have eliminated all his credit card debt and his outstanding personal loans and just be left with his mortgage.

A good result I think. Now the question you have to ask yourself is this, “What am I truly prepared to do to stop debt ruining my life?”. What big sacrifices would you be able to make to help you repay your debt? Can you see yourself renting out your house and moving closer to work? Taking on overtime at work? Cutting back on your social life?

You have to remember that these changes are not forever – they only have to last as long as it takes to repay your debt. How fast does a year go by anyway? How fast does three months go by? Worst case scenario if you try and fail at least you will have learnt some valuable lessons in the process.

Debt Management – Anyone for some elephant?

Mar 182008

After finally making the decision to tackle your debts two months later you are wondering why you have made no real significant progress. That mountain of debt you are trying to climb just seems to be getting bigger and bigger. And your goal of debt freedom further and further away.

It’s easy to get caught up with the initial euphoria of starting a new venture. When you finally make the decision to tackle your debts you feel excited and relieved. You feel excited because you feel that you are taking back control of your life. You feel relieved because you know that if you can achieve your goal of paying off your debts then you will be free from the worry that comes with financial burden. From somewhere you get an initial jolt of motivation. It may be a New Year’s resolution or you see how a friend has managed to pay off their debts and you think ‘I can do that’.

You go enthusiastically about researching debt management on the web. You talk to friends and family about how you are going to tackle your debt. You think about how you are going to payoff your debts and how you are going to manage your money. You have a plan.

Now please correct me if I am wrong but your plan is to tackle some of your larger more expensive debt first right? You’ve read all about it on the internet and in the debt management books. Tackle your more expensive debt first. For most people their most expensive debt is their credit cards so they go about trying to pay them off first.

Then what? Then after about three or four weeks the motivation is gone. You’ve made a small dint in your credit card bill but you’ve slipped back into the old routine and get an uncomfortable feeling whenever you think about your debts. You can no longer focus on your debts and the feelings of hopelessness are made worse because you think you have failed and are doomed to a life of debt slavery.

Does this sound familiar? This is a common experience when people set out to achieve big goals. The first wave of enthusiasm and motivation quickly wanes as they try to do too much all at once. Focus is lost easily as people do not see the massive progress they expected. After a while the experience can be soul crushing and people lose all hope. Then the next New Year’s they try it again only to repeat the vicious cycle.

What many people fail to realise is that the timeline that they give themselves is restrictive. In their mind they say “I want to have my debts paid off by this time next year…” whereas in actual fact they may need to give themselves a lot longer.

The approach they take may also be incorrect. They are trying to eat the proverbial elephant whole. I’m sure you’ve heard the clichéd question in relation to goal setting – ‘How do you eat an elephant?’ the answer being ‘one piece at a time’.

So compare the elephant eating approach to the approach that most people take. Can you see the difficulties you’re going to have when you try to eat the whole elephant at once or in your case payoff all your debts in one big flurry of activity?

Now when you think about it logically there has got to be a better approach to debt management than the all or nothing approach that most people seem to take. The truth is there is a much simpler and more effective method. The thing is this approach goes against conventional wisdom (the best ones usually do) and you are unlikely to read about it in the debt management magazines.

The standard debt management advice is “Pay off your high interest debts first”. In an ideal world this makes sense as these types of debt are the most expensive and are costing you money. In the long run you will end up paying a lot more for them especially credit cards. Unfortunately we do not live in an ideal world, its taken lack of self control and years of overspending for you to get into this situation. To get out of this situation you need to pace yourself and rock out of it gently.

Discipline is like a muscle. The discipline you need to pay off your debts is no different. You just need to think of it as a debt free muscle. Now if I wanted to be a bodybuilder how would I build up my muscles? Would I go to the heaviest weight and start trying to train with it? No I’d get the smallest weight that I could and I would train my muscles to gradually use heavier weights. The whole idea behind weight training is to work your way up to using heavier weights and by default your muscles will respond and grow.

Now apply this logic to the debts you currently face. From a discipline point of view it makes no sense to tackle the biggest debt first. It’s not sustainable. If you do and make very little progress then you will become disheartened and the self flagellation will begin. The ideal way to start paying off your debts is to start small.

Think of paying off your debts starting with the small ones the same way you would think about a small snowball starting down the mountain. In a short time the snowball has grown into a much larger ball of snow and eventually it turns into an avalanche. It is the same principle of momentum that you should apply to tackling your debts. Build the momentum. Start small, your phone bill, electricity bill. Knock out your debts one by one starting with the smallest. The key here is that the good feelings you will have from paying off the small debts will act as a motivating factor to help you tackle your larger debts. You will build on your success and success in paying off your debts is exactly what we are after.

Like an out of control freight train once you build up a significant momentum you will be unstoppable when it comes to tackling your debts. The great thing about paying off your small debts first is that allows you to not only build up the internal discipline of paying your debts off but it also lets you get a great understanding of how to manage your money.

Think about it another way. Which is better? To have a crazy burst of enthusiasm about tackling your debts and last about two months and make very little impact on your debt burden. Or take a much more measured approach starting small, having a clear long term plan and building up the self discipline that will serve you a lifetime? I know which one I would prefer.

Simply put when tackling your debts you have to be your own best friend. Don’t be too hard on yourself. Debt is an emotional issue. Money for most people brings with it incredible baggage. Instead of seeing money for what it is – a means of exchange – people see it as a way of carving out their place on this earth through buying crap that they do no need. You need to give yourself time, time that will pass anyway. It’s better to settle in for the long haul than to face a life of short attempts to tackle the problem. When it comes to your debt you need to get serious about getting serious.

Inability to pay credit card debt

Mar 092008

Recently the inability to pay credit card debt has come into focus for a number of people I know. The problem is not that they do not have jobs – some of them have good jobs – but rather the issue is one of timing. This inability to pay credit card debt has come to the fore as a result of the arrival of their credit card bills that relate to purchases they made in the Christmas period.

Up to that point most of these people had been in denial in relation to their credit card debt. Their attitude in relation to their credit cards went something like this. Pay off the minimum amount each month by direct debt and don’t worry about the balance. It was a case of sticking their heads in the sand when it came to how much they owed on their credit cards.

The thing is with credit cards is that if used correctly they can be incredibly useful. They offer huge flexibility. Unfortunately credit cards are open to abuse. When we use credit cards its not as emotionally painful as if we were to hand over a bundle of cash. Credit cards make it easy for us to get into debt in two ways. Firstly they are so user friendly – if you want something you can use your plastic to get it. Secondly you only ever have to pay a minimum balance. In effect this situation allows us to get what we want and pay as little as we want. We can put off paying for things indefinitely once we make that minimum payment each month.

The hidden danger behind all this flexibility is the large interest rates that the credit card companies charge. It’s this large interest rate combine with only meeting the minimum payment amounts that leads to the inability to pay credit card debt.

How to solve the problem.

The reason the people I know got a shock was because of the large jump in the principal amount which was caused by the excessive spending at Christmas along with them paying the minimum amount. As a result they feet like they are on a never ending treadmill of trying to pay off their credit cards but each month the goal moves further and further away. They were looking for a quick fix.

Simply put there is no quick fix to credit card debt. Unless you have liquid assets that you can and are willing to dispose of then you are going to have to look at longer term solutions.

Here is a simple yet effective idea that will work. It is contingent on the total amount of your credit card debt so please bear that in mind.

First off cut up your credit cards and switch to debt cards or better still stop using any form of cards and simply use cash.

Secondly double the amount you are paying off each month on your credit card. Ok so if you are paying off the minimum of say $30 then double it to payoff $60. After a couple of months double this amount again. So once you have become comfortable with the $60 double it to $120. Now obviously you can’t keep on doubling it so once you reach a level where you are finding difficulty with meeting each month make every effort to stay at that level. For some that level may be $50 a month for others it may be $450 a month. The point is that you will need to stretch yourself emotionally by cutting back on the luxuries so that you can meet this new higher repayment level that you have set yourself.

If you are feeling ambitious then once you have reached your peak after doubling the repayment amount a couple of times why not try adding an additional 10% to it each month? You WILL find the money somewhere.

So to sum up. If you have an inability to pay your credit card debt then the two key things you need to do are.

Stop using credit cards and switch to debit cards or preferably cash.

Increase the monthly card repayments that you are making but not only that you need to push yourself to keep increasing those repayments.

Finally it is a case of adding time to this whole equation. Once you stop using your credit cards then the pressure will ease. Ok the interest on the principal will continue to increase but by continually increasing the amount you repay each month you will eventually catch up with it and repay your credit card debt.

The Sum Total of your Debts

Mar 042008

In relation to your debts this is probably the most difficult thing that you will have to do. If your debts have become so out of control that you try to ignore them then this will be especially difficult. A lot of the reason why debt can be so intimidating is because we do not have a clear picture, however ugly, of the sum total of our debts. If you want to make changes and begin repaying your debts you need to know exactly what you owe.

The worst thing that you can do – and most people with serious debt do it – is to hide from the problem. Your debt problem will not go away unless you take direct affirmative action. To do this you need to feel empowered to take control before you can start back on the road to financial freedom. In order to put yourself in a position of power you need to know exactly what you are dealing with. You need to take a long hard look at your financial situation.

Don’t know where to start?

This is a very common problem. It’s probably taken you years to get to this point; the Debt by Stealth phenomenon has taken hold of your life. It starts small, a loan here a credit card there and then it grows into an uncontrollable beast. Not knowing where to start can be caused by the feeling of being overwhelmed by the past. The guilt associated with past mistakes and errors in judgements handicap us as we try to make amends in the present.

You need to forget about the past, we are dealing with the here and now. Let’s be clear about one thing there is absolutely no value to be had by worrying about how you came to be in your current financial situation, none whatsoever. If there was value in wallowing in regret then we would all be millionaires.

Forget about the past – we can only deal with the here and now and the actions that we take in the here and now are gonna help make a brighter and richer tomorrow.

Back to the debt list. Take out a pen and paper and start writing. Simply begin writing a list of things that you think you owe money on and the amount you think that you owe. Leave no stone unturned. Be creative!

Here’s an example:

Student loan                                           5000

Credit card                                            11000

Car loan                                                 6400

Phone                                                     200

Electricity                                                300

Cable TV                                                 100

My brother Tim                                       4500

My Mum                                                  320

Back tax                                                1300

Parking fines                                            250

Now for the tough part, for each item on your list find one piece of hard up-to-date information (a bill or statement) that either backs up or contradicts the figure you initially put down.

This exercise serves two purposes. The first one is to give you a reality check. Most people either grossly over estimate or grossly underestimate what they owe. There is no point in kidding yourself – where’s the value in that? In the end it’s you who will pay the price either financially or emotionally or both!

The second purpose is that it forces you to get organised. Once the exercise is completed you will have the latest information in relation to your debts. This can serve as a starting point for your climb out of debt. Here you have a full list, along with back up documentation as to your exact debt situation.

The ugly truth about your debt.

So you owe a fortune? So what? Are you going to let your guilt and fear paralyse you? Are you going to sit there and take a beating from your debts? The simple fact of the matter is this – you managed to get yourself into this situation but you can also manage to get yourself out of this situation. The only way out of this situation is through it.

It’s going to be a very slow process. You have to be in it for the long haul. The goal of freedom from your debts is yours if you want it but you must really want it. The future can go one of two ways for you. A future filled with hope and freedom and excitement as you rise up to the challenge of your debts or a future that is dominated by the dark spectre of your debts, never managing to get out of the cycle of ever increasing debt and eventual bankruptcy. The choice is yours.

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