Is financial paperwork the bane of your life? It was for me.

May 302008

Financial Paperwork was the bane of my life. I’m sure I’m not the only one struggling to grasp the idea that in this so called ‘electronic’ age that there is more paperwork floating around now than there ever has been. Invoice after invoice, statement after statement, form after form. My sanity was being washed away by a deluge of paperwork. In fact at one stage it had almost developed into a fear of form filling and a dread of paperwork of any sort.

By financial paperwork I mean every single piece of paper that comes into your life that affects or reflects your financial situation. Generally all the paperwork that comes into my life tends to be related to my finances in one way or another but not always. The ideas outlined below will help you focus on the necessary changes you need to make to get your financial paperwork organized.

While the paperwork in my life still keeps coming, the dread and fear are no longer there and I can manage my paperwork in a calm and orderly fashion. What changed? Well it took a bit of organizing and a lot of focus but I got there in the end. In the process I managed to clear a backlog of a couple of years worth of paperwork and what’s more I had a crystal clear picture of my financial situation. It was scary but it was liberating because I no longer had the fear that there was some bill or invoice lurking around waiting to catch me out.

What are you trying to achieve with your paperwork?

Be clear about what you are trying to achieve when you decide to tackle your paperwork. Are you trying to get a better picture of your financial situation? Create a budget? Tidy up your home? Make sure you know why you are doing this. Just because it is on your to do list doesn’t mean that it has to be done. You need a reason otherwise you will fall at the first fence. So before you tackle your paperwork think of a good reason as to why you should do it. Some obvious reasons are freedom from stress, clarity, easy of use. You get the picture.

Cardboard box clarity

This is a fun way of doing things and it allows you to be lazy for three weekends of the month.

Get a cardboard box. It doesn’t have to be too big just big enough to hold about fifty sheets of A4 paper. For one month place every single piece of paperwork that you receive into it. Every Invoice, every receipt, every credit card bill, every credit card offer, every insurance offer – everything. Make sure to pay your bills as you normally would but once you have paid place the bill into the box.

At the end of the month take the contents of the box and tip them on to the floor. It feels good doesn’t it? Now I want you to roll around on the floor…only kidding. What I want you to do is to create four piles (or as many piles as you see fit).

1. Receipts, 2. Bills, 3. Junk and 4. Statements.

In the receipts pile I want you to put all the receipts that you have received over the month. This would include things like receipts for dinner, groceries, gas. In the bills pile put all your credit card, energy and auto bills into. In the junk pile put all those offers you receive in the post. Things like credit card offers, loan offers, insurance offers etc. Finally in the statements pile put all the bank account statements, loan statements and mortgage statements into.

These four piles will now form the basis of your monthly budget. These piles of paper are worth their weight in gold because the information contained in them allows you to build a personal budget and will help you turn you financial situation around. Most people simply do not know exactly where they stand financially. Until they do they will be doomed to muddle through each financial decision they face. Not good.

I like this method because it is simple and effective and can be fun. It helps to centralize all your paperwork in one place so you don’t have to be worrying that you are missing anything. By working through the pile of paperwork you get a great sense of achievement. The great thing is that it doesn’t take long to do at all.

X marks the spot

When you pay a bill mark it with a large ‘X’ and put the date on it. This will accomplish two things. Firstly it will allow you to keep track of what is outstanding and what has been paid and secondly it will give you a sense of closure and satisfaction that you are making progress with your bills. Again simple but effective.

Don’t be afraid to ask questions

Completing financial paperwork can be a nightmare. If you want to transfer your mortgage or set up a new bank account you can be hit with a lot of forms and requests for information that will leave your head spinning. These forms can be confusing and contain things you simply do not understand. My advice is simple – ASK.

How else are you going to complete the forms correctly if you do not ask questions about items you do not understand? If you fill out the form incorrectly you just know that the bank will be back on to you looking for more information. See my article on how to deal with banks and financial institutions to get a better insight.

Destroy the evidence

A lot of the paperwork that we acquire is of no use or becomes obsolete after a period of time. Once we include the information in our budget then we may no longer need the physical piece of paper. Be careful of how you dispose of these pieces of paper. Many of them will contain sensitive information about your bank accounts and credit cards. The best way destroy the evidence so to speak is to shred it and then divide up the shredded material and place them in separate thrash cans. It’s a bit paranoid but you would be surprised at the length some people will go to get information about you.

How long should you keep paperwork?

Well it depends on what the item is. If it is something like a grocery receipt then once it is taken into consideration in your budget then you can destroy it. If it is something like a credit card bill then it should be kept for a minimum of six months. This is so that you have a physical back up if there ever was a dispute with the bank. Financial documents that relate to loans or your mortgage or insurance should be kept indefinitely. Ideally these should be kept in a fire proof safe. Fireproof safes can be bought quite cheaply. Look on the money spent as an investment. The amount of hassle you will save yourself in the event of a fire will be huge.

Storing your paperwork

Everyone will have their own system. I generally prefer to use a lever arch folder with lots of dividers. I use each divider to separate the months. I use one folder per year and I use a hole puncher to punch holes in each bill or document. As mentioned earlier for the more important documents I store in a fire proof safe.

For me the goal of any filing system should be ease of access. If I get a call about a bill I can ask when the bill was issued. If they say Feb 2007 then all I have to do is go to the 2007 folder and check the Feb section. If I find the bill and it doesn’t have an ‘X’ on it I know that I haven’t paid it.

In Summary

Financial paperwork is a necessary evil. You have two choices. You can either sit there and moan about it and do nothing or you can get started and get organized. As you see from this article getting organized is not a big task but the payoff is huge.

Feel free to experiment and find your own level of comfort with your financial paperwork and records. The system has to work for you and the only way that will happen is if you design it. There is no point in trying to create a fancy sophisticated record keeping system because in the long run it is always the simplest record keeping systems that last.

Do you have the energy to fight debt? Part 2

May 292008

In part one of we spoke about the way your thoughts can drain your mental energy leaving you in no fit state to tackle your debts. The tiredness associated with tackling your debts is primarily a mental tiredness. As mentioned in part one this mental tiredness is related to the mental clutter in your life. Clear the mental clutter and you will free up mental capacity and mental energy to allow you to focus on your debts. It’s not just your thoughts that can drain you though. Your environment plays a big part also.

Is your home clean and clutter free?

I don’t mean to pry but is your home clean? The reason I ask is that you are less likely to want to sit down and do some work on your finances if your environment is messy and its stressing you out. Don’t get me wrong – I’m not a cleaning fascist. I’m just making the point that a clean and clutter free environment will help clear your thinking. I’ll give you an example. If I don’t clean the kitchen and put away the dishes from the night before then the next morning I get a little stressed. Here in front of me is work that I should have done yesterday. I am reminded that I have been lazy and that I have a pile of work today and next thing you know I have the whole Chicken Little complex that the sky is going to fall.

If your home is cluttered your thoughts will be cluttered and if your thoughts are cluttered you are going to suffer from inertia. Then it’s back to square one. Check out this link for information on how to declutter your home. Discover organisation

Sorting through the paperwork

In theory this section deserves an article by itself but I want to make a few key points here.

Part of the problem with tackling your debts is the lack of a clear picture as to your income and expenses. To begin with most people don’t know where to locate the paperwork that relates to their finances. A lot of it gets lost in the clutter of their homes – some gets thrown out in the thrash, some just disappears.

As a very simple action that is easy to implement I suggest you get a big cardboard box. In this cardboard box place absolutely every piece of paperwork that even remotely relates to your finances. So into the box goes bills, bank statements, credit card statements, till receipts, credit card receipts, letters from banks, credit card offers, loan offers. Do this for a month but don’t bother looking at the contents of the box for that time. Just continue on as you would normally do, paying the usual bills that you would pay.

Make sure to give yourself a month. This is important for a number of reasons. First off you will need a months worth of financial information to help you form a budget and get a clearer understanding of where you are financially. Secondly you will need at least a month to help you move mentally from a place of resistance and inertia to a place of action. You will need to build up the mental strength to tackling the contents of the box. Especially because you will probably not like what you find in the box.

Virtuous circle

To give yourself the best chance of finding the energy to tackle your debts you need to create a virtuous circle. A virtuous circle is the opposite of a vicious circle. With a virtuous circle each positive action reinforces the existing positives and in turn creates more positives. Compound interest is an example of a virtuous circle. You can earn interest on the interest that you have already earned.  Even Einstein had a lot to say about compound interest calling it “the most powerful force in the universe”. A virtuous circle can be a very powerful thing. If you manage to get even the smallest virtuous circle going in your life then the effects it has will be profound. How to complete the loop of your virtuous circle? Well that is entirely up to you.

Do you have the energy to fight debt? Part 1

May 282008

When I read personal finance books I generally feel like the life is being sucked out of me. I am hit by a wave of tiredness. Part of the reason why has to do with the fact that most Personal Finance books are dull. They are full of facts and figures and they can be well written but they make what is already an unappealing subject even more unappealing. The thing is I actually like personal finance and I enjoy reading about new ideas in relation to personal finance. But if I am honest most of these books put me to sleep.

If these books put me to sleep I can only imagine what they are doing to people with no interest in personal finance. People in debt may have been recommended to buy a certain book as a quick solution to their debt problems. However it is likely that some of them will become even more frustrated and depressed if they are faced with a book that is boring.

It’s not just the personal finance books that cause people to go into a trance. The whole field of personal finance is almost like a dirty word to most people. There seems to be an inbuilt resistance to tackling financial problems – particularly debt problems. Most people just don’t want to know, sure they’d like to have all their financial problems solved but when push comes to shove they are not really bothered.

You come home after a long hard day at work, you’re tired and hungry. The last thing you want to do is sit down and go through the process of creating a budget or sorting your bills. I know I’ve been there. In fact it can get even worse because when you know that you should be doing work on your personal finances you start to feel guilty. But no matter how guilty you feel you still can’t overcome the inertia that has you sitting in front of the TV all night.

The weekends aren’t much better. You wake up on Saturday morning full of confidence. You assure yourself that this weekend you will tackle your finances. By noon on Saturday you still haven’t done anything but you are still confident – there’s plenty of weekend left. By six on Saturday you decide to enjoy your evening and you will sort your finances tomorrow. Sunday is not much better. It passes by so fast that you don’t even have time to think. Its eight o’clock before you realize that you forgot to look at your finances. Ok you say to yourself I’ll do it one night during the week. Unfortunately that one night during the week never happens. Your finances remain the same.

Now the scenario above is a bit general but it outlines nicely the way most of us manage to push looking at our finances as far away as possible. I’ve always had a problem with looking at my finances. Ironic I know but true. I often wondered why this was. The reason I came up with is that I was tired and the thoughts of looking at my finances made me even more tired. For me looking at my finances was too much like work.

Do you feel the same? Do you feel that looking at your finances is too much like hard work? Well you’re right it is like work and it’s certainly not easy. So how do you overcome that inertia?

Clear the mental clutter

Before you can tackle your finances you need to tackle the mental clutter. The feelings of tiredness and dread come primarily from the one hundred and one thoughts going through your mind at any one time.

The simplest way to tackle this mental clutter is to write a list. On this list write down all your thoughts – however random. In fact the more random the better. You will feel immense relief once you get these thoughts down on paper. You are in effect verbalizing your problems, hopes, fears, dreams and worries. This allows you to then think about your thoughts in a more structured and logically fashion. Do this for a week – everyday after you get home from work. You will be surprised at difference it will make. After the week is up you will probably notice a pattern to your thoughts. This pattern should then be used as the basis for an action list.

I know the dreaded ‘A’ word – action. But trust me you’ll enjoy this. Ok so you have your list of thoughts and you have highlighted the recurring thoughts. Now what I want you to do is to write down three fun and enjoyable actions that you can take that will help you solve your problems or resolve a particular situation that you are thinking about. For example if you are stressed at work – you could invite a close friend at work for a coffee or a beer and you could have a good rant about the situation. You could take your companies logo and put it on a dart board and fire darts at it for an hour or so. The list is endless but the emphasis has to be on fun fun fun. You have to take actions that will allow you to let off steam and enjoy yourself.

So what has this go to do with my debt and personal finance? Well the aim is to tackle the problem of your inaction in a roundabout way. For most people the thoughts of diving head first into their financial problems can be too much. It was financial neglect that caused the problem in the first place and this is not going to be solved overnight. The goal here is to clear your mental clutter and get the cogs of action turning in your brain. You’re more likely to take action if it seems appealing so the key here is to make it appealing.

I mentioned it in previous articles but one technique that I find really useful is NLP or Neuro Linguistic Programming. A bit like brain surgery without the actually surgery. Here is a link to an ebook that comes highly recommended. Success with NLP

In Part 2 of this article I discuss the impact of environment and how it can slow you down mentally and impeded your progress.

In Debt? – Let go and move on

May 272008

It’s hard to believe that the party is over. The last few years that have been so good to so many people are now over. Years of excessive spending fuelled by easy credit have now come to a bitter end. The banks were literally throwing money at us and boy did we stand up and accept their challenge. Yes we can spend more than our neighbors and Yes we will spend more than our neighbors.

Then it changed, at first a whisper of change and then suddenly a roar of change. We all became familiar with the term subprime and what it meant. It basically meant that banks no longer want to know. They don’t want to know you or anything about your debt situation. The nice man down at the bank no longer works there anymore. Those tricky loan forms have become even trickier without his help.

Where does that leave you now? Your debt didn’t seem so big and scary when you were been given easy money by the banks.  But now after the tide has gone out it seems that your debts are an even bigger problem that you first thought. Your escape route of more easy credit is drying up fast and you’re finding it hard to make ends meet. At first you were stunned but now you are slowly coming round to the fact that things have changed. So how have you responded? Have you made changes to your lifestyle to match your changing circumstances?

The lifestyle you have become accustomed to has been the cause of your debt. The question I have is why are you still living that lifestyle? Why do you still go for your latte in the morning? Why do you continue to pay lip service to cutting up your credit card yet we still find you down the mall at the weekends? Why haven’t you downsized your car yet?

What is so precious about the lifestyle that you cling to so dearly? Are you worried about what the neighbors will say if you downsize your car? Worried about what your friends might think when you don’t meet them out for dinner anymore? If you think about it most of the people you know are probably in a similar situation. Everyone is impacted by this debt storm in one way or another. Why should you be a martyr to a lifestyle that is no longer useful?

Times have changed – but for many they are still living in the past. Still living the highlife and not realizing that the music has stopped and the smart people already left the party long ago. Isn’t it time you did the same? Get up now and leave the credit party. Go home and take stock of your situation and realize that times have changed and its time to do something about it. Its time to let go of your old lifestyle and move on to a new lifestyle based on financial awareness.

Debt and Lottery tickets – Is this the answer?

May 262008

It’s funny the way the mind works. We can convince ourselves that we are justified in buying $10 worth of lottery tickets each week when we are up to our eyeballs in debt. We say to ourselves that if we win big that all our debts will be wiped out in an instant. This type of logic is fundamentally flawed. Yet why do we persist?

I’ve often heard the lottery referred to as a tax on the poor. I couldn’t agree more. Why is it a tax on the poor? I think it has to do with the fact that it is poor people who have the most to gain if they win the lottery. If they win they can go from a place of zero wealth to a place of massive wealth overnight. The dream is that all their problems can be magically solved overnight. It is poor people who have the most to gain materially from a lottery win. It is this dream that spurs us all on to buy lottery tickets every week. Ironically it is the people who can least afford to play the lottery that plays it most often.

The lottery by its very nature plays on the hopes and dreams of people. It is very effective at this – without even trying. People just see all those millions and start dreaming about what they would do with all the money. I’ve done it. On numerous occasions, especially for the really large rollovers, I have found myself planning out my future with millions in the bank and to be honest I really enjoyed the feeling that yes it could be me that wins this time. Unfortunately it never is me. I won’t say that I have given up on winning the lottery but week after week it did feel like I was banging my head against a wall so I don’t play that often anymore.

From a debt management point of view it would be very easy of me to say that this money spent on lottery tickets would be better spent paying down your debts. The simple fact of the matter is that you know it is true. If you spent $10 a week on lottery tickets then that is $520 a year that could be spent on something more useful. Tell me – how much have you won on the lottery in the last year? Was it over $520? No? Really? You know deep down that the lottery is a waste of time and money. The choice is yours as always but I would ask you to consider cutting it out or certainly cutting it down and diverting those funds to paying off your debts. In the long run the returns will be much better from paying off your debts.

Now before we go on I want to make it clear that my first instinct for someone in debt is to cut out all the luxuries and in my opinion playing the lottery is a luxury. What I’m trying to point out is that playing the lottery is something that brings a little hope and although you know deep down that you are not going to win there is a strong emotional attachment to the ritual of checking the numbers. This ritual can make it hard for people to break the habit. You have to accept the responsibility for your actions and if you decide to continue playing the lottery then you need to live with the consequences.

Ok lecture over.

Now here is the interesting part. If you are determined to continue playing the lottery then you need to do something to increase your chances of winning. Currently the odds against you winning the lottery are astronomical. In reality there is no point in even playing. But yes I agree with the logic of “You gotta be in it to win it” and it gives you a glimmer of hope in what can be an otherwise bleak situation if you are in debt.

The goal here is not to spend more money on the lottery but to use the money you currently spend on the lottery in a more efficient manner. So what I suggest is that you either form a syndicate or join one. For those who don’t know what a syndicate is it is essentially a group of people who come together and pool their funds so that they increase their chances of winning.

If you compare the your chances of winning with your weekly $10 against a syndicate of 20 people each with $10 for a combined $200 in lottery tickets, you can see that the syndicate will have a better chance of winning. You might argue that if you win with your $10 on your own that wouldn’t have to share your win with anyone and you would be correct. In a syndicate the winnings are split among the members. My thinking on this is that there is a trade off to be had. You will win a smaller amount with a syndicate but you have a much better chance of winning (the odds against winning are still huge). For example 5% of $20m is better than 100% of nothing.

I’ve been part of a few lottery syndicates mostly at work and to be honest they are quite a lot of fun. Ok we never won big but we all had this common thing to talk and joke about. It certainly helped to liven up the atmosphere especially when there was a big rollover.

Syndicates are not without their problems. To start one up requires a bit of organizing. There needs to be rules in place that cover things like how much is played each week, who looks after collecting the cash, who is in charge of buying the tickets. You need to make it absolutely clear from the beginning what the rules of the syndicate are and if you are joining a syndicate make sure you know the rules. How often have you heard horror stories about people who didn’t pay up in time only for the syndicate to win big and they subsequently missed out? Don’t let it happen to you.

I know most of you were probably expecting me to mouth off about cutting your lottery out and reducing your debt. I suppose I had initially set out to write about that but then I realized that we are all adults and that we can make our own decisions and that you don’t need to be spoon fed. For me the lottery is a bit of fun. I don’t do it that often anymore and I’m no longer part of any syndicates. When I think back over the times that I have played it then I certainly had most fun when I was part of a syndicate. What I will say is that if you do decide to continue to play is keep it small and keep it real and if you want to increase your chances of winning then use the power of numbers and let other people share in the fun.

Did Self Help books cause your debt and ruin your life?

May 232008

I really enjoy reading self help books. They give me an emotional kick and the powerful words have helped me through some tough times. However the cynic in me has always questioned some of the claims made in them. Is it really that easy to make a million? Someone once said that the people who made the most money during the gold rush were the people who sold the digging tools. I think in a lot of ways this applies to the self help industry. I also think that the self help industry can take some of the blame for the current tsunami of debt.

Let’s cut to the chase. When you read a self help or motivational book you are generally looking to feel good. Sometimes you are looking for answers and other times you are looking for ideas. It was the ideas contained in some of these books that in part caused the debt problems of this generation. I am talking in particular about financial self help books.

As the boom in technology stocks began to fade a number of books appeared on the market. These books claimed to have the key to wealth. The premise of these books was that people who worked in jobs were fools and the only truly successful people were investors who managed to create a passive income. In one book I can think of, which shall remain nameless, the author was relentless in his recommendation of property. He went on at lengths as to how he bought condos left right and center and how his cash flow was positive. This got people thinking – if he can do it then so can I.

I genuinely believe that it was books like this and others that prompted a lot of us to go in search of our fortunes in the property market. The boom in technology stocks simply transferred to property. Combined with a low interest rate environment people now had the means and motivation to pursue their dreams and for a lot of people this has turned into nightmares.

What these books did not tell you about was the hard work and risk that was involved in property or indeed in pursuing your dreams. The books led people to believe that it was simply a case of “build it and they will come” or more like “buy it and they will rent”. In a lot of cases this didn’t happen. I know of people who bought rental property at the height of the boom and are still having difficulty renting them out. They are faced with the situation of paying two mortgages a month. They too were seduced by the talk of easy profits and the supposed fast track to wealth.

Aside from the financial self help books that were glamorizing the property market and the fortunes to be made there were other self help books that persuaded people to be easy with their credit. The key thing about self help books is that they promise you the world and when they didn’t deliver people went out and bought the world they wanted anyway…on credit.

Who is to blame? Is it the authors of the self help books who claimed that they could help you or is it the person who buys the books, tries the techniques, fails and buys their dream on credit? To be honest I think both parties get something out of this relationship. For the author the obvious reward is monetary for the reader the reward is that warm fuzzy feeling that yes some day my dreams will come true.

Unfortunately for most readers of self help books their dreams do not come true. Why? I really don’t know, maybe its lack of commitment or maybe it’s because people knew that if they really wanted a house on the hill they could have gone to their nearest friendly mortgage broker and got a nice big mortgage to buy it.

Self help books sold you the dream. They made you write down in detail all the material goods that you wanted. They made you write wish lists. And you know what? The universe delivered you the things on your wish lists. How? With a little help from your plastic friend of course but that’s not the point is it? The universe still delivered. The live for the moment brigade got what they wanted.

As I said at the start of the article I like self help books, especially the financial ones. There are some really good ones out there. At the same time if you believe all the hype contained in them you are likely to be very disappointed. While self help books can point you in the right direction it is ultimately up to you to travel that road. The thing is it is generally a road that is a lot longer than the books would have you believe. This is something you need to be aware of. There are no short cuts, no get rich quick schemes. You could buy your dream on credit I suppose but you will end up paying for it the rest of your life.

Gasoline, Groceries and false economies. It’s your call.

May 222008

What do you need to survive? If you are in debt then where do your limited resources go? What should get priority? As always it depends on your particular circumstances but there are a number of key things to consider. If you are going to get out of debt you need to maintain a basic level of existence. You can’t simply turn off everything and sit at home in the dark eating crackers.

Some things you simply cannot function without. The thing you have to ask yourself is that if you reduce or remove something from your lifestyle will it compromise your ability to function? By function I mean your ability to get up and take positive action to reduce your debt. For example if you decide to reduce your grocery budget right down and you end up living on crackers and cheese then you can be sure that in a short time you won’t have the energy to go take any action. This type of logic is what is commonly referred to as a false economy.

Beware of the false economy

In simple terms a false economy can be defined as some action that you think will save you money in short term but in the long run it actually ends up costing you more. Using the example of eating crackers – this will slash your groceries budget to pieces but in the long run you will end up paying more in a number of ways – trips to the doctor’s, missing days at work, general sluggishness – you get the picture.

With any budget you need to be conscious of the fact that you can overdo the cutting. What happens in a lot of cases is that people tend to have an initial wave of motivation and then draw up a budget that is unrealistic and full of false economies. They cut too deeply into the key essentials. After what is usually a very short period of time life becomes uncomfortable and they become disillusioned and wonder why they can’t stick to the budget.

The whole point of a budget is that it is right for you. It should force you to think about your spending choices but it should not be so hard on you that you won’t stick with it.

There are some things that you will need to maintain and you simply cannot and should not compromise on. Some of the obvious ones are food and transport. The price of gas is rocketing? – So what. You need to get to work. So the price of food is also rocketing? – So what. You need to eat. Health insurance gone through the roof? – So What. You might need it some day soon.

In any budget there are things you can cut back on and there are things you shouldn’t cut back on. Those mentioned above are just some examples of the basic things in life that you need. Notice that cable TV is not mentioned? Or are expensive dinners out. You need to make sure that you don’t blur the lines between what is a necessity and what is a luxury. Take the example of gasoline – I said it was important and that you need it for transport but what I didn’t say is that you also need a top of the range SUV for transport too. There are plenty of ways to cut your expenses without compromising on the basics of life.

With this in mind you need to ask yourself if you are cutting in the wrong place?

What is your problem with people in debt?

May 212008

I was browsing the web recently and I came across an article about people in debt. The article outlined all the facts and figures about how we are all doomed. Then I got to the comments section and I couldn’t believe what I was reading. Almost every single comment was in a negative and derogatory tone against the people who were in debt. It was unbelievable. Some of the people’s comments were pure poison.

One such comment went something like this

“Don’t try to educate these fools. Having their homes taken away from them and their lives destroyed will teach them”

I mean come on what is that all about? I was a little shocked to say the least and this got me thinking. Why were these people so angry at people in debt? What motivated them to post such vitriolic comments? 

I think some of these people who posted the comments feel that they lost out during the boom times and for whatever reason feel angry about it now. They seem to want to blame the people who were trying to make a better life for themselves. I’m not denying that there were excesses during the good times – this is always the case. Some people went overboard with the easy credit. But in my opinion the vast majority of people who find themselves in trouble today do so because they were simply seeking a better life. What’s wrong with that? What’s wrong with trying to make extra cash doing something like flipping properties – ok it is highly risky but you got to admire the people who were willing to take those risks. A lot of people got burned but they will be back again doing something different trying to better themselves and improve their lot.

I know people who simply wanted to improve their kid’s education. Give them the best start in life. How can you judge someone who goes into debt for that? How can you judge the college graduate who is up to their eyeball in debt as a result of tuition fees? Man some people can be cruel.

The Germans have a word called “Schadenfreude” which basically means “to take pleasure in someone else’s misfortune”. A sort of “serves them right” mentality. This kind of attitude is wrong and unhelpful. How are we supposed to solve our debt problems with people beating on us?

Amid the negative comments there was one comment that I agreed with. The comment went something like this.

“People need to live by the choices they make and accept responsibility for them”

Yes I couldn’t agree more but just because some makes some bad choices about their finances should they be labelled a fool? These people who have made bad decisions about their finances are paying the price whether they like it or not. Some may lose their homes or have their credit rating ruined – is that not penance enough? Why start the name calling as well?

In the end we are all responsible for our own financial wellbeing and it is only us that can put it right. So what if we make a few mistakes along the way. It’s how we learn. Mocking people who are in debt now is like laughing at someone who has a car crash and saying – you should have learnt how to drive properly. You just don’t do it or at least you shouldn’t because someday that person could be you.

To those people who are in debt and are struggling to get out of it I salute you. Pay no remarks to those little people who are trying to exercise some sort of moral superiority. Simply by trying to do this they show that they don’t have any moral superiority – no one does. Stick with the fight. No matter what happens simply by going through your debt situation you will come out the other side as a stronger person.

There I said it - Personal Finance is boring. But I’m still in debt.

May 202008

Up to this point it may not have mattered. You may have been happy to put your faith and financial future in the hands of that nice man down at the bank. You didn’t need the hassle and if you’re honest filling out forms scares you. Better just take their word for it and sign on the bottom line.

Recently though you’ve become worried and frustrated. Worried that you don’t fully comprehend all this financial speak that is coming at you from every angle and frustrated at the fact that it seems so hard to understand. You may be feeling stupid and that other people seem so much smarter than you when it comes to money. You may even feel helpless and that you are being left behind in the race for a better financial future.

These feelings are a lot more common that most people care to admit. No one wants to be seen as stupid. However financial knowledge is not something you are born with. In most cases financial knowledge comes from hard fought experience. Learning the hard way is not something that I advocate. Learning the hard way means that you must face financial problems in order to overcome them and learn how to deal with them. These situations can be avoided but for many people it is only when they face real financial problems that they begin to learn about personal finance.

The truth is financial education is probably not on the top of everyone’s to do list. There is a good reason for that and in my opinion financial education can be unappealing to most. If I’m honest the thoughts of sitting down and learning about loan rates and credit card debt is not my idea of fun. It can be draining and boring. There’s no two ways about it and no matter how much some of the financial gurus try to dress it up learning about personal finance is boring.

There I said it – Personal finance is boring. You don’t have to feel bad about not wanting to learn about it. The unfortunate thing is that if you don’t learn even the basics of personal finance then you are destined for trouble.

So what can you do to make it interesting? Well I’ve always found that if I you have a vested interested in learning about a subject then you will put more effort in and learn more quickly. What is your vested interested when it comes to your financial education? This should be become clearer when you think about your existing financial situation. If you want your existing financial situation to improve then you need to start investing time and energy in your own financial education.

The amount of money you have in your bank account or the amount of debt you have are not going to change until you change. How do you change? You strive to learn more about personal finance.

Yes I know it will be hard. Yes I know you have very little interest in it. Yes I know you have better things to be doing. What I want you to think about is the long term. Think about your financial future. What do you see? A grey and bleak place where you continue to struggle with your finances?

Here’s an easy way to think about it. Learning as much as you can about personal finance and debt management is the most effective way for you to increase your wealth. For the amount of time and money you invest in your own financial education you will reap massive dividends in the future. The great thing is that the all the information you are looking for is out there on the web and it is for free. The only thing you have to do is invest the time and effort.

Don’t make the mistake of leaving your financial future in the hands of someone else. What makes you think they know more about personal finance than you do?

Debt Magic – Clear your mind first

May 192008

Everywhere you look its coming at you. Like a plague from biblical times the debt tsunami is washing over the land and not sparing anyone. Switch on the TV you get talk of the credit crunch and job losses. Read the newspapers and you get scary statistics of foreclosures. Turn on the radio and all you hear are talk shows with someone telling their tale of debt woes. At work it seems that it is all anyone ever talks about “How am I going to afford this month’s mortgage payment”.

There almost seems to be a collective acceptance that we are all doomed and that somehow if just join hands together that the debt Tsunami will wash over us and we will all be spared. Yes there is strength in numbers but at the same time do you want to be dragged under by the weight of everyone else?

As they say a problem shared is a problem halved and I agree up to a point. When people start trying to halve that problem over and over again it just becomes toxic. You see it doesn’t take much to create a panic. When you have a few friends where all they talk about is their financial situation then it is going to have an adverse impact on the way you think about your financial situation. Misery loves company so to speak.

So where is this all leading I hear you ask? Simply put if you really want to solve your financial problems then you need to detoxify your mind of all the negative self talk and negative financial propaganda. You need to realize that the media are screaming negative headlines only to sell papers. They are not worried if they ruin your day. They just want you to buy their paper and if that means using scare tactics to do it then so be it.

Freeing up mental capacity

Think about the mental capacity that you will free up if you can clear the negative financial news from your mind. Ok you have your own debt situation to be worried about but why are you bothered to be worried about the financial situation of people you don’t even know. It’s terrible when someone loses their house without a doubt but why are you worrying about it? You could be next? Well you will be if you don’t stop focusing on everyone else’s debt worries and start focusing on your own.

Stop listening to the media and to everyone else. Deep down you know what you have to do to get out of debt. You may not know the exact steps but what you do know is that you need to change. You are only hindering your progress by listening to reports of financial chaos in the media. Trying to reduce your debt while listening to and reading about financial trouble is like a person on a diet trying to lose weight while working in a bakery. You may laugh but you are making life so much more difficult for yourself. You are cluttering your mind and making yourself stressed.

To free your mind of the excess financial stimulation you simply need to turn off your TV, Radio and close that newspaper. Why not include the internet in that list? Well the great thing about the internet is that you chose what you want to see and read. If you don’t want to read horror stories about debt then you just don’t look them up. You have a choice. With TV, radio and newspapers you are not given much of a choice. Either sit there and listen to the news or turn if off. The choice is yours.

When someone at work tries to corner you and moan about their debt situation don’t listen. Be polite but make your excuses and don’t listen. Don’t talk about your situation to anyone only your closest friends and family and be careful that you are not overloading them with your problems. Yes the mental release is nice but you have to be wary of doing too much talking and not taking enough action. I urge you to cut the negative stimulation about debt and financial problems out of your life.

Do it for one week and see how you feel about your debt.

You will be surprised at the difference it makes. You will gain so much mental clarity about your own financial situation that it is well worth the effort. No longer will you have other people’s debt stories floating around your head and causing you stress. You will be able to tackle your own debt problems with greater efficiency.

I’m not saying to bury your head in the sand. This is the worst thing you can do when it comes to your debt problems. What I am saying is that you aren’t doing yourself any favors by reading about other people’s debt woes. You get more of what you focus on and if you are focus on debt and debt related misery then I’m sorry but that is what you are going to get more of. You need to stop focusing on the negative feelings that surround debt you need to stop wallowing in your martyr status. When the music stops and you are the only one left standing you won’t feel too clever and your martyr status won’t account for much. Harsh but true.

Where to now? Try cutting negative debt influences out of your life for one week – seven days. That’s not too much to ask is it? You won’t be sorry and the feelings of relief will make you want it to continue it. Then once you have done this you will be able to revaluate the steps you need to take to get out of debt in a different light. You will be approaching your debt problems from a place of power and not from a place of fear. Those negative lingering voices will have been significantly reduced and this will allow you to take empowering action on your debt situation.

What type of Second Income person are you?

May 162008

The headline screams at you “Make $5000 a month in your spare time”. Curious to find out how this is possible you read on. It appears that it is a Multi Level Marketing (MLM) scheme. You read a little further and then you lose interest thinking to yourself that it is a scam. How on earth can someone make $5000 per month in their spare time? I tend to agree with your first reaction – initially at least. It does seem like a bold claim.

Dig a little further into something like MLM and you are confronted with even bolder claims of wild earnings. The same sort of thing applies to “Internet Marketing”. Stories abound of people who claim to have made lots of money in their spare time. The thing is you only ever hear about the success stories. I doubt that you will ever see a headline like “I lost $2,000 trying to make it in MLM”. The truth is thousands of people try and fail at MLM and Internet Marketing – myself included. In the quest for that elusive second income people spend thousands and make very little in return.

It always made me curious as to what separates the winners from the losers in the game of trying to generate a second income. Now my focus isn’t just on MLM or Internet marketing. You can take any part time endeavour such as a second job or trading on eBay and you will see that long term success is limited to a select few. The turnover of staff in part time jobs tends to be large. The long term success of your average eBayer is not guaranteed.

What makes the difference? Well to be honest I struggled with this myself for a long time. If you want to generate a second income you have a number of factors to consider. The key one is how badly you need the money. If you need it bad enough you will do anything. However this attitude will only work in the short term. To really generate a significant second income you need to be thinking long term.

Your focus needs to switch from short term activities to something that you can maintain in the long term. Ok this is best explained with an example. Say you are in debt and you need money fast. You have a day job but you get a part time job as a security guard to make extra money. You personally find the work boring but you need the money so you stick with it. You took the job to improve your situation and clear your debt but in the long run if you don’t like it then it will become a burden. My advice is to do it as long as it takes to make the money you need to pay your debts. Then look for something more suitable for you for the long term.

 What suits you long term? 

When you are considering the best method for you to generate a second income you need to examine your personality very closely. How well do you know yourself? Just because a MLM advert promises riches does this mean that the work involved is suited to everyone? Could it be that the people who really make it in MLM are pushy extroverted people who are extremely driven? How comfortable would you be hard selling products to your friends and family? I know I wouldn’t be comfortable with it but I know people who would have no problem with doing it.

The way I see it is if you want to successfully generate a second income in the long term you need to play to your strengths.  You need to do something that matches your personality. This seems pretty obvious but I don’t know how many people I have heard about or met that go into something just because there seems to be a lot of people making a lot of money at it. I think it is easier to pick an income generating activity that matches your personality rather than trying to force your personality to match the requirements of an income generating activity.

So if you know yourself, your strengths and weaknesses then you can begin by drawing up a list of activities that you think would suit you. The secret is if you are well suited to an income generating activity and you genuinely enjoy it and put the effort in you will make money at it. It’s as simple as that. It may not happen overnight and you may not make a million but it will give you the satisfaction of knowing you are controlling your financial destiny.

Second Income – One man’s journey of learning to do it right

May 152008

It’s strange the way the world works. Lately I’ve been thinking a lot about how to generate a second income. I’ve even written a few posts on it. Everywhere around me I see people working double jobs or running some small side business to generate a bit of extra income. Anyway I got an email from a friend that I hadn’t heard from in a couple of years. He had a very interesting story to tell and one I’m sure that you will find very useful if you are thinking about how to generate a second income.

Ok to protect the innocent I’m just going to call my friend Jon. This is not his real name. A bit of background is important here. Jon has been working in the IT department of a large corporation for the last seven years. Jon hates it – absolutely hates it. He admits now that he made a couple of wrong choices after he left college and ended up in a place that he didn’t want to be. After college he was in debt and was determined to pay off his debt and to him this meant staying in his job.

As the years went by Jon became more comfortable in his situation. He still hated his job but he knew it inside and out and was happy to remain in it. Jon always had a bit of an entrepreneurial flair in him and was always looking at business ideas. The thing was he only ever looked at them and very rarely did he actually go out and do something about them. That is until he got caught up in the property boom.

A few years back Jon began to notice a lot of people making a lot of money in the property market. At the start he didn’t know a thing about property – how to flip, how to manage rental properties, where to buy etc. This would eventually lead to his undoing.

Jon was concerned that if he did not act fast he would miss the boat. Off he went to his nearest real estate agent and began looking at property. He didn’t have any strategy he just wanted in. He didn’t care how he did it he wanted his piece of the pie. These are his words not mine. He’ll admit that he was too eager and innocent and was taken for a ride. Anyway he bought an apartment off the plans. He was assured by the people in the know that this was the quickest way to make money from the property market. He could ‘flip’ the property and make a quick buck. And you know what? It worked! First time out on the field and he hits a home run. He made $12,000 on the deal. The man now had the fever.

Every week Jon went to look at different properties. With credit so freely available he was able to buy three properties in quick succession. His goal was to flip one and keep the other two as rental properties. This worked out. He made another $15,000 on the second property he flipped and then he managed to rent out the two properties. All the time Jon still had his job. Life was rosy. Jon reckoned that at the rate he was going he’d be a millionaire by the time he was 35.

We all know how this story ends.

At his peak of property dealing Jon had three rental properties and was looking at buying a fourth. He had managed to flip four properties and had rolled all his profits into doing more property deals. Two of his three rental properties had tenants and one of them was vacant. He was still doing ok. His cash flow was positive.

As Jon puts it – the signs were there. It wouldn’t have come as a big surprise to the seasoned property investors. The season property investors would have known how to read the signs and back away from the market. For the likes of Jon it was like blindly walking over a cliff. Jon had got carried away and bought into the hype that property only ever goes up.

What happened next has been written about and written about everyday for the last year. The whole credit crunch and decline in property prices hit Jon very hard. He was able to maintain his cash flow for a while but then one of his property deals went wrong and he was forced to take a $50,000 drop in his selling price. This pretty much ate up all the profit he had made. Then it got worse.

One of Jon’s tenants got laid off. Jon is an understanding type of guy and let his tenant have a grace period of a month. Unfortunately his tenant had taken this kind gesture as a sign of weakness and began refusing to pay their rent. It got a little ugly but eventually it got sorted out. This left a bad impression on Jon and it added further to his stress. He now had three rental properties with tenants in only one of them.

Jon was able to survive financially for a while but he was dipping into his savings a lot. He knew it was unsustainable in the long run so he did everything he could to rent out his vacant properties. He had mixed results. He was able to rent one of the two vacant properties out. He now had to sell the other vacant property.

After months of trying Jon managed to sell his vacant property. Jon reckons he was lucky as he only lost $35,000 on the deal. Man that is tough!

At the end of Jon’s property journey he had a net loss of about $25,000 – this was costing him $400 a month in repayments as he had taken out a short term loan. He was also losing $450 a month on the rental properties.

Jon’s new plan

Jon realised that he’d made a mistake and instead of giving him a chance to leave his job his property escapades meant that he would have to stay in his job even longer. Jon’s a positive guy and after a couple of months feeling very sorry for himself he picked himself up again. He was soon back looking for ways to generate a second income. This time he was going to take a different approach.He looked around his current life situation and skill set and he thought long and hard about how he could generate cash. The only thing he could think of as something he could monetize was his computer skills. He had seven years experience working in IT for a large corporation.

He started small and placed an advert in his local free sheet advertising a computer repair service. Things were slow at the start. From his existing customers he noticed that there was a demand for education courses on how to use computers. Particularly from his older customers. He decided to advertise a class on the basics of computer use. He rented a room in a local college. All he need was ten students to breakeven. He got seventeen.

Jon never looked back. He continues to work in his day job but three nights a week and at the weekend he is either giving computing classes or he is repairing computers. He told me that his average income after tax is about $1000 per month. This is on top of his salary. He is able to meet his commitments on his loans and also he can save a small amount towards replenishing his savings.

All round it appears to be a positive outcome. Don’t make the mistake of thinking that Jon’s journey was easy. It wasn’t. His initial attempt to generate a second income failed and ended up pushing Jon further into debt. It was then a case of ‘necessity is the mother of all invention’. He ship was sinking under the weight of his financial obligations and he need to start pumping fast. Knowing Jon I don’t know if he would have bothered teaching the computer course had it not been the case that he was desperate for cash. I’m not sure if his pride would have let him. This is something he will admit himself. He said that at one stage he was prepared to work in a fast food joint. His situation had become that bad.

Where does that leave you? Well if you are in debt and need to generate a second income take heart from Jon’s story. When he got desperate he looked around his life to see what skills he had and how he could use these skills to add value and generate income. He did it and so can you. It may take time to get things up and running but keep telling yourself that you are building a better future because you know what? You are building a better future.

Debt elimination – the next leg. Generating a second income.

May 142008

The benefits of generating a second income are obvious; if you are in debt then the entire second income could be used to pay down your debt. Your debt would disappear fast. For every salaried employee out there who is doing the 9 to 5 generating a second income is the holy grail of personal finance.How easy is it to do? Well that depends on who you are talking to. Put something like “make money online” into a search engine and you’ll get a zillion pages. Each one of them trying to tell you how easy it is to generate a second income – from the comfort of your home, in your spare time, while your watching TV, ok you get the picture.

On the other hand you might talk to someone who has tried a couple of different ways and has had bad experiences. They may have lost money. They may be cynical and negative on even trying anymore. They would probably advise you to work hard and stay focused on your 9 – 5 job.

 

I think the truth lies somewhere in the middle of these two extremes. I don’t believe it is easy to make millions in my spare time yet I do believe that with a lot of hard work and motivation it is possible to make a nice second income. You may not be able to retire or quit your day job but it could be the key factor that allows you to be rid of your debt burden. After all that is the focus here – eliminating debt. Once the debt is gone we can worry about where we will put all our money after that.

Before you decide to pursue a second income you will need to put a lot of thought how you are going to do it. More importantly you need to consider what method is best for you given your preferences and needs.

How badly do you need the money? 

There are two aspects to this – if you need cash badly enough you will do almost anything to get it and I discuss this further in the next section. The second aspect and the one I want to discuss here is the time lag. If you are badly in need of cash then there is little point in trying to build a website or buying a rental property. The reason why is because of the time lag between when you start your website or buy a property and when you begin to generate income. By the time you receive your first bit of income you could be further in debt.

If you are in need of money you need to look at the time lag and how soon you will get paid. For example if you were to take a part time job waiting tables you can be pretty certain that you will either get paid at the end of the night or end of the week or in the worst case the end of the month. With a website/rental property it could be months before you generate any income.

If you need money urgently then you must pursue the method that will allow you to generate income fastest. You may have to swallow some of your pride. No it won’t be easy and yes it will be a lot of hard work but what you have to always do is think of the prize. The prize in this case is eliminating all your debt.

What are you prepared to do for the money?  

Nothing illegal I hope!

What you are prepared to do is directly related to how badly you need the cash. As I mentioned above if you are desperate you will do almost anything. But let’s imagine that you are not desperate but you do need additional income. In order for you to successfully generate a second income you need to think strongly about what exactly you are prepared to do for the money. If you are an accountant by day would you wait tables at night? If you were a waiter by night would you work in construction during the day? I’m not saying there is anything wrong with these jobs – nothing whatsoever. What I am trying to point out that in order to generate a second income you may have to do things that you would not normally be prepared to do.

Aside from getting your hands dirty so to speak what else are you prepared to do? Are you prepared to give up TV? Spending time with your friends? Going to the Gym? The reason I ask is because when you make a determined effort to generate a second income a lot of what you currently do in your spare time will have to take a back seat. If you go to the gym three times a week you may find that you simply don’t have the time to go anymore. For someone trying to keep in shape this can be tough. Remember this doesn’t have to be a permanent lifestyle change. It only has to be until you get your debt situation sorted out.

Do the logistics make sense? 

Imagine that you were working your normal 9 to 5 but you have taken a second job working for 4 hours each night in a call center. You finish your day job at 5 and the call center job starts at 7. Now let’s say that it takes an hour to drive from your place of work to the call center but that most days you don’t actually finish work until 5:30 and that the traffic is really bad and sometimes it can take up to two hours to drive to the call center. So you end up arriving at 7:30. This isn’t sustainable.

 

The logistics have to make sense. The method you use to generate a second income has to fit well with your current environment. By environment I mean the physical buildings, roads and transport. You need to get from A to B fast. But by environment I also mean the emotional environment. Does the fact that you will be very tired from working late on a second job fit well with the people around you? Will your partner support you if you arrive home late and cranky demanding to be fed?

Do the numbers add up?

This is a crucial thing to consider. You may think that by working twenty hours a week in a job that pays $15 an hour makes sense for you but you need to consider the numbers. How much do you make after tax? How much does it cost to get you there and back? How much do you spend on food? Do you have to pay a baby sitter? Before you decide to try to generate a second income you need to look very closely at how much of the income you generate do you actually get to keep?

A lot of the focus in this article has been on generating a second income by getting a part time job. There is a reason for this. For many people in debt there is a pressing need to generate income quickly. Apart from selling your possessions getting a second job is the quickest way to get money fast.

Learning how to trade shares online or learning how to build a property portfolio are great ways to generate income. The problem is that there is a lot involved in both and it takes years of learning and experience to be able to do it effectively. That is why I pointed out that time lag is crucial. If you have a long term perspective then by all means go and learn about shares and property but if your focus is on the short term removal of debt then you should focus on those activities that will generate money fast.

The key thing to remember with generating a second income is that it only has to be for a short time. What would be the point in spending all your day working and all your night working too? You would eventually burn out. The goal you should have is to only continue with generating a second income if it makes sense for you – physically, financially and emotionally. Only do it as long as it takes to repay your debts. Once you have achieved that goal then reassess your situation. Take some time out and think about your next financial goal.

Generate a Second Income? – You can't be serious?

May 132008

You have a job and you have a lot of debt. There is only so much budgeting and belt tightening that you can do. Your focus has now shifted from reducing outgoings to increasing incomings i.e. you want to generate a second income. You can take all the second income and ring fence it so that it goes directly against your debts. You will have your debt problem solved in no time. Unfortunately the reality is a lot different.

To gain an appreciation of how realistic you need to be in order to generate a second income there are a number of key factors that you need to consider. Generating a second income is not as easy and as straightforward as some people would have you believe.

The options

Here is a quick list of ideas off the top of my head and in no particular order that could generate a second income for you. Take a moment to think about each and how they would fit in with your current lifestyle.

1. Get a part time job.

2. Rent out a room in your house.

3. Buy a rental property and rent it out.

4. Trade shares online.

5. Build a website and sell a product.

6. Start trading on eBay

7. Start selling a Mutli-Level Marketing (MLM) product.

8. If you have a trade or skill start doing them on your own account in your spare time.

There are dozens of ways of generating a second income. I just wanted to throw these ones out there to get you thinking.

All fired up yet?

When I look at the list above I say to myself that I could do any one of the items on the list. A nice warm feeling fills up inside of me as I think about how I am going to pay off my debt in double quick time. Oh this is going to be great!.

Then reality hits me square on the chin.

If you have ever tried to generate a second income you will know exactly how difficult it is. Each method of generating a second income has its own drawbacks and limitations. In theory they all seem so simple yet the only person who seems to be making any money is the person who is selling the latest ‘Get rich in your spare time’ course.

Over the next few articles I’m going to be examining what are the best and most effective ways of generating a second income. Is it really possible from a long term perspective to generate a second income? Why it can be hard to generate a second income and finally what are the key factors you need to consider before you can generate a second income effectively.

Where is my money? Clarity is the key

May 122008

Picture the scene. It’s the end of the month and you’re about to get paid, before you do you check your bank balance and you realize that you didn’t spend as much as you did last month and that you have $600 left in your account. You smile. Tomorrow you will get paid. In the following week your mortgage, your phone bill, your electricity bill and your retirement savings will all leave your account. The following day a large sum of money will leave your account and be transferred to your savings account. After all you are saving for a new entertainment system. It’s your reward for all the hard work you have been putting in. That leaves you with plenty to live on for the month.

Ok – back to reality. The existing scene probably goes a little more like this. It’s coming to the end of the month. You’re about to get paid. You go to check your bank balance and it is in overdraft and you are touching your overdraft limit – not much room to move. You cringe. Tomorrow you will get paid which will just about cover your overdraft. The following day your mortgage will come out putting you straight back into an overdraft position. You will delay paying your phone and electricity bill until as long as possible. You’re not trying to scam anyone but you just don’t have the spare cash. You have stopped making payments to your retirement fund – sorry I can’t afford them. Savings you ask – what are savings?

There is a vast gulf between the two scenarios outlined above. When you picture the first scene you can almost feel the mental clarity of the situation. Everything is taken care of and there is enough money to pay all the bills. There is almost a sense of joy as the reward of the entertainment system is on offer. You look forward to the future because you know it will be prosperous.

When you picture the second scene your thoughts become muddled and the level of stress you feel increases. You begin to feel anxious. That dreaded look at your bank balance. The sinking feeling you get when you know that in order to make ends meet that you will have to draw down cash on your credit card. You dread the future because you can see no end in sight and you feel like you are trying to plug a hole in the dam with you finger. The future looks bleak.

These two scenarios are on opposite ends of the same spectrum. The question you have to ask yourself is whereabouts on this spectrum does your existing financial situation put you. Are you a stress free financial wiz? Then fantastic – well done!

If on the other hand you are like the vast majority of us and your feelings about your financial situation vary from bad to very bad then take comfort in the fact that you are not alone.

Don’t use the fact that you are in a similar situation to most people as justification for inaction. Fine if you make the conscious choice that you are happy to continue existing like this then no problem that is your choice. But if you want to change it and have been putting it off by using the rationalisation that we are all in this together and that you are afforded some sort of camaraderie then I ask you to question your decision. That to me smacks of peer pressure of the most insidious kind.

Get real about the choices that are available to you. At any moment in time you can simple say to yourself ‘No more’. You can cut that credit card up and downsize your car.

You need to be clear about why you are doing these things. You need to realise that you want to move from a place of pain and stress to a place of action and direction. By action and direction I mean that you are using your pain and stress to propel yourself to take action in the right direction and that direction should always be towards bettering your financial situation.

Accounting for where every cent goes is the first and probably the most important action you can take. If you are already in debt then this type of thing will be hard at first but realise that in a bizarre way it can be fun and after a while it becomes very empowering. The satisfaction you get from knowing that you are gaining control – however slowly – over your finances can be compelling. You need to realise that there are small things you can do that that will have a big impact on your financial situation. The great thing is that the majority of these things won’t cost you a cent as it’s a case of cutting out instead of adding more.

To fire your engines and get you moving in the right direction I want you to go back to the two scenarios outlined above in the first two paragraphs. I want you to really visualize them. Make them real in your mind. Now which scenario do you want to make real? If you want the first scenario to be your future then keep focusing on it. Use this scenario as a baseline for the financial future you would like. Every time you begin to think about your current financial situation change the focus of your thoughts by thinking about how you want your financial situation to be and how you are taking small actions to achieve it. Always reaffirm your dedication to achieving the financial situation that you want. It may take six months or it may take six years the point is that you need to always keep yourself moving in the right direction.

In debt? Where do you start cutting?

May 092008

I recently had to visit the doctor. Fortunately it was nothing serious but it did get me thinking about how we prioritize our expenses. What wins the toss up between having better healthcare insurance and having a bigger car? Or between having a nice meal out or paying the phone bill?

As I thought about these ideas further it occurred to me that not everyone will have the same preferences of what is important and what is relatively unimportant.  Some people would rather live in the now and enjoy the money they have by spending on consumer goods rather than pay money for something that may never be needed as in the case of healthcare.

When I was in college I remember in Economics 101 studying Utility theory. The basic idea behind this theory was that each consumer received a certain level of satisfaction from the consumption of consumer goods. This satisfaction was measured in Utils. So for example a cup of coffee might be worth 50 Utils but for someone else the coffee might be worth 70 Utils. The concept of Utils is arbitrary and abstract. What value do you assign to a Util? And more importantly how do you measure Utils? The key thing is that it is a neat way of explaining differences between consumer preferences.

How can you use Utility theory in your financial life to make a difference? You need to realize that some things are more important and life enhancing to you than others. At the same time the things that you prefer need to be balanced against the things that are necessary to have in your life. Take the example of healthcare – what satisfaction would you get from that versus say cable television? Yeah I know very little but now lets think about it a different way. Let’s say you had an accident and you were in hospital for a few days. How do you think your satisfaction level of the cable TV versus healthcare insurance might be affected? Seems obvious doesn’t it? You would want to have the best healthcare cover possible.

Don’t worry I’m not some health industry crony. I’m just using this as a good example of the part preferences play in our spending habits. You can apply this logic to any two consumer choices. What brings you more satisfaction? A nice meal or a nice outfit?

Where Utility theory is most useful in your personal finances is when you begin to apply to choices between things like paying your credit card bill or having twenty lattes. If you are in debt it is crucial that you identify which choice means more to you. Does paying off your bills and the prospect of being debt free bring you more long term satisfaction than the short term hit of going for a weekend away? What I am saying is that you need to decide what is more important to you. Accruing more debt so you can continue to get the short term hits of satisfaction or the knowledge that one day you will be debt free and that you are building a secure future?

Prioritizing is the key

How you prioritize your spending choices will depend a lot on your financial goals. You need to be clear about your financial goals before you can even begin to prioritize your spending. If your goal is to be debt free then you will prioritize your spending with that goal in mind. If your goal is to maintain your current spending habits then your will prioritize your spending based on that. You need to make the decision about your financial future and if you want to be debt free. Only then can you make changes to your spending habits. Until that point I’m afraid you are wasting your time.

Fast ways to eliminate credit card debt

May 082008

So it has suddenly dawn on you that you have a lot of credit card debt and you are looking for a fast way to eliminate it? Well the good news is that you can eliminate your credit card debt a lot quicker than you think but the bad news is that it involves a lot of hard work.

I have put together a list of ways that should help you eliminate your credit card debt fast. The thing you need to be aware of is that in order for this to happen for you, you will need to be committed. The great thing is that because these ideas will help you pay off your credit card debt fast then you won’t have to be committed for long.

The list is made up of simple yet highly effective ideas to help you. How you work it is entirely up to you. You can choose one idea and focus on it or you can use a combination of ideas. The key thing is that whatever one you choose you must take action on it and see it through. There is no point paying lip service to this. YOU need to take action otherwise you are wasting your time.

Remember the focus here is on speedy debt elimination. How fast you eliminate your credit card debt is a direct result of how much action you take. At the same time you do not want to take on any excessive tasks that make you end up feeling miserable. Focus on having fun and the end result.

1. Buy time for yourself by transferring your credit card balances to cards with lower introductory rates. There are a multitude of balance transfer deals out there. Find one that suits you. Do your homework and make sure to check the terms and conditions for any penalties. This will involve some paper work but it will help slow the rate at which your credit card debt is increasing while at the same time allowing you to concentrate on eliminating that debt.

2. Extreme budgeting for one month (or as long as you can stand it). This is taking budgeting to the next level. What this involves is for you to stop buying absolutely everything apart from the bare necessities – food and transport. So this means no lattes in the mornings, no lottery tickets, no cable TV, no new clothes, no dinners out, no movies, bring your lunch to work, shop at discount food stores etc. I think you get the idea. At the end of the month you need to calculate how much you saved and then transfer this amount off your credit card. Now I’m not advocating this lifestyle long term but you would be surprised at the progress that you would make in a month or two of it. You could simply become a monk for a month? I did say it was extreme.

3. Downsize your car. If it is possible for you to get a smaller and more economical car then do it. Any money that you save on lease payments and fuel can be put towards eliminating your debt. I did say fast not easy.

4. If you have a mortgage look around for a better mortgage deal. In some cases you can significantly reduce your monthly repayment. It depends on each case. Again do you homework and check the small print. The amount of deals on offer is probably smaller since the credit crunch started.

5. Get a second job. Okay if you are considering this then you need to think about logistics and how you will manage your time. If you resolved to put all of the income from your second job towards your credit card debt then it won’t be long before you eliminate it.

6. Do you have any existing savings? If you do then it probably makes sense to use these savings to help pay off your credit card debt. The reasoning is simple. If you are paying a rate of 16% on your credit card debt and only receiving 3% (if you are lucky) on your savings then it makes financial sense to pay off your debt because your are incurring interest on your debt at a much faster rate than you are incurring interest on your savings.

Imagine the scenario where you have transferred your credit card balances to a lower introductory rate, downsized your car, took on a second job all the while following an extreme budget. How long do you think it would be before you had your credit card debt paid off? What could you do with an additional $500 per month? $1000 per month?

When you look at it from the point of view of the additional income you can make/save then it becomes obvious that it is path worth following. Now as I said before you don’t have to use all of the ideas on the list, even if you implement just one of these ideas correctly then you will be well on your way to eliminating your credit card debt.

It requires discipline and dedication to eliminate your credit card debt. It’s not easy but with the right amount of focus it can be done.

Is your mortgage a debt? Mmmm that’s a tough one!

May 072008

If you own your home or want to buy one at some stage then it is important that you consider a number of factors. Now unless you have won the lottery or have a rich aunt who just left you a bucket of cash then you’re going to have to get a mortgage. The trouble with a mortgage is that when you sit down and look at your monthly expenses it stands out like a sore thumb – taunting you.

In recent conversations that I have had with friends the discussion turned to mortgages and whether or not they are true debt. Ok I know you going to be scratching your head but bear with me on this one.

The general argument goes that a mortgage is a debt. The word mortgage itself comes from the Latin word “mort” and mortgage essentially means “until death”. Basically back in the old days when you took out a mortgage you had it until you died. Nowadays you usually have a mortgage for 30 years which is a lifetime but you expect to still be standing at the end of it. When you look at it from a historical perspective you were in debt until you died. It’s as simple as that.

Today it seems to be the case that everyone has a mortgage or is in the process of getting a mortgage – credit crunch aside. Most of my friends seem to think that a mortgage is a debt and ask any accountant and he will define your home as a liability given that it is costing you money ever month. I have a problem with this. Ok I agree with the accounting definition and agree with the historical perspective but I want you think about it in another way.

Let’s lay it on the table. In the last few years there has been a mania about buying houses. I’m not going to start discussing who is to blame – not here anyway that will come in another article. No what I want to point out is that there has been a madness of the crowd that had been driving property prices through the roof. If you didn’t flip properties in your spare time you were a nobody. It got to be ridiculous. There was a complete change in the way people thought about their homes.

You see people not longer talked about homes – they talked about houses and apartments and flipping and rental yield. I can’t emphasise enough how out of hand it got. The thing that got lost in the haze for many of us is that we were thinking about our homes in the wrong way. We began to think about our homes as assets and as cash machines. If they went up in value then great! But what we failed to see is the simple truth that they were our homes.

These are the places where we bring up our families, where we create all those memories. Ok this may sound sentimental and a bit naïve but you have to see your mortgage from the point of view of a necessary evil. I would never put mortgage debt in the same category as credit card debt for the simple reason that we will always need a roof over our heads. We will always need a place to keep our family safe. We don’t always need that new 32inch plasma screen TV.

Some may argue that renting is cheaper and there is some truth to that. The thing is with a mortgage is that you are acquiring ownership of the property. You know that some day you will own that property outright. When you rent you are on a never ending treadmill of monthly payments that lead nowhere.

What you have to ask yourself is this. What is my attitude towards my mortgage? Do I look on it as a monthly burden that it depresses me to even think about? Or do I look on it as an enabler – something that allows me to enjoy the comfort and security of my own home safe in the knowledge that one day I will own it outright?

You see a mortgage is a debt in the technical sense but in reality it is one of those facts of life like death and taxes that we need to embrace and accept. We need to get over our obsession with buy to let property or property flipping and we need to focus on building a home on the foundation of our mortgage. If you want to be happy with your mortgage then you need to change your attitude towards it. See it as a means to an end rather than something that is holding you back financially. Otherwise you are in for a lot of pain and mental anguish as your mortgage continues to come out of your bank account for the next 30 years. My advice? Get over it.

Debt consolidation – Where is the catch?

May 062008

On paper debt consolidation looks great. Take all your monthly debt payments and roll them up into one nice smaller monthly payment and hey presto you have just performed financial magic! Oh if only it was that simple. The realities of debt consolidation are not so magical.

As I navigate my way through the internet looking at various services offered on debt related sites it strikes me as strange the way that they use the terms Debt Management and Debt Consolidation interchangeably. This can lead to a lot of confusion. I know it has for me. In its true form Debt consolidation is simply taking out a large loan to pay off all your smaller debts and reduce your debt payments to one payment a month. Generally it is the case that people with smaller unsecured loans like credit card debt take out a larger loan to the value of their debt which secured against there house or some other asset. Then using this new larger loan they pay off all their smaller more expensive debt.

Take a person who has lots of unsecured debt for example credit card debt but they also have some equity in their home. Assuming that the bank is willing that person can withdraw some of the equity from their home or get a loan secured on their house. The person can then take this money and repay all of their smaller debts.

Creatures of habit

Debt consolidation can work like a charm provided that once the existing debts that the loan is being used to repay are repaid and no additional debt is incurred. Now you and I both know that in the majority of cases what will happen will go something like the following scenario.

As soon as the small annoying debts are paid off and are rolled into one monthly payment the individual can, for probably the first time in years, see their financial situation clearly. They can see that they now have a reduced payment to make and have rid themselves of the financial clutter. They say to themselves – ‘Never again’. However after about two months the temptation becomes too great and they decide to make one little purchase on the credit card that they have kept for emergencies and so the spiral continues. In about eighteen months they are looking to consolidate their debts because it worked so wonderfully the first time.

Does debt consolidation make sense?

It really depends on your current financial situation and what you are trying to achieve. The key attraction of debt consolidation is that it frees up cash flow, for example if you were paying $1200 in debt repayments each month and managed to consolidate your debt and only had to pay $750 a month then you are freeing up $450 cash each month. This additional cash flow can be used to increase your savings. The point is it takes the pressure off you to come up with $1200 because now after consolidation you only have to come up with $750.

On the flip side if you use the equity in your home to consolidate your debt then you are now spreading your short term debts over a much longer timeframe and as a result while the interest rate may be lower and the repayment amounts lower you will end up paying a lot more in interest.

The advantages and disadvantages of debt consolidation can be summarised as follows

Advantages of debt consolidation

1. It clears the financial clutter from your monthly payments. You go from having any amount of monthly payments to service your debt to just one single payment.

2. It is possible to reduce monthly out goings significantly.

Disadvantages of debt consolidation

1. You are paying your small debts over a much longer period and as a result while the interest rates may be lower you will end up paying a lot more in interest because it is spread over such a long period of time.

2. The fees to arrange debt consolidation are usually quite high.

Debt consolidation is simple in theory and it often sold as the solution to all your problems. Unfortunately the reality is somewhat different. While there are certain advantages to debt consolidation there are disadvantages to it also. You need to be aware of these before you decide if debt consolidation is right for you. Do your homework and make sure that if you do avail of debt consolidation services that you thoroughly research the company that is providing the service. The same applies if you decide to consolidate yourself without using the services of a specialist debt consolidation company.

Shopping – your drug of choice?

May 052008

I’m just now recovering from what the ‘experts’ would call cold turkey. Yesterday I went to the local mall to buy some books that I had been meaning to buy online but couldn’t face the wait. The bookstore I went to is huge. It is spread across three floors. It is what I imagine walking in to Amazon.com’s warehouse would be like.

It took me a little while to find the section that the books I was after were located. Once I found the section I had a very enjoyable time looking at numerous different books before I found the books I was looking for. There is nothing like the smell of new books. I don’t know what it is but the newness of the books was something to behold. If I am honest I got a little intoxicated on that smell and off I went and bought a few additional books that I originally had no intention of buying.

The thing is I had only brought enough cash on me for the original two books but now I had five books that I wanted to buy. What did I do? Leave the three additional books back on the shelf? Hell no! I whipped out my credit card and bought the lot on credit.

As I was walking out of the bookstore and through the mall a strange sensation came over me. It was like a pleasant warm fuzzy feeling. The best way I can best describe it is that it was similar to the feeling I get when I drink a nice coffee. It’s that relaxed warm feeling. You’re almost without a care in the world. To be honest I was a little curious as to why my mood had suddenly lifted.

The only thing I could logically put it down to was the fact that I had just bought some nice new shiny books and I was really looking forward to getting home to start reading them. As I walked through the mall to the car park I began to look at the people around me. Did they notice that I had a spring in my step? Or more interestingly could I tell who was getting high from shopping? Here’s the best part – it looked like there was a lot of people getting high. It wasn’t just the stereotypical women with their ten bags of shopping that seemed to be getting a rush but men also – myself included.

From high to low

How long did the high last? Well to be honest I don’t think I got value for money for this high. Between the time I left the store and got home was about twenty five minutes. When I got home and took out the books to look at I felt deflated. I realised that one of the books was not what I wanted at all. I don’t know how or why I even picked it up. Not only that but I felt guilty that I had broken one of my cardinal rules about buying discretionary items with my credit card. It just kept getting worse.

This experience got me thinking about the whole psychology of shopping and how things are designed to trip us up and how this causes us to compound our debt until we are in trouble.

A huge industry exists to exploit and manipulate the consumer. Advertising agencies hire the best and the brightest minds to help them come up with ways that they can separate you from your money. It is scary the lengths that companies go to. When you enter a shopping mall you have to realise that nothing is random. Every single thing from the layout to the colors of the walls to the music that is played are all designed to make you want to shop more. No I’m not some paranoid anti-capitalist, far from it but what I am is concerned about the pain this shopping hypnotism causes.

How many people do you know that ‘shop til they drop’ and put it all on plastic only to realise that they did not need the stuff that they have bought? Have you done it? I did it yesterday! I have heard some horror stories about people who suffer from what can only be called an addiction to shopping. They buy stuff and bring it home but don’t even take it out of the packaging. The amount of debt they accumulate from this behaviour is frightening.

What to do?

If you suspect that you suffer from an addiction to shopping then please get help. I know there is almost a kind of cool that comes with the saying “Oh I’m addicted to shopping, I just love the winter sales” this holds true especially for women. In reality there is nothing cool about being up to your eyeballs in debt.

Short of getting professional help I suggest a policy of avoidance. Avoid the mall. Make it a goal of yours not to visit the mall for three weeks. On top of this reduce the amount of time that you spend watching TV. The advertisements on the television are again a not so subtle attempt to get you to part with your cash.

As for me well I’ve decided to leave the credit card at home the next time I go to the mall. At least that way while I may be tempted I can’t do anything about it. In the long run I should save myself a lot of grief. That said I think you will need to ‘watch this space’.

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