The windfall mentality won’t get you out of debt

Jun 302008

Recenty I wrote an article about buying lottery tickets when you were already heavily in debt. The main thrust of the article was focussed on the element of hope and how you can increase your chances of winning big money by joining a syndicate. I argued that while playing the lottery was a luxury it did offer a tiny glimmer of hope in what can otherwise be a bleak financial outlook. As such I argued that playing the lottery could be a good thing as hope is always a good thing.

Since I wrote the article I have come across a strange and slightly disturbing phenomenon related to the lottery post or more accurately recognized something that already existed. It was something that I had seen in a few people I knew and experienced it myself but I couldn’t quite understand it before. It is really only since I wrote that post did I come to understand it better. I call the phenomenon ‘windfall’ mentality.

Windfall Definition: Any unexpected acquisition, gain, or stroke of good luck

The attitude which accompanies the mentality is built around the idea that the money to pay off the person’s debts will come from somewhere – they will have a windfall. People with the windfall mentality will not focus on things like cutting costs and increasing income rather they will focus on things like playing the lottery or visiting an old aunt with the hope that she will leave them money in her will. Windfall mentality can be described as a sort of double or quits mentality – lets keep accumulating debt in the vain hope that someday soon we will have a windfall and that we will be able to pay back out debts in one go.

I had seen this attitude in people before but I could never quite put my finger on it. I always thought that these people were greedy or deluded but the reality is that they are just trying to cope the best way that they know how. Their mind has put them in survival mode. Unfortunately the way they are trying to cope with their debts is far from optimal – in fact I would go as far as to say that what they are doing is living in a fantasy world where they hope someone with a magic wand will rid them of their debts.

I think for all of us in debt that we all experience some form of this windfall mentality. I suspect that this usually occurs when we are in the denial phase of our debt. I have personally experienced this windfall mentality first hand. I was convinced that one of my share investments was going to be a multibagger (i.e. go up loads) when one of their new products came out into the market but this never materialized. It was only when the company came out with a profit warning did I realize that I had been kidding myself. The share tanked and I was in a worse state financially than I should have been. The struggle back was a lot more painful than it had to be.

I think for most people this windfall mentality doesn’t last long and people are smart enough to realize that their debts can only be solved by their own direct actions and efforts and not by some windfall. However for some the windfall mentality lasts a lot longer than the initial denial period. Some people never come out of the denial phase and are in a constant state of waiting for things to come to them rather than going out and making things happen.

Invariably nothing ever comes to the people with the windfall mentality. They sit and wait and hope and dream about how someone or something is going to give then thousands of dollars to solve all their problems and how life will soon be good again. It’s only when they are confronted by debt in a real situation such as a repossession that they get shocked back into reality and they then realize that they have a lot of lost time to make up.

The question you have to ask yourself is if you have the windfall mentality. Do you daydream that someone is going to save you from your debt with a nice lump of cash? Ask yourself how likely is it to really happen? I believe in miracles as much as the next person but I also believe that you have to go out and make your own luck. Are you making your own luck or are you waiting around for someone else to make it for you?

Media diet - useful in helping to slim down your debt?

Jun 272008

Nine hours a day.

That’s how long it is estimated that the average person is exposed to media. That’s nine hours a day where you are either watching TV, listening to the radio, online or reading newspapers/magazines. That’s nine hours a day that you are being constantly bombarded with advertisements urging you to buy something that is bigger, brighter and better than what you already have. That’s nine hours a day that you are being made to feel inferior by those smart advertising people.

We take our daily exposure to media for granted. We don’t even think twice about it. But when you do stop to look at what is being repeated constantly on the TV or on the internet you come to notice that it’s pretty much all doom and gloom. Even on a good day the news is always bad. From a mental health perspective this can’t be good. To me listening to bad news all day and being exposed to advertising does to the brain what constantly drinking soda does to the body.

Yet I am the first to admit that my exposure to media on a daily basis used to extend to a lot longer than nine hours. I estimate the figure to be closer to thirteen hours. I’m a media junky or I was until very recently.

A few months back I started to record my favourite TV shows. The reason was because I was too busy with work to watch them. As a result I would end up watching my favourite TV shows at the weekend except there would be no advertisements I would simply fast forward through the ad breaks. I stopped watching the news – again because I was too busy. I seriously cut down on my online browsing of websites. The net effect was that for a couple of weeks my exposure to the media had decreased from about thirteen hours a day to about five.

Then a strange thing happened.

I no longer had that panicky feeling when I was stuck in traffic on my way to work. That silent urge to get to my desk and see what had happened in the hour since I last was at a computer. I had a feeling of liberation. It was short lived but it gave me a glimpse of what could be achieved if I made a determined effort to cut down on my media consumption. It got me thinking about this blog and about debt and about how we are influenced by the things we see in the media.

I estimate that the impact that the media has on debt and spending habits is huge. It makes sense if you think about it. The more you are exposed to the adverts for “the good life” the more you will want to have the good life – no harm in wanting the good life – but when you are using debt to fund it then it can become a problem.

Realistically it will be almost impossible to cut all media out of your life. Short of living in a cave you are going to find it very hard to do. However there are some serious benefits to be had by cutting down on the amount of time you are exposed to TV, the internet etc.

Going on a media diet will serve two purposes

Firstly it will help reduce exposure to advertising which in turn will in turn reduce the amount of reinforcing messages you are exposed to which tell you to buy stuff you don’t even need. One of the fundamental principles of advertising is that the more often a consumer is likely to see an advert the more likely they are to buy the advertised product.

The second benefit is that you will be reducing your exposure to all the negative financial self talk. Have you noticed that there is nothing but doom and gloom in the news about the state of the world economy? How we are all heading for a financial disaster that will rival the depression, nothing but bad economic news. You don’t need to hear it. If you are continually listening to negative ideas about the economy then you will start to believe it is true. If you believe it is true then it will become true. Everywhere you look you will see signs of how bad things are getting. It will become a self fulfilling prophesy.

I’m toying with the idea of going on a media diet. An almost complete shut down of my media consumption. The idea would be that I reduce down all media consumption apart from that needed for my job and for leisure. So I would stop watching the news, I would stop reading the newspapers. I would record TV and skip through the adverts.

Instead I could use the time I currently spend on media to do something much more constructive like calling friends or reading books.

The benefits of going on a media diet are obvious but I still am struggling with the concept of going on one. I think that the media has become such a fundamental part of life, my life, that to remove it would take a lot of energy. Energy that I think I could use focusing on some other area of self improvement.

In Debt? Don’t try to cut everything all at once.

Jun 262008

When faced with a person with a debt problem one of the first standard pieces of advice thrown out there is “Cut back on your spending completely”. Sound advice I might add but not always the most appropriate advice. I find that it’s a very easy piece of advice to give “Cut way back on your expenses and everything will be ok” but you already know that this isn’t the case. If it was that easy to do you wouldn’t be reading this article because you would have had no problem cutting back in the first place.

I accept that if someone is in debt then radical action is needed. However telling someone to cut back on expenses is a bit too general. It’s not so much what to cut back on – a simple tally of your monthly bills will tell you that – rather the key thing that I feel is missing is the ‘how’ to cut back element.

From your experience, what happens if you try to cut back everything at once? You go into a state of cold turkey. Your mind gets overwhelmed by this new behavior. Spending danger lurks around every corner and you get exhausted from trying to keep your mind focused on not spending. But no matter how hard you try and no matter how much you focus on ‘not spending’ your money just seems to run away from you – sometimes at an even faster rate than before.

What causes this? Well there are a couple of things at play in this. The first is that you are focusing on ‘not spending’. When confronted with a spending opportunity the natural response is to say to yourself is something like ‘I must not spend, I must not spend, I must not spend’. However all your brain will process is the doing part of the sentence which is the verb – spend. So all your brain will hear is “Spend, Spend, Spend”.

Ironic I know but studies have shown that how you phrase something is key to changing your behavior. So what you need to do is to rephrase what you say in relation to your spending. Don’t talk in terms of spending and buying or expenses, talk more using terms like saving, investing, reducing. For example instead of saying “I must not spend” you could rephrase it to something like “I must save more”. The difference is small in terms of the words used but in the long term the difference it makes to you mentally will be very significant.

The second and most important aspect of changing your spending behaviour is the speed at which you do it. This is a tough nut to crack as there are a number of variables at play. How much debt you have will be a factor in intensity of your desire to get a move on and start making cuts. What your current level of spending is now is likely to also have a huge bearing on your ability to make cuts. The more spending you are currently engaged in on a day to day basis the harder it will be for you to make drastic changes.

Slow and steady

The average time needed to change a habit is estimated to be anywhere between 21 and 30 days of repeat behavior. What this means is that if you want to change a habit you need to spend at least 21 days repeating the new more positive habit – consistently – day after day.

A lot of the time people assume that the habit they need to change is their ‘spending’ habit. This way of thinking is not 100% accurate. A much better way to think about it is that your spending is just the umbrella for a whole host of different habits. If you want to make real progress in your spending then break your spending down into its component habits.

Your spending pattern is probably made up of dozens of habits, each habit feeding into the next while all the time your money is disappearing.

So if your spending is made up of dozens of spending habits then you need to identify them. To help you do this it is simplest to think of your average week and how you incur your spending. For example do you buy a paper with your morning coffee? Do you buy that coffee on the way to work as you stop off for gas? When grocery shopping, do you shop when you are hungry? At the weekends do you simple amble into the local shopping mall just to kill time but have no clear plan about what you need to buy?

Each bad spending habit that you can identify needs to be put down on a list. You then should write down what a positive spending habit would be that would counter the bad spending habits. This will take time and some imagination but it is well worth it. Finally you need to identify the one habit that is doing the most damage to your finances.

Remember slow and steady.

Having identified the one habit that is doing the most damage to your finances you need to resolve to change that habit and that habit alone. Do not try to change more than one habit at a time!!! Focus all your energy on changing that habit. Stick with it for at least 21 consecutive days. Once you are happy that you have changed that habit then move on to the next most expensive habit.

You may have the urge to change a lot of habits at once. This is understandable, once you have made a firm decision to tackle your debt you will want to get moving as fast as possible. Don’t – take your time. The problem with trying to make a raft of changes in one go is that you cannot allocate enough energy to each of them to make them permanent. There is a saying that goes ‘the more hurry the less speed’. I believe this is true for debt management also. If you rush into making a lot of changes you are likely to lose motivation as you don’t see the changes you would have hoped for.

By tackling your biggest spending habit and focusing on it for at least 21 days you will make a lot more progress than if you simply tried to tackle five smaller spending habits at the one time. Don’t try to cut everything all at once. Doing so is simply a recipe for frustration. Don’t be tempted. Focus on one spending habit at a time.

Saving while in debt – does it make sense?

Jun 252008

Saving while in debt seems to be a bit of a contradiction. If you are in debt then why should you save? Shouldn’t every last cent be going towards paying off your debt? Ah you must mean the emergency fund? Right? That fund that all the financial gurus recommend you have. Well the thing is that I’ve read a couple of articles recently that say you should not bother having an emergency fund and that all the money that you would have saved should go towards paying down your debt.

I disagree.

The emergency fund seems to be one of those worn out clichés that you hear about every time that you pick up a book on Personal finance and debt management. Its used so often that I feel it has become part of some text book response when some one is in debt. Very few commentators seem to go into much detail as to the true importance of the emergency fund and as a result people probably don’t put as much importance on it as they should.

Controlling your personal finances is a lot like playing a strategy game like chess. Chess is a game of strategy whereby you use various strategies and moves to defeat your opponent. One of the key things about chess is that you always have to leave different strategies open to you. You shouldn’t close too many options off by losing strategic pieces too soon into the game. When you are controlling your personal finances you have to employ various strategies to reduce your debt. An emergency fund is one of those strategies.

If you were to put all your money against your debt you would be limiting your options, limiting your strategies.

The main point that the authors who advocated putting all your money against your debt were making was related to the interest difference. If you have a high interest debt such as a credit card debt at say 17.5% but you only actually receive 5% interest on your savings then it is effectively costing you money to have savings because you are paying a higher interest rate on your credit card debt for longer than necessary. On a pure math basis then this makes perfect sense.

When you are in debt pure math and logic doesn’t always win the day.

That crazy little thing called psychology plays a huge part in controlling your finances and your emergency fund is no different. From a financial payoff point of view having an emergency fund is not optimal. However from a psychology point of view having an emergency fund is crucial.

As with the game of chess, it is important that you always have something in reserve when it comes to your finances. Having an emergency fund affords you some comfort that should some emergency arise that you are not going back into debt and in the wrong direction to tackle it. This provides a great psychological boost as it allows you to draw strength from the fact for the first time probably in a long time that you have not had to rely on your plastic to get you out of a tight corner. This can be empowering.

Take it a step further. When you see your emergency fund grow along side your debt shrinking you can’t help but get more motivated. The sense that you are gaining control of your finances can be immense. For most people this spurs them on to further action.

The other key thing I disagree with when it comes to not having an emergency fund is access to cash if there is an emergency. Imagine that you have no emergency fund but you have put all your available funds against paying down your debt. Then an emergency happens and you need cash fast. Where do you go for it? Borrow on your credit card? Ok it is an option but you are going back to square one, the same with a loan or and overdraft. They all lead you back to a place you do not want to be. In some case as soon as you have paid off your debts these avenues of raising cash may be closed off to you. This is of key importance if you decide not to have an emergency fund.

Bad things happen to good people

I’m not advising you whether or not you should have an emergency fund – this is something that you will have to decide yourself based on your own personal circumstances. However the one thing I will ask you is this. How often in the last three years have you found yourself in a tight spot when it came to money? How did you manage to get out of that tight spot? More borrowing?

I hate to say it but bad things happen to good people. The more financially prepared you are to respond to such emergencies the less of an impact the emergency will have. As with chess, financial management is all about strategies and options. It is up to you to make sure you have plenty of options available to you. For me an emergency fund along with adequate insurance is one of the best ways to prepare.

The silent scream of generation debt

Jun 232008

‘The mass of men lead lives of quiet desperation’

Henry David Thoreau

Are we now faced with losing a generation of people to debt? A generation of people who lived the high life for about five years but end up paying for it for the rest of their lives?

As the economy teeters on the brink and people start to try to cope with their debts – are we faced with a generation of people whose hopes and dreams and now lay shattered? Homeownership and material wealth that seemed so close and real are now slipping fast from the hands of many. Untold emotional suffering is now happening in the homes across the land. They say that no one ever knows what goes on behind closed doors but you can be sure that for many the financial burdens are playing havoc with their home life.

If you listen closely you can almost hear the collective scream of a generation lost in a sea of debt. Look at the faces of the people you meet. Can you see it in their eyes? Can you feel the frustration and anger at their situation – your situation? I can’t quite put my finger on it but there is something there – it’s almost like a screaming despair – a want for the good times just gone and a dread of what lies ahead.

Who is to blame?

You tell me? Who do you think is to blame? The bankers and financial institutions that made it too hard to refuse? Or does the uncomfortable truth lie a little closer to home? For me the truth probably lies somewhere in the middle, a collective euphoria existed where almost everyone (myself included) joined the party and got drunk on cheap wine provided by those nice guys down at the bank. What we are now facing is a collective hangover and no amount of coaxing can beat the booze blues. We just have to sit and wait it out.

The sitting and waiting

It is the sitting and waiting it out that is the hardest part. The memories of easy credit and good living are still fresh and yet the pain of debt is starting to hurt. Frugal living may not be a new concept but it is one that will take a bit of getting use to all the same. For how long will the pain last? Well it depends on how much debt you have and how determined you are.

You see most people haven’t woken up to the fact that the party is over and that they now have a problem with debt. Those who have woken up to the problem are in a state of denial. The next stage is anger – anger at themselves – ‘how could I have been so stupid?’ A lot of people don’t move beyond the anger phase. They sit there and stew with anger and despair. ‘How could this of happened to me?’ and yet fail to realize that the one person who can help them is so caught up in the negative emotions of the situation to do anything about it.

It is those people that are in the anger and despair phase that you hear moan about how the world is a crooked place. How everyone has a hand in your pocket.

Where are you? Are you in the denial phase? Not quite ready to leave the party and still living on your few last lines of credit? Or perhaps you have moved beyond denial and are in a state of shock. That’s good, keep on moving. Anger comes next but from that anger can come positive action. Any action is better than no action. It will only be a matter of time before you find out what works and what doesn’t work. Keep moving.

While the mass of men (and of course women) may lead lives of quiet desperation that doesn’t mean that you have to. You may have bought into the whole easy credit thing but that doesn’t mean that you have to sit there and silently scream as you long for the good life again. You can get the good life again – a lot quicker than you thought possible if you are only willing to focus your efforts and apply yourself to your finances. Rome wasn’t built in a day but give yourself a few short years and the good times for you could be back, this time for good. So I say let the good times roll.

Freeganism – Is this the ultimate solution to debt problems?

Jun 202008

I was watching the Oprah show recently – yeah ok I admit it I sometimes watch Oprah! But that’s about all the confessions you’re getting out of me today. Anyway Oprah had a piece on a really interesting topic – freeganism. Check out the show here.

Now before you start thinking it is some type of deep sea fish let me give you this definition that I pulled from Freegan.info website.

“What is a Freegan?Freegans are people who employ alternative strategies for living based on limited participation in the conventional economy and minimal consumption of resources. Freegans embrace community, generosity, social concern, freedom, cooperation, and sharing in opposition to a society based on materialism, moral apathy, competition, conformity, and greed.”

What does this have to do with me? Well I’ve done a little research into the freegan lifestyle and it’s fascinating. It might not be to everyone’s tastes and I admit that I find some of their techniques unappealing but overall I think it is taking the ‘Buy Nothing day’ which I spoke about previously to the extreme.

As I understand it the basic premise of Freeganism is to find and use food that has been discarded by supermarkets and restaurants. How do they do this? Well this is the interesting part. Freegans engage in a practice called dumpster diving. Dumpster diving is exactly what it says – diving into dumpsters and retrieving food that is still edible. It is effectively foraging for free food.

Again taken from Freegan.info website.

“Perhaps the most notorious freegan strategy is what is commonly called “urban foraging” or “dumpster diving”. This technique involves rummaging through the garbage of retailers, residences, offices, and other facilities for useful goods. Despite our society’s stereotypes about garbage, the goods recovered by freegans are safe, useable, clean, and in perfect or near-perfect condition, a symptom of a throwaway culture that encourages us to constantly replace our older goods with newer ones”.

Extreme debt requires extreme measures.

If you are in extreme debt then you could do a lot worse than consider adopting some of the tactics used by freegans. Before you reject this idea out of hand I want you consider that a lot of the people engaged in Freeganism are highly educated and middle class. They have made a conscious choice to reject the consumerist aspects of our society. On the Oprah show there was the story of a couple who embraced the freegan lifestyles. One was a doctor and the other and Engineer. Click here for more info.

What I am about to say is a bit cynical and will probably get me in trouble with our Freegan friends so I apologize to them in advance, but why not adopt a semi freegan lifestyle for as long as you are in debt? If you are in debt then consider going freegan. What do you have to lose? I know this is an extreme lifestyle but the benefits are huge. You don’t necessarily have to agree with the anti-consumerist sentiment. All you have to do is go and participate and take the free food. Think of the savings this lifestyle will allow you to make? If you are concerned about being discovered by your friends and neighbors just tell them that you are making a political statement about how society has become too wasteful. They will admire your principles. In fact I would go as far as to say that you will gain some kudos and have a great thing to talk about at parties.

As always the point of this website is to help you reduce your debt. Freeganism is another way of doing it. You may start out with the aim of reducing your debt but I’m sure that after adopting the freegan lifestyle that you will come to appreciate the amount of waste that goes on in our society. The choice as always is yours.

Freeganism – is it sustainable?

I see what the freegans are trying to achieve and I admire them for it. As a society we waste too much all the while people are dying from starvation in poorer countries. However I wonder how practical and sustainable freeganism is from a long term perspective? To be honest I don’t know but the more popular it becomes and the more people that adopt it as a lifestyle then the less free stuff there will be to go around. What you will have is more people chasing limited free stuff. That said I do think that for the open minded among you it offers a very unique way of reducing your food expenses and in turn reducing your debt.

Would I turn Freegan?

I agree that as a society we waste too much. If freeganism can help solve that problem then I’m all for it. Would I currently turn freegan? If I’m honest I would have to say no. I know what you are thinking – I’m a bit of a hypocrite to write about becoming a freegan when I won’t turn freegan myself. I agree to a point. I said that I currently wouldn’t turn freegan but that is not to say if my financial situation deteriorated that I wouldn’t turn freegan. If my financial situation was that extreme that I couldn’t afford to put food on my table then I would become a freegan.

I have to admit that initially I dismissed freeganism as another form of misplaced tree hugging. I thought it was just rich college kids making a statement simply because they could afford to. However the more I learn about freeganism the more I understood what the movement was driving at and I have to say as a result I am more conscious about the amount of waste in my life and as my Mom always said “waste not, want not”.

Foreclosure of a dream

Jun 192008

I recently heard the sad story of a single mom who had her home foreclosed. This is a story that has become depressingly familiar and has been repeated thousands of times over and will be repeated thousands of times in the next few years. No two cases are exactly the same but they all seem to have a common thread running through them. However this story is worth repeating if for no other reason than to show how you can be seduced by easy credit only for the dream to turn sour. For those of you facing a similar situation take strength from the knowledge that you are not alone and that the mistakes you have made were not necessarily all your fault. For those of you in debt take a warning from this story as to how bad things can get if you do not face up to your problems now.

To protect her identity we will call her Michelle. Now Michelle came from a disadvantaged background to begin with. Her Dad left home when she was young and her Mom struggled to raise her and her two brothers the best she could. Michelle grew up with strong principles of right and wrong and despite her background she did well for herself.

Michelle was a hard working single mom. She had a job in a local company doing administrative work. She enjoyed her job. In spring 2005 she spotted an advert for mortgages. What caught her attention was the fact that the mortgages on offer were ‘no money down’ – she didn’t need a deposit or any assets to get the mortgage. Too good to be true.

Initially she was worried about being able to meet the mortgage payments and the fact that she had a spotty credit history due to some late payments on an auto loan. However when she called the mortgage broker she was assured that she would be able to afford the monthly repayments and that her credit history wouldn’t be a problem. In fact she was quite pleasantly surprised at the low monthly payments. This of course was to be her undoing. The mortgage broker either didn’t mention the rate reset on the mortgage or mentioned it in terms so obscure and alien to Michelle that she didn’t understand them. Either way a couple of years later Michelle was in for a nasty shock.

With tears of joy Michelle took the keys from the real estate agent and opened the door of her new house. For two happy years Michelle enjoyed her home. It was no longer just a house to Michelle it was her home. She made a great emotional investment in it. She spent every spare moment she had working on the house. It was her pride and joy and it was a safe place to bring up her young son.

In June 2007 Michelle received a letter informing her that her mortgage rate was to be reset to a much higher rate. Her monthly payments went up by $300. Like so many other people she was stunned. She was not expecting such a large increase in payments but due to her poor credit history she was charged a higher rate.

To make matters worse she was already behind on another loan and was getting letters from the bank about it. She did have a small amount of savings but this was simply eaten up by trying to meet the new higher mortgage repayments. It wasn’t long before Michelle fell behind in her mortgage payments. Her situation got so bad that in November last year her home was foreclosed. Michelle was devastated.

Michelle’s story is similar to so many other stories of foreclosure. All that Michelle wanted was a home that she could raise her son in and enjoy life. She had a dream and that dream was home ownership. In reality what she got was a nightmare.

What are the lessons to be learnt? Hindsight is always 20/20 and people can always tell you what you should have done after the event has happened. However there is value to be had from learning about other people’s mistakes. There were a couple of obvious mistakes that Michelle made that could have been avoided.

The biggest mistake Michelle made and probably the single most important thing she could have done was to learn more about her mortgage and about personal finance in general. It doesn’t matter what state your finances are currently in, the more you learn about personal finances the quicker you will solve your financial problems. Financial education is the single most important thing that you can obtain. If you have any spare cash invest it in yourself and in your financial education. You need to know as much about personal finance as possible so that you won’t be taken for a ride.

In Michelle’s situation it was not properly explained to her about the rate reset but whose fault was that? Was it the mortgage brokers? Or was it Michelle’s for not knowing enough about mortgages to ask the question?

In reality Michelle should never have been approved for the loan. The lenders were too easy with the credit and in a lot of ways the banks and financial institutions have no one to blame for their current problems only themselves. But that’s not the point. The point is Michelle was given a loan she clearly should not have qualified for. This was unfair on her. She was given the dream only for it to be snatched from her two years later.

The housing market for people like Michelle was one giant Ponzi scheme. Michelle just happened to be a willing victim. I know some of you reading this will say ‘good enough for her’ but I think you are missing the point. Michelle wanted the dream of a nice home in a nice area and a secure future. Don’t we all want something like that? Who is to say that we might not be next?

Competitions – a fun way out of debt?

Jun 182008

Crazy as it might sound but that plan might just work. How often have you heard this phrase said in movies or in TV shows? Well how about this for a crazy idea – try clearing some of your debts by entering competitions to win prizes. Then either keep and enjoy those prizes you win while saving yourself the money it would cost to buy them or sell the prizes for cash.

Let’s be clear, I’m always looking for alternative ways and ideas to reduce debt. I will consider almost anything that is legal. Any ideas I have or come across I will pass on to you. I think a lot of people’s minds are closed to new and unique ways of doing things and as a result they get caught in the vicious cycle of trying to change behaviors that are firmly entrenched while getting frustrated at the lack of results. To me entering competitions is a novel way of at least trying to do something about your debt.

Too often I hear from people that they just don’t have the patience or willpower to tackle something as boring as their finances. It’s true that personal finance can be boring but so can brushing your teeth. I still brush my teeth a couple of times a day though. Entering competitions is a fun and exciting way to maybe win a little extra money. Think of it as a way to brighten up your debt freedom journey.

Entering competitions when times are tough is not something new. During the depression events called “Dance Marathons” were held in local halls. These were dance competitions based on endurance. The idea was that couples would dance for days in the hope that they could last the longest and win the cash prize. For more background information on Dance Marathons click here.

The best way to think about entering competitions is as a hobby. There is absolutely no guarantee that you will win something but entering competitions serves two purposes. The first is that you feel like you are doing something about your debt that you are taking action and moving in the right direction, although at a slow pace. The second is that it offers hope. If you enter a competition there is always a hope, no matter what the odds are, that you will win a prize. It is this hope than can help you through the dark days of your debt. You have to be kind to yourself and give yourself hope – however small.

How to do it?

There are competitions going on almost everywhere you look. The newspapers, the local store, the radio and of course the biggest place to find competitions is the internet. Set aside sometime each week to enter competitions. If you have children then this will be a fun way of spending time together as they can help you stuff the envelopes with tokens and offer suggestions for tie breakers.

While the cost of entering competitions online is usually free. Competitions where you have to send your entries via post cost money in the form of stamps and envelopes. This is something you need to be aware of. While the cost of entering competitions may be negligible it will eventually add up. So what I recommend is that you set yourself a competitions budget. Yes I know the dreaded ‘B’ word, but at least time it is in relation to having some fun!

Why bother – no one ever wins?

This is the key point. The vast majority of people never win because the vast majority of people never enter the competitions in the first place. How do they ever expect to win if they don’t enter? Reduce it down to simple maths and probability. The more competitions you enter and the more times you enter each competition the higher the probability of you winning something. It is a numbers game.

One of the main reasons people tend not to enter competitions is that you actually have to do something. You might have to complete a tie-breaker or you might have to collect tokens. For a lot of people this is too much hassle for something that may or may not pay off. What I say to this is that you have to make at least some sort of effort and if you are honest the effort involved in entering most competitions is minimal.

Above all else have fun.

You may not win anything but as someone once said “it’s the taking part that counts” and just remember that you have to be in it to win it. J

Freedom Debt Management -The price is eternal vigilance

Jun 172008

Freedom debt management? Is it possible? Sometimes people go into a state of denial. Recently I wrote an article about how easy it is just to sit and stare at your debt and get caught up in the emotions of it. All the while you do nothing to combat it. Today I want to talk about the day to day element of your debt journey and how hard it can be to continue the fight on a daily basis. I find that while most people have the initial enthusiasm to tackle their debts the day to day struggle can overwhelm them.

The struggle with debt is all consuming. Almost all of your waking moments and probably most of your sleeping ones are spent thinking about your debt. How do you cope and function when you have such a weight on your mind? How do you focus on your day to day mundane activities when there are constant reminders of your debt situation? The answers to these questions are one of the key elements in solving your debt problem. If you can’t make it happen on a day to day basis then you will struggle to ever pay off your debt.

The daily struggle with your personal finances requires a lot of energy and focus. Almost every element of your daily activity is impacted by your finances. If you think about your daily routine every single element, from what you have for breakfast to what you wear to work has an element of money or more accurately have a cost element attached to them.

“The price of freedom is eternal vigilance”

                        Thomas Jefferson

This quote holds true for debt management as well. You should read the quote slightly differently – “the price of debt freedom is eternal vigilance against unnecessary costs”. On a daily basis you need to make it your goal to examine the costs involved in your every activity, no matter how small. This is the price of debt freedom, paying close attention to your every cost.

You always have to look at your daily activity in the long term context. If you spend $20 needlessly today then that’s $20 less you’ll have when you really need it. So what is $20? Well think about it another way. If a plane leaves New York for London and it is even 1 or 2 degrees off target on it’s 4000 mile journey then it will go far off course and probably end up landing in Africa. Now if we take this principle of small differences applied over a long time and apply it to your financial situation you get a feel for the difference it can make. If you try to reduce your expenses by $5 a day then in the space of a year you will have saved $1825. I don’t know about you but for me that would make a big difference.

By adopting this attitude you are laying the foundation for greater freedom. As the days turn into weeks and the weeks turn into months you will get a greater sense of that freedom. The funny thing is that if you were to simply develop a better awareness of your daily costs then you would, almost by default, reduce your debt significantly. The small incremental savings that you make will all add up to something significant.

How hard is it to do?

Very! What I have written about above makes it seem real easy to do. I apologize if I have given that impression. Most people in debt have got into debt as a result of a ‘live for the moment’ attitude. What I am outlining above is almost the complete opposite – a ‘look to the future’ attitude. For someone who has amassed a lot of consumer debt trying to go to a place where they examine every aspect of their daily spending is like driving a car in fifth gear and then trying to put it straight into reverse. The end result? A badly damaged car.

Why suggest it if it is so hard then?

Well the simple answer is that while the actions above are hard they are not impossible. For that consumer who is driving at full speed in fifth gear it is possible to move down the gears and slow their spending. That’s all I’m asking. Start looking at your daily activities. No one is expecting you to change overnight but what is possible is a more gradual shift to cost reduction. It will take time to make these changes happen but time may be the only thing you have. Just remember the sooner you start making changes the sooner those debts will disappear.

In Debt? – get your emotions out, get over them and get on with it

Jun 162008

One of my pet hates is to see newspaper articles about people in debt. The reason why is because the people in the articles are nearly always cast as helpless fools. The picture that comes with the article is nearly always one where the people stare into the distance with a tear in their eye. I think it is highly disrespectful to the people involved. The people in debt are nearly always at their wits end and can see no future. The last thing they need is to be lampooned in public.

I always get the feeling from these articles that for the people involved view it is a last resort. A public cry for help. I imagine that if their debts were under control that they wouldn’t feel the need to tell the world about it. I could be wrong but it seems that they may have left things too late to do anything and they are throwing themselves on the mercy of the public. I feel terrible that for them it has come to this. It does serve as a salutary warning but at the same time it doesn’t really offer any insight as to how you can pay off your debts faster. If anything the articles only tend to reinforce the view that there is no way out of debt.

In my opinion people in debt spend too long caught up in the emotion of debt and not enough time tackling the debt. They sit and stare as the debt grows bigger and bigger yet they remain frozen by their emotions. Like a deer caught in headlights they cannot move. When they do eventually come around and try to start doing something about their debt then they find it extremely difficult as they are emotionally and physically drained from worry.

When people realize the magnitude of their debt for the first time they sometimes adopt a ‘close your eyes and it might go away’ attitude. Eventually the debt becomes such a huge problem that they have no choice but to do something about it. For many at that stage it can be too late. The damage is done. While it is not impossible to fight their way back, their lack of initial action has makes it a lot harder. What makes it even harder is that their emotional energy is at an all time low. It’s no coincidence that debt problems coincide with relationship problems. The two almost go hand in hand.

I’ve often asked myself why there is a time lag between when the realization occurs that debts are a huge problem and the time when the people start to do something about it. I nearly always come back to the same answer. The emotional stigma and drain involved can be a huge factor. Being in debt is often seen as a failing and as a result people do not want to admit that they made a mistake. The problem is that by delaying the admission of the mistake the problem only grows and valuable time is lost.

Open the emotional floodgates

If you feel that you have a debt problem but you are stuck in that frozen stage of self denial then talk to someone. Talk to someone you can trust in confidence – a friend, a counsellor or someone you know you can be honest with. Tell them that you think you may have a debt problem and that you are worried and you don’t know what to do. Let the emotional floodgates open, cry, get angry, get scared. Go through the full range of emotions. Clear out your emotional system.

By opening the emotional floodgates you have a release. You release all those emotions that have been pent up in you. There’s no point in hiding from these emotions. Hiding from them serves no purpose whatsoever. The problems will still be there when you come out of hiding except probably much bigger. Acknowledging that you have a problem and dealing with the emotions that come with that problem is key to getting out of debt.

By tackling the negative emotions that surround a debt problem you are laying the foundation for an effective solution. If you try to tackle your debt while still carrying all the emotional baggage associated with you will find the going a lot harder than it need be. It is easier and more effective trying to tackle your debt if you are coming from a place of strength rather than a place of weakness.

Dealing with those emotions of fear and dread are the first step in any debt management program. Clear out the mental clutter of negative emotions. If you continue to carry these emotions with you as you try to tackle your debt you will be handicapping yourself needlessly. The problem of debt needs to be reduced to the simple formula of money in less money out. If you can take care of the emotions then it leaves you more energy to focus on using this formula.

Is it easy letting go of the emotions? No – it’s very difficult. Fear, worry and denial are never far behind when dealing with debt. The point I’m trying to make is that while negative emotions will continue to haunt you as you tackle your debt you can make your journey a lot easier by acknowledging those negative emotions and doing something to counteract them. Talking to someone and having a good moan about your situation is tremendously helpful but don’t make the mistake of getting caught in the ‘woe me’ trap. Where all you do is moan about your debt and how your life is crap. Get your emotions out of your system, get over them or at least accept them for what they are and get on with dealing with your debt. Remember no one else will do it for you.

Reject Society and you’ll pay off your debts a lot faster.

Jun 132008

I’m not here to push some socialist agenda on you. As I said in previous articles I’m one of the most pro-capitalist guys you can meet. Seriously. Now what I am about to say is at odds with my economic philosophy but there is a method in my madness. I’m here trying to make a difference in your life by encouraging you to take new approaches to getting out of debt. If you want to pay off your debt in the quickest time possible then the easiest way to do it is to reject society or more accurately reject the consumerist aspects of society.

This isn’t a new idea and I have to admit that I got the seeds of this idea from the ‘Buy Nothing Day’ movement. The idea behind the ‘Buy Nothing Day’ is to raise consumer awareness and get people to focus on consuming less and producing less waste. If you are in debt then by rejecting consumerism (for a while at least) you are achieving two things. The first is that you will, by default, have a lot more cash. The second is you will be doing your bit to help the environment as you will be consuming less and therefore less packaging is needed.

Reject Society? How exactly do I do that?

Its not as hard as you think and it doesn’t involve walking round waving a placard with ‘The end is near’ written on it. The easiest way to reject consumerism is to do nothing or do very little. More specifically continue to do your job, continue to meet your friends, continue on as normal except only shop for the necessities in life. Quit visiting the mall for the sake of it. Stop using your credit cards, stop taking out loans, Start shopping in discount stores, start buying own brand products, stop being a label junky, bring your lunch into work, buy in bulk, if you want something save hard for it. Make credit your enemy.

There doesn’t have to be much change in your day to day activities. In fact no one has to know that you have decided to take a break from consumerist society for a while. Your friends won’t know, your neighbors won’t know or care, your workmates won’t know. Take a little time out to recharge your batteries and recharge your finances. Reject materialism. Invest time in yourself, in developing your relationships with your friends and family. These things don’t cost money and in the long run you will get a much better return that you will on a hundred pairs of shoes or the latest SUV. By investing time in yourself and your relationships you are making a stand for who you really are when all the trappings of consumerism are stripped away. I’m sure you’re a lot different type of person than the person that the marketers have you typecast as.

Why am I advocating such an extreme lifestyle change?

Simple really – it has been extreme spending that has caused people’s debt problems and in most cases it will take extreme action to rectify their financial situations. Remember you don’t have to live this lifestyle forever, you just have to do it until you are back on track. Long enough for you to see that there is an alternative to the constant merry go round of work – spend – debt – work. You can break the cycle and by not buying into the marketers crap you will see the world around you in a totally different light. One where the true value to be had is in the relationships we build not in the things we buy.

Be selfish about your motive for rejecting consumerism. Remember no one is going to help you out of debt only YOU. By adopting a self-centered approach you will achieve debt freedom a lot quicker. Ironic I know but debt freedom is all about you and your financial situation not about that of your neighbors or friends. Look to the future and to the time and place where the stress of debt no longer exists for you. This is the place you want to go and by rejecting consumerism and material things you are going to get there a lot quicker than you thought possible. Of course once you reach that point you can spend spend spend – but that’s a whole different article.

Credit card debt services

Jun 122008

This sounds like a bad line from a really bad gangster movie – ‘Pay now in cash or pay later with your life’. The not so funny thing is that a lot of people in debt are faced with something approaching this attitude from their creditors. To be honest creditors don’t care about you, they don’t care where you are in your life or what you are going through. They just want their money back with interest and will go to great lengths to get it.

The point about paying with your life relates to the fact that creditors will haunt you for the rest of your life if you do not settle with them. They will make a point of putting a big stain on your credit record. So when you get back on your feet, because YOU WILL get back on your feet, there is a chance that your past credit mistakes will continue to linger.

So where does that leave you now, today? If you are in debt then start looking to the future and how you want it to be. Start building that future today through your spending habits. Start paying in cash now for everything. If you don’t have the cash then don’t buy it unless it’s an absolute necessity. Get your own back on your creditors – starve them of future business. Resolve to yourself and say

I am no longer going to use my credit cards or take new loans because of the way I have been treated. I will pay you what I owe you but do not expect to ever receive any business from me again – ever. From now on I am operating a ‘cash only’ system and I am determined to make it work. So please move out of my way.

Hit them where it hurts. Give them back their money – exactly what you owe them but nothing more. Pass no more business their way and see how long it is before they start sending you ‘special offers’.

Cash is king – cash for necessities is king – everything else is just junk. If you have mountains of debt and have been sustaining your lifestyle with easy credit then the switch to using cash only will be a huge shock. Have no doubt about it, the cash only system will cripple your current lifestyle and send you back to what many might regard as the stone age. But you know what? That’s a good thing. If you can accept the challenge of going cash only then you have won half the battle.

Cash only lifestyle – will life really be that bad?

Yes it will be that bad. Realistically if you are in debt then you should only be spending money on the key necessities – food, shelter and transport and using cash to do so. After that everything else is up for serious debate and unless you have medical issues then everything else will be shot down. If you don’t have the cash then you will have to do without it. If you really want something then save for it. You will appreciate it even more if you do.

The key to motivating yourself is always to keep your eye on the prize. The prize is to be debt free. Put post-its of your goal all around your home and in your car. Remember that you need to keep pushing and moving forward on this. The end justifies the means so if being debt free means that you live like a monk for six months then so be it. I can’t make the point strongly enough that you need to change in order to become debt free. Becoming debt free won’t happen if you continue on your current path of overspending and not budgeting. Change needs to happen and the only person who can make these changes happen is you. I can only point out the areas you need to look at and offer words of encouragement but I can’t do the work for you.

You have two choices. Continue along the path you are currently on and face a lifetime of struggling and stress or take the pain now for six months and then set yourself on the path to freedom from debt. I know which one I would take. Six months of very frugal living now is a small price to pay for a lifetime of debt freedom.

It’s not how much you earn - It’s how you spend it.

Jun 112008

Each month you face the same problem. You get paid and your salary only just about covers your overdraft. Within a few short days you will be back using your overdraft facility and supplementing your spending with your credit card. It feels like you are just threading water. Each month the same little routine plays out. Each month you kid yourself that next month will be better.

It’s a depressingly similar situation for your average salaried employee. We somehow managed to get ourselves into this ‘running to standstill’ situation whereby all our energy and focus is on being a good employee and trying not to rock the boat. We may not like our jobs, in fact we may even hate our jobs, but we need our jobs. By painting ourselves into a corner from a cash flow point of view we have no choice but to stay in our current job. No dreaming of a better future for you.

I know you don’t want to hear this and be reminded of what has happened or is currently still happening but I’m afraid its time for a few home truths. The reality of the situation is that if you are currently struggling financially then you need to look long and hard at how you spend your money. Somewhere I read that you spend in proportion to your salary. Now what this means is that if you get a salary increase then your spending should logically increase. But what seems to have happened is that the easy credit has allowed people to bypass this rule of thumb and now even someone on a modest salary can live like they are earning maybe three or four times what they really earn.

It’s not simply a case of living beyond your means. It’s a case of not even know what your means are. To me my means is simply my net take-home pay each month. To others ‘means’ is mistaken for ‘available credit’. Now in previous articles I have mentioned how it is this access to credit can help you ride out the tough times. However to help you avoid those tough times you need to look at your means as your net take-home pay.

Net take-home pay provides the parameters within which we must limit ourselves if we are ever to stop this cycle of living from paycheck to paycheck. The idea is simple. If you have a take-home pay of $3000 per month, then your target is to fit all your monthly expenses within that $3000. This way you can be sure that you are not incurring any excess debt.

Now most people will be starting from a point where their monthly expenses are way above their monthly net pay. This is where the problem lies. The treadmill just starts to speed up and go faster and faster and you can’t get off. At this point it’s where the necessities come into play.

Necessities?

There are some basic things in life that you just can’t do without. Ironically two people’s necessities are not the same and this is where the trouble starts. Between men and women there will be differences. So you need to be honest and determine what the necessities are. When I look around my life I could probably list the necessities on one hand – accommodation, transport, food, debt repayments and phone. I said these were the necessities not my current reality. I know that if I need to reduce my spending habits and free up some cash that I would simply reduce my life back to zero i.e. I would simply cut out the excess spending in my life. I call this living on life support.

Living on life support – financial life support

Not a particularly pleasant thought because it makes you think about death but I think it nicely defines how someone in debt should view their financial life. To recover from a bad case of debt you need to put your financial life on life support. By life support I mean reducing your spending down to the basics that you need to function. That way you can slowly but sure gain your financial strength again.

If your net pay is $3000 per month and your necessities only cost $2400 per month then straightaway that is $600 that you can use towards eliminating your debt. The maths is simple. After six months on life support you have freed up cash of $3600.

This $3600 can make the difference between you coming off financial life support or someone else making the decision to turn off your life support machine.

It will take a serious amount of discipline and focus to cut your life back to the bare minimum. It won’t be easy. There will be sacrifices that will need to be made, maybe for six months – maybe even longer. As always the choice is yours. If you do decide to take this route and cut your life down to the bare necessities then you can be assured that you will make a huge difference in your financial situation. It’s as simple as that. The hard part is knowing the difference between a ‘need to have’ item and a ‘nice to have’ item. Only you can decide that.

I have to admit that this article was a little darker than the usual. I don’t know why but sometimes I guess you have to be cruel to be kind. I’m all for tough love if the person it is directed at can understand that there is well meaning behind it. So don’t take offence and realize that the actions you required to change your situation aren’t that hard to take. I just hope that I can provide the spark to get you going.

Pets and debts – Isn’t it time Frodo start pulling his weight?

Jun 102008

So you love Frodo or Bobo or whatever you called your pet dog/cat/snake. You’re pretty sure they love you. Great! Good for you but now lets get down to serious business. If you are in debt then that great big ball of fur could be keeping you there. The costs associated with keeping a pet can be huge depending on your level of attention to detail and how much you want to keep up with the Joneses.

Pets are often treated as another member of the family – a very expensive member of the family. Even the smallest pet is not cheap. When they look up at you with their big loving eyes little do you realize that they are eating away at your budget.

Now before we go on I want to point out that I am not some cold hearted monster that is going to recommend that you leave Frodo at the side of the road. Far from it. I love animals. I’m more of a dog person but I have to admit that I admire the way cats can fend for themselves and give a collective two fingers to the world. I also have a soft spot for turtles but who hasn’t? Spiders and snakes are not really my buzz but I can see the appeal of an ant farm. Oh and fish, I really like tropical fish.

Now the thing is this website is about debt and your relationship with debt. The unfortunate thing is that most pets are expensive. As a pet is almost always seen as member of the family it is generally the case that you want the best for them. The clever marketing people know this and charge you accordingly. Pet expenses can be unpredictable and costly and this makes them hard to budget for.

So what’s the alternative?

Well there are a couple of simple things you can do to allow you to properly budget for your pet expenses.

The first is to buy pet Insurance. I know this is an extra cost each month but the way I look at it is it will help smooth out the annual cost of your pet. Each month you know that you have to pay a set small fee and as a result you can incorporate this into your budget. If you have to take your pet to see the vet then the insurance should cover most if not all of it.

The second step is to buy your pet food in bulk and online. If your pet is like 9 out of 10 cats and prefers a particular brand of pet food then shop around for the cheapest offer on it. The good thing about pet food is that it is usually long dated and it is a long time before it goes stale. This will allow you to buy in bulk and buy cheaply. Amazon is a good place to start but I highly recommend that you shop around.

Budgeting for a pet?

Yeah I know it does take a certain amount of the fun out of having a pet and it does add to the list of tasks that we need to do when we have a pet. I would put budgeting for a pet in the same category as cleaning up dog pooh. Not a nice task but something that needs to be done. The fact is that if you don’t budget for your pet and it gets more expensive to keep them then you will begin to resent them.

Another way to think about your pet is look at them from the point of view of cost of keeping them versus the benefits that they bring. Homes with pets in them seem to be filled with more joy. There seems to be a lot more going on if there is a dog or a cat running around. Studies have shown that the mood of people who are depressed improves when they have a pet. The pet takes the persons focus away from themselves and their problems.

The simplest way to increase the benefits of having a pet is to reduce the costs of having them. This way you get the same benefit but for a lower cost. Pets are great. They can be a little hard work and if you want to reduce the cost of having them they may require a little more hard work but the benefits far outweigh the costs involved.

Passive income? Look at your passive expenses first

Jun 092008

Do a search for the term ‘second income online’ and you will be hit with a hundred and one articles and stories about how someone makes $1000 a day in their spare time. More interestingly you will notice that the buzzword that is thrown around a lot is ‘Passive income’. Passive income has become the holy grail of the second income prophets. They talk about it in hushed tones. It almost has a reverential quality. Create a passive income and become financially free is their tagline.

If only it was as simple as some of these articles make out. Many times the authors of these articles are trying to sell you something. Some piece of software that will automate your selling or investing. Either way they are trying to make their ‘Passive Income’ by selling the idea of ‘Passive Income’ to you. In the end it resembles something like a pyramid. Person one at the top sells the idea of passive income to two people those two people sell the idea of passive income to another four people. This continues until eventually you have a couple of thousand of people all trying to create passive income by selling passive income tools.

I know about this because I’ve tried to create passive income in the past but with limited success. Generally I end up working very hard for the so called ‘passive income’ that I do generate. Passive income in itself is supposed to be self perpetuating by its very nature. Once you set up a passive income system it is suppose to carry on by itself using its own momentum.

So where does that leave you? You’re in debt or maybe not but either way you want a piece of this ‘Passive Income’. Well to begin with if you are truly going to go after passive income you are going to need a lot of time. Time is the one of the key elements.

Lets be honest most of us don’t have the time or energy to create a second income. I know I hadn’t. I was so busy doing nothing (well nothing important) that I made excuses and couldn’t get anything done. The few times I did get start passive income projects they invariably died a quiet death never to be mentioned again.

So what’s the alternative? It’s a lot closer to home than you think.

Passive expenses – the mirror image of passive income

No one ever really talks about passive expenses. Or certainly no one talks about them in the context of your personal finances. To illustrate what I mean about passive expenses take the example of gym membership. Say you have membership of the local gym that costs you $80 a month and is paid by direct debt. This $80 will be taken from your account every single month regardless of whether you are in the gym every day or whether you haven’t seen the inside of the gym since January 2nd.The point is that the expense is passive you don’t have to physically go out and buy anything for it to occur. You signed up once and now you pay via direct debt every month.

Now as an alternative to generating a passive income a simple solution would be to eliminate as much of you passive expenses as possible. The net result is the same. If you manage to eliminate $100 worth of passive expenses each month then that is still $100 staying in your account and not going anywhere. It means that you don’t have to invest time and energy into generating a passive income of $100.

Here is a list of some of the typical passive expenses.

Phone bill

Have a look around for a cheaper provider. There are always better deals to be had.

Electricity bill

Look for ways that you can permanently reduce your electricity bills. For example use energy saving bulbs. They may cost more initially but they will save you money in the long and there are more environmentally friendly. You’ll need to get creative while at the same time trying not compromise your standard of living.

Magazine subscriptions

Do you really need these subscriptions? Can’t you just check the magazine out in the store, see if there is anything interesting in it and then buy it if there is but don’t buy it if there is nothing that interests you in it.

Gym memberships

Be honest, how many times have you gone to the gym in the last three months? Is there anything that you do in the gym that you cannot do outside the gym? Things like going for a run, cycling etc.

Insurance

Shop around for the best offer. Usually if you go with one company for your home and car insurance then they will give you a discount. Keep looking!

Website memberships

As with magazine subscriptions – do you really need the membership? Most of the information contained in the website is probably available for free on the web somewhere else. It just takes a bit of searching.

Cable TV

Do really need those 200 TV channels? When was the last time you really watched anything on channels 50 to 200?

Rent/mortgage

If you have a mortgage, then shop around for a better deal. There are some good deals still on offer but it will depend on your individual situation. With rent maybe it is possible to rent a place for $100 cheaper a little further away from your current place? It might be worth a look. That extra $100 would go a long way.

Banking fees/credit card fees

Again shop around. Change banks if you have to. A lot of these fees can be reduced or eliminated.

The list above is only a sample of the passive expenses that people incur every month. There are other things that you could probably identify in your own situation that could be classified as a passive expense.

If you are determined to generate a second income then may I suggest that before you start that you tackle your passive expenses first. You are better off, initially at least, spending time and energy reducing your passive expenses. That way you can be sure that any additional income you earn will be adding to your bottom line and not to go to pay passive expenses.

It could be the case that in some situations if you reduce your passive expenses enough that the need for a second income could be eliminated. You may not need to take a second job or start a side business in your spare time.

Possessions – the weight of the world on your shoulders

Jun 062008

No, before you ask I haven’t joined the local communist party. I’m probably one of the most pro capitalism guys you can meet. All property is not theft. However I do believe in order and organization and in not having too many possessions. As always my reasoning behind these beliefs is practicality. If something in my life has become so bloated and impractical then it needs to go. Period.

I have in the past been accused of hoarding stuff. I had a habit of buying nice new shiny things, using them once or twice and then putting them away. It got to the stage that my apartment was overflowing with clutter and ‘stuff’. It wasn’t that it was a messy apartment but it just didn’t feel comfortable and if I was in it for too long I would start to get a little claustrophobic. Every inch of storage space was used up and the apartment was getting seriously cramped.

I lived like this for a couple of years until it finally dawned on me that the possessions I was clinging on to so desperately were adding no value whatsoever to my life. In fact they were taking value from my life. Every time I went home and looked around at the clutter my life force would drain away. Little by little the energy would sap away from me. It got so bad that I didn’t want to go home. Finally one Saturday morning after stubbing my toe on a crate of books I lost it.

I hadn’t much planned for that Saturday so I just went mad. I decided that if something is no longer adding value to my life, be it a book, a CD, DVD, clothes or whatever then it was gone. By the time I was finished going through my stuff I had a pile about two feet high.

Now I had two choices. I could sell this stuff on ebay (which I highly recommend – click here) or I could give it to charity. I decided to give it all to charity – no it wasn’t because I was looking for some good karma. It was because I was sick to death of having an apartment that I could hardly move around in. I wanted that stuff out and I wanted it out as soon as possible. I loaded it all into my car and headed to the nearest charity shop. The look of amazement on the woman’s face was worth it. I had that much stuff to donate.

What’s the point?

So what has this got to do with me? I hear you ask. Quite a lot actually. When I came back to my apartment after dropping off my stuff to the charity shop the sense of relief was enormous. I mean I can hardly describe it. I felt like a huge weight had been lifted off my shoulders. I hadn’t realized it at the time but up to that point subconsciously I think I felt my possessions me holding me back. Not just in my living space but in my life in general.

Look around your home. Is there any stuff that you don’t need that is just sitting there gathering dust? Do you feel that you can’t get rid of it because you might need it someday? Ask yourself “What value is this item adding to my life?” if it is adding little or no value then get rid of it. Now.

Don’t define yourself by your possessions

I know that it feels good to have nice things. A brand new high powered car will make anyone feel good – but at what cost? I’m sure if you were to do a poll of the people you know that are in debt then I imagine that the vast majority of them are in debt because they spent so much money acquiring ‘stuff’. They used this ‘stuff’ to define who they were instead of being authentic they simply bought into the latest trend.

Possessions can blur the lines between who you are and who people think you are. People use possessions to project an image of themselves out into the world. In a quest for self identity they just end up looking the same as everyone else. Possessions are just things that some marketing guru said that you needed. Do you really need all those things that are in the bottom of your closet? Do you use them every day?

If you are uncomfortable with talk of self identity then simply bring it down to a practical point of view. Clearing out the clutter and selling it will help you raise cash to pay off your debt. For this reason alone it is worth doing. Possessions are only things and at the end of the day there are a lot more important things like your health and wealth that you need to be concerned about. You won’t get wealthy by spending your cash on ‘things’ and your health won’t improve if you hardly have room to breathe in your home.

Impulse spending – it’ll be the debt of me

Jun 052008

Cheesy title I know. I had to think about that for a long time. J Cheesy as it may be it does contain a lot of truth – for me anyway. When I look back at my spending habits since I started working, impulse spending has played a huge part. In my opinion it was one of the primary causes of my debt downfall. For me there was no such thing as impulse spending there was just shopping. Every purchase came under the umbrella of ‘Shopping’.Now before we go on I want to point out that my spending was on the most mundane stuff you could imagine – books, CDs, DVDs, clothes. The thing was that I bought a lot of each. I would simply wander into a music store with the intention of browsing and come out an hour later with three CDs and a couple of DVDs. I can only begin to imagine the damage that impulse spending does on the bank balances of women. I’m not being sexist but there are some women I know that could buy three pairs of shoes in a day.

Women only?

No I think guys are affected by impulse spending as much as women. The difference is that the stuff that guys buy are probably not as expensive and can fulfil them for longer. The latest Xbox game will probably see more mileage than the little black number bought for the Christmas party. You see advertisers want everyone’s money. They will differentiate their advertising campaigns based solely on whether their target market is predominantly female or male. The thing is they go after everyone’s money with equal gusto.

Some of the best and brightest minds are employed with one goal and that goal is to separate you from your money. You shouldn’t feel too bad about it when you impulse spend. The reason why is because “they made me do it” is a very valid excuse. And no we’re no talking about the voices in your head. We’re talking about the hundreds of little tricks that advertisers use to get you to take action. You too can have a body like mine…for $9.99…ok you get the idea.

What can you do?

Hide in a cave somewhere? Erm maybe! But as an alternative solution you just need to take a look at your buying behavior.Have you ever gone into a shop for no reason only to come out with a bag full of ‘stuff’? Then when you get home you realize that you don’t even need any of it? It was almost like you were in a hypnotic trance. The key to defeating this behavior is to gain clarity about what you want and to become strategic about your shopping. You need to become more conscious of your shopping decisions. Sounds very grand doesn’t it?For some shopping is fun, for others it’s a chore. Either way becoming more strategic about your shopping will help eliminate impulse spending. The simplest way to become more strategic about your spending is to write a list and wait for it – stick to that list.

By writing a list of the items that you want you are pre-programming you brain to focus on the items on the list. As a result your mind will help push out the potential impulse items that are not on your list.

To strengthen your focus, make sure that when you write a list of the items to include the stores that need to go to get them. This way you are reducing the number of stores you are ‘allowed’ visit. If it’s not on the list then don’t allow yourself to go to that store.

When you go shopping do you have a list? I’m not just talking about grocery shopping. I’m talking about shopping in general. Ok I know you might like to browse and this is fine but you need to be browsing with intent. So say you want to buy a new pair of jeans, by all means browse until you find the right pair but make sure to browse with the goal of buying a pair of jeans. Not with the goal of just ‘browsing’.

If you see something else you like, resolve to buy it tomorrow and let yourself sleep on it. The decision not the item! Usually the following day you will have either forgotten about it or it will seem less appealing.

Another thing you can do to stem the tide of impulse spending is to set yourself a time limit. If you are under time pressure you are less likely to meander around the stores ‘browsing’ for stuff. If you have a time limit to do your shopping then you will be in and out and won’t have time to browse.

Ideally you should think about your shopping like a military expedition. You have your objectives – the items on your list. You have the targets you have to hit – the stores you can visit. You have a time frame in which you need to reach those objectives. This way you limit your options and reduce exposure to radiation – sorry I mean impulse spending.

Is this way of shopping fun? No not really but it is a very effective way of reducing your impulse spending. Shopping this way tends to be very matter-of-fact with very little room to enjoy the whole shopping experience. That’s the point. The more you enjoy shopping the more you want to do it and the more you shop the more you spend and the more you spend the longer it takes to get out of debt. You get the picture.

Are your vices keeping you in debt?

Jun 042008

Before your eyes glaze over and you go to sleep this is not going to be a rant about the morals of alcohol and smoking. You know the facts or at least you should make it your business to know the facts about alcohol and smoking. You see in this article I’m really only concerned about money and in particular debt. Your debt. There are plenty of other websites out there that will tell you about the ills of alcohol and smoking so I’m not going to waste too much time here. Check this link out if you want to know more. EasyQuit

If you look up the word vice in the dictionary you will get something like this

Vice: Definition: bad habit, weakness; sin

Now I’m not going to sit here and cast the first stone on the sin part so I want to use the word ‘vice’ in the sense of bad habit. I want to go further and I want you to think of your habits and whether they are good or bad in the context of your debt only. For example going for coffee with friends every morning can be considered a good thing from a social point of view but from your debt point of view it is a bad habit or a vice.

Think about your average day or average week. Can you spot any vices that you may have that are costing you money? Do you buy a daily newspaper but only read the sports or fashion section? Do you buy gourmet sandwiches for lunch even though you could make nicer sandwiches yourself for half the price? You see it’s the little daily routines that when combined have the effect of keeping us in debt.

The sandwiches and the daily newspaper are pretty worn out examples and I think a lot of people get annoyed when they hear them. Like c’mon I’ve heard this all before. Ok and I agree but it is a point worth repeating. Those daily expenses will burn you in the long run. Imagine that on average that the daily cost of your habits is $15 (including weekends) so in one year on average you will have spent $5475 on things that you don’t really need or things that you could replace with cheaper alternatives. Think about what that money could do to your debt.

As an experiment calculate the savings that you would make on a daily basis if you cut out your vices. You don’t even have to cut out your vices completely just cut down on them. So if for example you smoke ten cigarettes a day reduce it down to eight – you’re still making a saving of 20%. Once you have at least cut down on your daily vices and have calculated the saving then simply take that amount out of your wallet at the end of the day and place it a jar or money box. So if you save $7.50 a day by cutting down on your vices then place that $7.50 in a jar. At the end of the week you should have $52.5 ($7.5×7) in cash saved in the jar.

The use of the jar is very important. It acts as a psychological reminder of both the progress that you are making and the amount that can actually be achieved if you start small and work it day to day. If you were simply to cut down on your vices but not physically take the money everyday and place it in a jar it is unlikely that you would notice any difference in your debt. I’m not sure why this is because the net result should be the same. The money saved just seems to get lost among all the other details on your financial statements. I think it is probably due to the fact that when you place the money in the jar you set it aside and assign it a purpose. That money now has meaning to you.

Saving money in a jar? Are you crazy? So you’re not an eight year old anymore? No you’re not but can you remember when you were? Did you save your pennies in a money box? It felt good didn’t it? By saving the money that you free up from your vices I’m trying to get you to tap into that same feeling you had as a child. I’ve always saved some of my money this way. Whenever I had loose change in my pocket I would throw it into a jar at the side of my bed. I remember once in college I was so broke that I couldn’t afford my train ticket home. Then I remembered my jar full of change. I didn’t think that there would be a whole lot of money in it but I decided that I needed every cent I could find. When I was through counting it the total was about $170. It was first class all the way home!The simplest things are usually the most effective and I have found this to be true over and over again. The idea of saving money in a jar is nearly too simple. I’m not saying you should be putting your life savings into it. What I am saying is that any money that you can honestly say that you have saved as a result of cutting down on your vices should be put in the jar to help motivate you and keep a record of your progress. Simple but effective – just the way I like it.

Debt Management – Analysis Paralysis

Jun 032008

If debt is eating into your life, eroding your sanity then it is likely that you’re sacred and worried. You’re probably not even sure how you got into this situation. You know that you want out but you don’t know which way is out. At times it feels like you are running around in circles chasing your tail. When you do focus on the problem it just seems too enormous to know where to start. What? Where? When? How? All these questions go racing through you head and puts you in a spin.

Thinking about your debt problem too much can lead to a situation called analysis paralysis. I’ve seen this repeated over and over again and not just in relation to debt. What happens is that when someone is faced with a problem they tend to over think the situation. They over analyze every single aspect but in the end take no action because every action they think about taking they come up with ten reasons not to take it. Their thinking is like a constant battle between finding solutions and finding problems with those solutions. The net result is zero. No action gets taken and the problem still exists and in many cases the problem is even worse because of the time lag.

If this situation describes you or if you have experienced this first hand then don’t worry. I’m pretty sure we all have experienced it at some stage in our lives. I certainly know that I have and no doubt will do it again. By sitting there and thinking about a problem we feel like we are making progress and this would be correct up to a point. At a certain point we slip from constructively thinking about a problem to over analyzing it. When is that point reached? It’s hard to know but when you find yourself coming back to the same solutions over and over again and thinking the same thoughts you can be sure that your are stuck in the analysis paralysis loop.

The attractive thing about thinking and analyzing a problem is that it doesn’t really involve too much physical effort. By thinking about a problem in abstract you don’t have to get too involved and can avoid getting your hands dirty. The ironic thing about analyzing a problem to death is that the more you think about the problem the less likely you are to find a solution or at least a solution that you are happy with. Its fine and dandy to spend time thinking about the latest advances in budgeting software and how it will solve all your debt problems, but until you get up and take some action none of your debt problems will be solved.

With debt there is very rarely one grand solution that wipes away all your debt problems. It’s more the case that the solution to your debt problem is made up of lots of different smaller solutions that when combined prove effective. Looking for that grand solution that will solve your problems will likely be a waste of time. What you need to look for is lots of small and simple actions that you can take that will all contribute to solve your debt problems.

The great thing about smaller actions is that they are generally easier to take. As a result smaller actions can help you get out of the analysis paralysis funk. On top of that the smaller solutions usually involve forming positive habits that will serve you well into the future not just in the here and now. Smaller actions cost less in terms of both time and energy. They are generally simpler to implement and while on their own may not be as effective as you would like, combined with other small actions they can be a potent force. With small actions it’s a case of the ‘sum of the parts is greater that the whole’, in other words the small actions are best when combined with other small actions and in turn they are more effective than one grand action.

What small actions?The key with small actions is to devise a list of actions that are suitable to you. Not what someone else thinks is suitable for you. You need to push yourself but not over exert because otherwise you will get annoyed when things don’t happen as fast as you would like.

So at this point I’m advising that you do actually sit down and think. No for too long though. Think about all the small things that you can do to improve your financial situation. Start writing them down – make a list. The things on the list can be miniscule actions like taking the coins in your pocket and placing them in a jar. Seriously. What we are looking for is a list of small reinforcing positive actions with each action feeding on the momentum of previous one. At some point you will reach a critical mass and have a breakthrough with your struggle with debt. This works – trust me.

Once you have made your list take the easiest item on the list and do it. No! Not the hardest item the easiest. You don’t go from learning to drive one day and competing in the Indy 500 the next? Take it easy. Remember the goal here is to get you out of the analysis paralysis funk and into a state of taking action however small.

Try to make it a fun experience and make sure to reward yourself when you complete each task. The rewards should be in proportion to the actions you take so if you honestly think that you took some serious action then give yourself a good reward. The reward shouldn’t be monetary. It could be something like watching reruns of your favorite TV show.

It’s easy to be seduced into thinking that you are making progress with your debt when you are thinking about it all day. It’s true that in order to physically go somewhere you need to go there in your head first i.e. see yourself in that place first and mentally prepare yourself for the journey. However every thought needs to be expressed in physical action so there is no point spending your entire time thinking and talking about something when you should just be out there doing it. Time waits for no one and the long you sit there thinking about something the further away it is moving. So please don’t be all talk and no action when it comes to your debt.

Cash flow calendar – a lifebuoy in a sea of debt

Jun 022008

Cash is the life blood of any organization or so my college lecturer said many moons ago. He would also follow up the comment with something like this “many a profitable organization went under due to the lack of cash”. To be honest I never really understood what he was on about. I simply just took it to be some business philosophy that was great in theory but in the real world things didn’t work that way.

It was only when I got into the ‘real world’ that I finally understood what my lecturer was on about. The thing was that I didn’t need to have my own company to learn the full lesson. When I first started to receive income from a job I came to fully understand what the statement “cash flow is the blood of any organization” really meant. You see if you think about it you are in effect an “organization” or at least you operate along very similar lines. You receive income (from a job/property etc.) you have expenses (food, mortgage, phone etc.) that allow you to go about your daily business and at the end of the month you either have money left over or not (profit or loss). Just like any organization if you are constantly making a loss (i.e. your expenses are greater than your income) then you will eventually go bankrupt.

The simple accounting principles at play here apply equally well to your financial situation as they do to the financial situation of any large corporation. Money in and Money out.

When you think of cash you tend to think of the hard physical green stuff – right? Well in this situation I want you to expand your definition. From now on when you see the word ‘Cash’ mentioned in this article I want you to think of it as not only the physical notes but also as any access that you have to credit. So if you had $500 in notes, $3000 in the bank and $4500 available credit on your credit card then to me your total cash available is $8000 ($500+$3000+$4500) Confusing eh? But it is important. By thinking of your cash available in terms of both physical cash, cash in the bank and credit remaining you open up the flow of that “life blood” into your financial life. This is what will make all the difference.

For many people in debt and who struggle financially the problem isn’t so much lack of income. A lot of the time the problems seem to stem from the inability to manage the timings of their incomes and expenses. Here is a simple example. Let’s say that I get paid $3000 at the end of the month and let’s say that my average monthly expenses are $3200. Now imagine that the day after I get paid all my expenses for the month are taken from my account. So now I have negative cash of $200 ($3000-$3200). Now imagine that my car breaks down and I need to pay $500 to get it repaired. This $500 has to come from somewhere and if I don’t have credit available I will be walking to work for the rest of the month.

The point that I am trying to make is that in order to keep our heads above water we need to smooth out our outgoings and have a little in reserve to meet the unexpected expenses. Many organizations can manage to stay afloat for a long time while they continue to make losses. The same can apply to you. If you are struggling financially and find that at the end of the month you do not have enough to pay your bills then your need to look at your cash flow calendar.

Cash flow calendar

In simple terms a cash flow calendar is a calendar that highlights when your income and expenses fall due. In any given month you may have things like birthdays and weddings that you may need to budget for. On top of that a cash flow calendar allows you to identify any potential times of the year or month when you are likely to have a shortfall and this will allow you to make contingency plans.

A cash flow calendar can and should be used as the foundation of any budget. In order for any budget to be effective you need to know when your expenses fall due. The thing is most people’s budgets simply go on a month by month basis, their budgets never actual take into consideration the very important issue of timing.

The big thing about being in debt is the constant worry about having the funds to pay bills when they fall due. Some bills will get priority as they are taken via standing order from your bank account. Other bills are more discretionary in that it is up to you to go and pay them. It is these discretionary bills that can cause the most mental stress. The reason is that mentally we have prepared ourselves for the standing orders coming out of our account. We know each month like clockwork that the bills will be paid. However with the discretionary bills we have to build ourselves up to pay them and more often than not we end up putting them on the long finger.

From a cash flow point of view it is these discretionary bills that throw a spanner in the works of our finances. The great thing is that if you have a cash flow calendar you can look at it and see what else is due to go out that month. If there is enough slack in your current funds then you can pay the discretionary bill. For example any bills that tend to be bi-monthly i.e. they come every too months, can catch us unawares. How often have you scratched your head thinking ‘didn’t I just pay this bill last month?’ If you have a cash flow calendar and were expecting this bill then you can build it into the budget for that month.

Building a cash flow calendar

Building a cash flow calendar is really simple. Depending on type of person you are you can use a spreadsheet or an actual calendar that you would hang up on your wall. I tend to use both! I use a calendar that I hang up on my wall so that I am constantly reminded of upcoming bills and expenses and I also use a spreadsheet because it is easy to calculate totals and edit amounts. I recommend that you do both as I have found from experience that using both is very effective.

All your income and expenses need to go on to the calendar. It needs to be a reflection of the flow of cash into and out of your financial life. The calendar will help you create a mental picture of your financial situation at any one time and will help eliminate the stress of unexpected bills. When you receive and unexpected bill you can go to your calendar and see how much room to manoeuvre for the rest of the month and how much you can afford to spend. This will empower you and will give you key insights to your spending habit.

It will take a bit of trial and error to get the calendar accurately reflecting your cash flows. When you look over old cash flow calendars you will be surprised at how off you can be. Don’t worry this is natural and comes from the tendency to over estimate income and underestimate expenses.

Cash flow calendars should be used in conjunction with your budgets and not instead of them. Think of cash flow calendars as a tool that gives you a quick up to date idea of your financial situation. As the months and year go by you will see that this will lead to better financial decisions.

As with the rest of the tools in your financial armoury this needs to be used regularly to be effective. Cash flow calendars are highly effective for such a small and simple idea. The benefits to you can be enormous and the cost miniscule. Remember with cash flow calendars you only get out what you put in so makes sure that what you put in is quality.

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