Playing musical chairs with debt

Jul 312008

I was going to call this article ‘Robbing Peter to pay Paul’ but something in that phrase implies that while Paul might get paid what he is owed – Peter never gets paid and never seems to bother reporting the crime.

If you’ve been juggling your debt by borrowing off one source to pay another you know that while Peter may get paid some of what he is owed Paul isn’t long about coming looking for his money back.

To me juggling debt in this fashion could be more accurately described as a game of musical chairs. (For those of you that haven’t heard of the musical chairs game here’s a link to an explanation – musical chairs.) The reason I think musical chairs is a more appropriate description is because when you juggle debt by borrowing from one source to another you are gradually tightening the choke hold on your finances. As with musical chairs each time the music stops or you receive a bill your options become more and more limited until eventually you are eliminated from the game.

Elimination from the debt musical chairs game could take the form of bankruptcy or foreclosure.

If you are playing the game of borrowing from one source to pay off another then you might congratulate yourself that you have made all your minimum payments – well done, you may just have a perfect credit score. Now for the unpleasant part, what happens when your sources of credit runs out? Is it possible to continue doing this forever?

Once in the vicious cycle of juggling debt then it’s like a treadmill where you are running just to stand still. It can be incredibly difficult to break this cycle without missing payments on your debt.

However I think the alternative to not breaking the cycle is much worse.

Each month as more borrowing is used to make the payments on existing debt the pressure on your finances continues to mount. Your borrowings are growing monthly but not only that, the new borrowings you take on to meet your payments will start to accrue interest. If you are using credit cards to do this you are effectively using borrowed money to make interest payments which in turn will start to cost you more interest. Confusing? Don’t worry all you need to know is that you will effectively be charged interest on interest just to maintain your current financial situation – not good.

As you can imagine what may have started out as a small debt can morph into something much larger and uncontrollable.

Juggling debt – seemed smart at first.

I use to do a bit of debt juggling a couple of years ago. My overdraft was at its max and I needed to make a few loan repayments so I put them on my credit card. I figured that it would be just this one time and that I wouldn’t need to do it the following month. Unfortunately the following month the same thing happened and I ended up using my credit card again to pay some of my loan repayments. This went on for about four months and if I’m honest I really started to feel the pressure as my credit card fast approached its limit.

The last thing I wanted to do was to increase my credit card limit or get a new credit card. It was looking more and more likely that I was going to have to do one or both of those things. I was getting deeper into debt and the interest and fees were mounting fast.

I had no other choice but to move out of my rented apartment and back in with my parents. Not the most ideal scenario for a young man in his twenties. Needless to say this was a huge saving for me and it allowed me to divert what I would have been paying in rent towards my debt. It was not without its cost however – emotionally I felt like I was taking a huge step back. I had moved out of home a few years previously but now I was back living with my parents. As you can imagine I didn’t go around broadcasting the fact.

I was lucky in that I had the option of moving back in with my parents. Most people aren’t as lucky. However in most people’s situation there are one or two pieces of radical action that they can take to jumpstart their debt repayments without having to resort to additional borrowing.

If you are caught in this game of debt musical chairs then you have to ask yourself what action can you take that will have the biggest impact on your debt?

Normally I would be focused on long term change of habits – obvious things like quitting smoking. However in this situation the focus is purely on the short term. Could you sell or trade in your car for a smaller cheaper one and pocket the difference? Could you move in with your parents or a friend or even into cheaper accommodation? Could you rent out a room in your home? Do you have anything of value that you could sell?

Painful options and difficult decisions I know but not half as painful or difficult as playing a constant game of musical chairs all the while waiting for the music to stop.

Walking away from your debt

Jul 302008

My initial reaction to writing this article was simply ‘don’t go there’. Part of me didn’t even want to entertain the idea but another part of me wanted to give you a chance to decide for yourself. The goal of this website is to provide information and motivation to get you moving on repaying your debt. To discuss walking away from your debt is to go against almost everything that I have written on this website – however recently I have had something of an epiphany.

Before I go on I want to point out here that the main focus here is walking away from your mortgage not credit card debt or unsecured loans.

Yesterday I read an article on the BBC website called ‘America’s house price time bomb’. At first I thought it was going to be the usual parade of facts and figures about the number of homes foreclosed that we are all too familiar with. Up to a point that was the case but then the article talks about a woman who bought an apartment in California in May 2006.

The woman bought the apartment in May 2006 for $500,000. This year her apartment is now worth $300,000. She still owed $500,000 on the mortgage. She had negative equity of $200,000. The interest rate on her mortgage had recently increased. The interesting thing was that she was a well paid professional who could easily have afforded to make the new higher repayments. Instead she simply decided to walk away from her mortgage. By her estimates it will take about five years for her credit record to get back to where it was before she walked away.

The way she justified it was that it didn’t make financial sense for her to continue paying a $500,000 mortgage on a house worth only $300,000. She asked the question “Is the bank going to pay for my retirement because I was a good girl and paid my mortgage”.

I did some further research about walking away from your debts and I came across another article on CNN.

The thing that really interested me about this article was the comments section – when is it okay to walk away? The comments that were posted represented all sides. Those who favoured walking away as a possible solution to debt and those who were against it – it is well worth reading the comments to get a feel for the general opinions on the subject.

I reckon that the biggest thing that prevents people from walking away from their mortgages is the social stigma associated with it. People don’t want to be seen as a quitter. However according to the BBC article there seems to be a change in this attitude. There is growing acceptance of the fact that the housing market is on a serious downward trend and that it’ll likely be years before it recovers. The pervasive attitude now seems to be that people should do what is best for their financial interests.

As the need evolves so do websites to cater for that need – one such website is youwalkaway.com. I’m not in anyway recommending this website I am just letting you know of its existence.

So now for the hard part – where do I stand on the issue?

Almost every time that I write an article on debt and repaying debt I make some reference to personal responsibility. We are all responsible for our own individual actions. What this means is that if we have a debt problem then it is up to us to solve that problem whatever way we can.

I don’t know you personally and I don’t know your financial and personal situation but if you are reading this the chances are your financial situation is not good. If walking away from your mortgage is your way of taking responsibility for your debts then so be it. It should however be the option of absolute last resort. You have to give repaying your debts your best shot. In years to come you don’t want to be looking back and regret not trying harder to save your home.

Fortunately I’m not currently faced with a debt situation as emotionally hard as foreclosure so perhaps I’m not the best person to be asking for his opinion on the subject. I’m sure I would be singing a different tune if I was faced with foreclosure. I’ll admit that prior to doing research on the subject I would have been in the ‘don’t walk away camp’ but I’m now of the opinion that some people may have no other choice and it is in their best interest to walk away. I’m sure it’s not a decision they take lightly. To those who are judging the walkers I say try walking in their shoes for a while before you make any judgements.

Can’t break the cycle of debt?

Jul 292008

If you’ve been trying to shake off your debt for a while now but with limited success then it is possible that more radical action is needed. Once you are caught in the debt cycle it can be incredibly difficult to get out of it.

I have been caught in a debt cycle for a number of years now. I’ve come to a few conclusions based on my experiences and these are backed up by the experiences of my friends and from what I’ve read on the internet.

The desire to consume ‘Stuff’ never really goes away. You may tame the urge to spend for a while – maybe even a couple of years but deep down the urge to spend is still lurking and waiting for its chance to get you back into the debt cycle.

Strangely as you approach your goal of getting rid of your debt the pressure and hate of debt seems to take a back seat. You have slain the dragon that is your debt. It no longer holds any fear for you so maybe just maybe it would be okay if you charged just one small item on to your credit card. It’s okay because you have your debt under control right? Nothing to worry about you will pay it off next month.

This situation is a lot more common than you would think. Once you have got your existing debt down to an acceptable level you grow in confidence about your ability to manage further debt. Before long you are back in serious debt. I’ve seen this happen over and over again. No one ever seems to get off the debt treadmill 100% and stay off it forever.

Luckily there are a few key changes to your lifestyle that you can make to break this cycle for good. The bad news is that these changes are hard to do.

The idea behind these changes is that you are no longer in harms way so to speak. The aim of making these changes is to reduce the influences that were causing you to overspend and consume in the first place. By making these changes you are in effect trying to shut out consumer life.

Change one – Change who your friends are

I did say this was hard. The logic behind this is that if your current set of friends have been enabling you to indulge in spending then simply cut them out. You want a set of friends that will support you and understand what you are going through. You don’t want to be around people who are constantly spending or talking about spending as it will put you under pressure to spend. This is not where you want to be.

Change two – Go on a media diet

I have discussed this at length in the following post, Media diet – useful in slimming down your debt? In this post I discuss the merits of reducing your exposure to the influences of advertisers by cutting down on your media exposure. One thing I learnt having tried to do this myself is just how difficult it can be to achieve.

Change three – Pick something big you really want and save hard for it

As you approach the point of debt freedom you are approaching the hardest part of your journey. The end is in sight but your fear of your debt will most likely have diminished and the temptation to shop and spend will be huge. It is at this point that you need to give yourself a new, hard to achieve financial goal.

The goal could be something like saving for a big holiday or saving for a new car. The thing is the goal has to motivate you and no matter what you have to commit yourself to SAVING for that goal. Buying that goal on credit will be considered cheating. You must save for it.

By having a big savings goal you are taking the focus off your fast approaching debt freedom. It gives purpose to the money that you were using to pay down your debt and in turn it should limit your desire to take on more debt.

How easy are these changes to make?

Not easy at all. But don’t let that put you off. Paying down your debt is not easy but you’re on your way to doing that. The changes outlined above are necessary if you want to make it out of debt and stay out of debt and ultimately break the cycle of debt.

Even just making one of the changes outlined above should give you enough momentum to stay out of debt but if you could combine all three together then you can break the debt cycle for good.

If you are in debt and hate your job then read this.

Jul 282008

If I’m 100% honest I can’t think of any job that I have had since college that I have truly loved. Some jobs I liked and some jobs I hated but none I that loved. From what I gather most of my friends and work colleagues have had the same experience. Work to them is just that – work. If they had the choice they would much rather be somewhere else doing something else.

I often wonder why we bother.

Why not just jack it all in and go live on a small farm and become self sufficient? Then I could close my doors and my mind to the ‘real’ world and live happily ever. This is one of my little daydreams around the daily three o’clock slump. When my energy is sagging after lunch and just before I go for my ‘get me to 5:30’ coffee I seem to slip in to daydreaming mode. Physically I’m at work but mentally I’m a million miles away. It is in this daydreaming mode that I dream of upping sticks and heading to the country with my solar panels strapped to the roof of my car.

So why do I have these daydreams? It’s simply because I don’t like my job and I hate the fact that I have to stay in it to pay my debts. I use my daydreams as an escape from the pain of my job and my situation. I’m not alone in this. At any given point in my working day I can look around the office and see one of my colleagues with a thousand yard stare on their faces and I just know that in their mind they are on a beach somewhere.

So what keeps me and my colleagues in jobs that we don’t seem to like much? The simple answer is debt.

No matter how much you want to leave your job and take the risk of going after what you truly want in life, if you have debt then you are unlikely to take the chance. Most people would rather languish in a job that they hate rather than risk disruption to their income by going after a dream or even just a better more challenging job.

I understand this completely as I am one of those people.

Here’s my logic and reasons behind staying in the same job until my debt is paid.

Consistency – If you have a debt repayment plan, any sort of debt repayment plan, then one of the key things you are going to need is consistency of income. The last thing that you need is for your income to be disrupted. Your plan is based on your current income levels. When you shift jobs you may increase your income but there may be a readjustment period depending on the dates of the pay in your old job versus your new job. This can be unsettling and may cause your debt repayment plan to go off kilter.

Change – No one likes change. Changing jobs is regarded as one of the more stressful life events. If you are already stressed enough by the weight of your debts then the last thing you need is additional stress of starting a new job and trying to bond with new work colleagues. In your current job the chances are there are people you like and people you don’t like but either way you know their moods and quirks and they know yours. While it may not create a perfectly harmonious work environment it does enable you to navigate work politics a lot easier than if you were the newbie.

Focus – If you know your job inside and out then you have a certain level of comfort with it. You generally know what to expect and when to expect it, you have daily routines and habits. This level of comfort with your job allows you to free up energy to focus on your debt repayment plan. That’s where you want to be – in a situation where you can focus on eliminating your debt. Not in the situation where you are anxious and worried about your new job and also worried about your debt. The chances are one of them will suffer as you try to give attention to both and from personal experience the one that will slip is your focus on your debt plan.

But you absolutely hate your job, right?

I can identify with this completely. As I mentioned in a previous article I was in the situation where I hated my job and had a bucket load of debt. The situation became unbearable because I resented the fact that I was trapped by my debt in a job that I hated. Eventually I realized that my attitude was working against me and moving me further away from my goal of paying off my debt. I set about slowly making amends by focusing on how my job allowed me to focus on paying off my debts.

I knew the job inside and out and I could practically do the work in my sleep. I realized what a huge benefit this was. After awhile I began to look on my job as an enabler – it allowed me to get paid a consistent income and focus on my debts without having the stress and worry of trying to prove myself in a new role.

Ok so you still hate your job?

Then think long term. Your ultimate goal should be to get debt free and get a job that you like and enjoy. The logical order should be that you focus on paying down your debt and then you can pour all your energy into getting that job or new career that you want.

I know from painful personal experience that staying in a job you hate is incredibly tough. Everything is telling you to run screaming from the building. Then to solve the problems of your debt and your job then you need to focus on them one at a time. Debt first job second.

The simplest way to survive in a job that you hate is to develop coping strategies. You could give yourself simple rewards to get yourself through the day. You could develop a long term plan that incorporates paying off your debt and then switching to a new job or career. Set a specific date in the future that you aim to have X amount of debt paid off and a new job in the pipeline.

Remember that while you may hate your job now you don’t have to stay in it forever. You will move on and find something you like better. Look on your current job as a means to an end. See the benefits that it offers you as you tackle your debt burden. I’m sure when you look back on your current job in ten years time that you won’t even remember the bad stuff – all that you will remember is that you put your head down and got on with it.

How long could you survive if you lost your job?

Jul 252008

I’m not trying to be all doom and gloom but I want you to start thinking about how long you could survive financially if you were to lose your job. How long could you continue to pay the bills? Six months? Six weeks? Six days? I know its not nice thinking about these things but deep down I reckon most people realize that planning for redundancy is very important in today’s weak economic climate.

Have you put much thought into it? If you are like most people then the answer is probably no. That’s ok because I never really put too much thought into it either. That was until there was a series of head count reductions in the company I worked for.

It was around May 2004 and the company that I worked for at the time was going through some serious difficulties. As a cure for these problems management decided that it would be a good idea to reduce headcount by 15%. For some strange reason the department that I worked in was particularly badly hit. I estimate we lost about 40% of the people who worked there.

What really got to me was what happened to the people who lost their jobs after they left the company. I remember thinking at the time that the redundancy packages were fair and that they should allow the people who were laid off enough time to find a job. Part of me was even envious at their enforced break. The thing that I hadn’t taken into consideration was how much the jobs market had changed.

After about three months most of the people were still struggling to find work and by this stage they had spent their redundancy packages on day to day living expenses. I remember hearing that a few of them were getting into serious financial trouble because they had been sailing pretty close to the wind financially even before they lost their jobs. The loss of their jobs tipped them over the edge financially.

Stories like this got me worried. At the time my financial focus was on paying down my debts but a part of me realized that I should be paying more attention to creating a big emergency fund. But not only should I have been increasing my emergency fund I should have been doing other things to cushion the blow of any potential redundancy.

To ease my worries I set about doing three key tasks.

I gave myself a period of 4 – 6 months in which to complete these tasks. I figured that because management had just completed a round of redundancies that it would be at least another six months before they would go at it again.

The first thing I did was to calculate how much money I needed to survive and pay my bills for six months. I calculated this figure by taking my monthly expenditure on essential items and multiplying by six. I then estimated any big bills that could potentially come up in any six month period – things like car maintenance, insurance, tax etc. I added the two figures together and I came up with a figure of $7800.

I resolved within myself to save like a crazy man until I had hit that target. It was highly ambitious given that I was still repaying debts but I felt that it was the right time to be focusing on building a big emergency fund.

The second thing I did was that I tried to do as many of the internal training programs that were run by my company as I could. Everything from building rapport to client management, I did as many as I could. The training was free as it was run internally. The budget for training had been cut deeply but if you put your name down far in advance you could pretty much get on any course you wanted.

By doing a lot of the internal training it achieved two very useful aims. The first was that management saw that I was eager to learn and that I was motivated. The second was that I was developing very saleable skills that I could put on my CV and bring to any potential future employer.

Finally the third thing that I did was to begin researching the jobs market. I became familiar with the companies that were recruiting. I would scour the jobs websites maybe once or twice a week to get a feel for what was out in the market. At the same time I was fine tuning my CV. I updated it and I began to tailor it to suit the roles that I was interested in pursuing should I have been made redundant.

The net effect?

The six month period that I set myself to achieve these tasks passed without incident. Work went on as normal once the office had calmed down after the upheaval of the redundancies.

I managed to save a total of $5400 – it was short of the target but it was still some going all the same. I was proud of my achievement.

I continued to do the training courses and research the jobs market.

These tasks combined to leave me in a much stronger position than my colleagues if there was to be further redundancies. I wanted to be playing from a position of strength if I got that redundancy letter. As soon as I started to work on these tasks I took the power back into my own hands. I have to admit that it gave me an immense sense of relief to know that if worst came to worst that it wouldn’t be so bad after all.

Now it’s your turn to examine your contingency plans for redundancy. Do you have a contingency plan? Can you see the merit in having one? A lot of people get caught short when they are made redundant. They don’t have any emergency funds and as a result tend to rely heavily on credit cards and bank overdrafts – this is a recipe for disaster. Don’t let that be you. Start as soon as you can to build contingency plans for your job should it go pear shaped. You just never know what is around the next corner.

Living Paycheck to Credit card to Paycheck

Jul 242008

Don’t get me started on the treadmill that was my (mis)management of my monthly Paycheck. Ok I’m not as bad at it now as I was about five years ago. Five years ago I was living Paycheck to Paycheck, heavily in debt and I was not coping well at all. I had let too many small things slide and I was paying the price – both financially and emotionally.

Every month I was using nearly all of my overdraft facility – sometimes I would even go over my overdraft facility and incur heavy fees. To avoid any embarrassing situations I would transfer funds from my credit card to my bank account so that I could meet my bills. I was paying my bills and meeting my obligations but it was a serious struggle.

Day to day living expenses were met with credit cards. On the 28th of each month I would receive my salary into my bank account. The amount of my salary almost always matched my overdraft. I would go to my bank account and see a balance of almost zero in my account on the same day that I got paid. Sometimes the balance on the day I got paid would be negative. For those of you who have experienced this you know how depressing it can be.

My work began to suffer. Now most logical people would think that my work should improve as I needed to have a job to pay my bills. The better I became at my job the more I would get paid and the sooner I would get out of this financial hell – right? Nope, not for me, I began to seriously resent my job and the people I worked with. I began to resent the fact that I was trapped and that I should be paid more and if I was paid more then all my financial problems would disappear.

The ironic thing is that I was relatively well paid and that the people I worked with were for the most part very nice and pleasant. There were plenty of opportunities for promotion and travel but I didn’t want any of it. I was just so focused on obsessing about how unfair the whole thing was.

Little did I know that I was digging a deeper and deeper hole for myself with this attitude. I was getting more and more frustrated with work and my financial situation and in turn this made me angry. I was angry at the world and for a while I was not the most positive person to be around.

How I got out of this vicious circle

I slowly came to the obvious conclusion that there was one common factor to all my problems and that common factor was ME. This realization took me months of banging my head against the wall, it wasn’t just a sudden ‘a ha’ moment. These things rarely are – no matter what the self help books tell you – it took me time to realize and accept that I was the cause of my problems.

Once I realized that I was causing my problems things became easier. I could now have a direct impact on my situation through my own actions. I was the cause of the problem and I was the only one who could solve it. My anger and energy had been misplaced and I now realized that I had to act fast if I was to make up lost time.

Despite my eagerness to make changes things didn’t start to happen for a further couple of months. The process of changing my financial habits was a very gradual one. I liken the change in habits to an oil supertanker in the ocean trying to turn around. The supertanker is so big that it can take up to 24 hours for it to turnaround. Things happened gradually for me.

I started to stop going out with friends at the weekend. Usually we’d go to a bar one or two nights a week and then on to a club. I first reduced this to once every two weeks and the eventually to once a month. This was one of the major contributing factors to me getting control on my finances. I was wasting way too much money partying and all I had to show for it was a sore head and empty pockets.

I did lose a few friends as a result of my reduced social activity but I now think they weren’t real friends to begin with. If you were to analyse my fight against my overdraft I suppose these friends would come under the category of collateral damage.

Another thing I did was that I brown bagged my lunch for maybe three out of the five working days in the week. This wasn’t very glamorous and I did receive a bit of stick from my work colleagues but that just made me more determined.

At work, instead of trying to fight everything and go against the flow I simply decided to go with the flow. Whatever happened at work happened. My work was not me and didn’t define me as a person – it was something I did to pay the bills. A bit short-sighted I agree and my long term career prospects might have suffered but I don’t think they suffered as much as they would have had I stayed in the negative/angry mode of thinking.

Eventually my attitude to my work softened and it became a lot more pleasant than I thought possible. I left that job a few years later for another but it was on the best of terms.

I didn’t go for a radical financial overhaul. I was eager to change but I don’t think I would have stuck to it for very long. I did things slowly. Gradually I began to notice a difference in my bank balance on the day I got paid. My bank balance was staying positive for longer and longer each month. It was a strange but refreshing feeling to reach the middle of the month and still have money in my bank account and not to be overdrawn.

The things I learnt.

The most important thing that I learnt was that it takes time to make changes. No matter what the gurus say – change takes time – don’t beat on yourself if you haven’t solved all your financial problems in six months.

The second thing I learnt is that you have to be realistic. You can’t draw up a plan that expects you to make major sacrifices straightaway. Can you really stop something like smoking overnight? Some people can but as I mentioned above change takes time. You need to factor this into any plans you make.

Finally another major thing I learnt from my living Paycheck to Paycheck is that the unexpected happens. You can’t plan for everything but you can counter the effects of any unexpected expenses by putting a little money away each month into an emergency fund. Start the emergency fund as soon as possible – it might delay you getting out of debt for a few months but it offers a safeguard against falling further into debt.

Living Paycheck to Paycheck is a very unpleasant situation to be in. By the time you notice there is a problem it is nearly too late. The overdraft facility just crept up on me while I was sleep walking through my finances. It was an easy mistake to make but a costly one nonetheless.

The New York Times series on debt

Jul 232008

The New York Times recently compiled a series of articles and video clips about people in debt called ‘The Debt Trap’. These stories give a harrowing account of the debt turmoil that many people are facing today.

It’s not just another set of ‘woe me’ debt stories. These people are showing courage under fire. Some of them suffered from bad health which then tipped them over the edge. One couple simply wanted a better future for their kids – nothing wrong with that.

Here is the link: The New York Times ‘The Debt Trap’ series on debt

Why more debt stories? Well I think you can use these stories as further motivation to focus on your own debt situation. If any good is to come from their situation let it be that we try to learn what went wrong in their situation and how we can avoid repeating the same mistakes.

I found the series truly tragic and I was moved by their stories. Unfortunately I know these are stories that are being repeated everywhere. These three stories are just a sample of the torment that people are going through.

There is one thing saying that we are all in this together – there is quite another trying to live that reality. While we must always accept responsibility for our actions and we must solve our debt problems on our own – we don’t have to be alone. There are plenty of good forums and even in the comments section of posts like this where you can discuss your debt problems.

If things are bad and you feel that you simply can’t cope with your debt burden then perhaps you might consider joining your local Debtors anonymous. It’s just a thought. If you had friends and family to turn to for support then that would be ideal. However some people might feel more comfortable talking about their debt problems with people that they do not know. I respect and understand that.

Decide what is right for you and then do something about it. Get the support you need – don’t suffer alone. Get a release from the pressure and talk to someone.

Help with Debts

Jul 222008

Getting help with debts can be hard. Based on my past experience one of the key stresses on relationships is when there are financial problems and each person in the relationship is looking to the other for help with debts. One is hoping that the other will come up with something to solve the problem. Instead of looking to themselves to solve their problems they look to the other person in the relationship to carry the burden.

While the mantra of ‘we are in this together’ is a powerful one, the reality of most relationships is somewhat different. Debt and money related problems will create a claustrophobic atmosphere in any relationship. Self preservation instincts kick-in in negative ways. After a while it is no longer a case of ‘our’ money problems but more likely ‘his’ or ‘her’ money problems. A split in thinking between the couple becomes apparent and if nothing is done to heal this split then it usually is not long before the split becomes real and permanent and the couple go their separate ways.

For those of you in a relationship that is currently experiencing money and debt problems then it can be very hard to see the ‘wood for the trees’. Your debt problems are probably so big, real and pressing that you do not have the time or perspective to look at the small problems developing in your relationship. This situation is highly understandable but unfortunately it can lead to serious trouble.

What to do?

I’m no relationship expert and I don’t claim to be. What I am suggesting here is based on personal experience, research and huge dollop of common sense.

One of the simplest ways to solve your debt problems and in turn help heal any rift in your relationships is to take the initiative and lead by example.

What this basically means is that you are no longer sitting around looking for others to help you but instead you are out there making it happen for you. Whether this means you getting a new or second job or selling your car for a smaller model or even cutting coupons – it doesn’t matter. It is the fact that you are demonstrating leadership and determination to make right past wrongs. You are out there fighting the good fight. At the end of the day your partner will see that you are taking action and making every effort to turn the situation around.

The hope is that your partner will, having seen your efforts to change, be encouraged to make changes of their own. When this starts to happen and they have made a few changes you can begin to plot a common strategy that both of you can work on. Common goals lead to teamwork and in turn lead to a move away from the blame and shame tactics that are so often used to hurt.

Generally a catalyst is needed to kick start change. In a relationship it can sometimes be the case that change doesn’t happen unless an external force comes into play. I say why not pre-empt change and be that catalyst? By taking the lead you are the one in control and you can direct the flow of action.

Debt is the slow rot that will sink your relationship. The guilt, fear and worry that it brings is enough to unsettle even the most solid of foundations. Stop that rot now. Take the small messy and ugly steps towards paying off your debts. Your actions don’t have to be pretty, clean and clever – they just have to move you in a positive direction.

The more serious you can show your partner that you are about repaying your debt and sorting your finances the more likely you are to stop the rot.

Look after yourself first – your debt second

Jul 212008

I recently read a comment on a finance website by a guy who was deeply in debt. He had a huge mortgage and had major debts that he incurred when his business failed. The thing that struck me was his comment that he thought he was losing his mind. He was having sleepless nights and during the day he was too tired to take any meaningful action on his debt.

In a previous series of articles I asked the question “Do you have the energy to fight debt?”. In most peoples cases the answer is a resounding no. The comment by the guy in debt is typical of the emotions and feelings that people experience when they are confronted by a wall of debt. Sleepless nights, worry, stress and the inability to take positive action seem to be the order of the day. I should know as I’ve been in that situation on more than one occasion.

The energy aspects and how to motivate yourself are dealt with in the ‘do you have the energy to fight debt’ article. In this article here I want to focus more on the fact that most people don’t seem to put themselves first when it comes to sorting out their debt.

When debt is coming at you from all angles the general tendency is to curl up into a little ball of negative emotions. Lack of knowledge as to how to deal with debt and lack of income to pay down the debt combine to create a very tight corner. A lot of people who find themselves in this situation tend to constantly beat themselves up. Somehow believing that things will get better if they beat down on themselves, that somehow the harder they are on themselves the quicker the debt will get paid.

This logic is clearly flawed yet the phrase ‘how could I have been so stupid’ is one that is repeated hundreds if not thousands of times.

What I learnt from my time in this tight corner is that the only person in that corner is YOU and the only person who is fighting your corner is YOU. You can be your own best friend or your own worst enemy. By beating on yourself you are not solving any problems. No matter how hard you try you cannot beat sense into yourself.

You need to be your own best friend.

The truth is that the only way you will ever get out of debt is by being your own best friend. You need to put yourself first. You need to tend to the worries and stresses you have in order for you to be effective in dealing with your debt.

What is one of the main things that the air hostess says when you are being shown the how to use the oxygen masks on a plane? Make sure to put your mask on first and then help your family. This makes perfect sense. If you can’t breathe and are losing consciousness then you are no good to anyone. By tending to your own needs first you ensure the maximum odds of survival for the people around you. If you try to solve everyone else’s problems first you are doomed.

The exact same logic applies to debt management. Look after yourself first. You are no good to anyone if your health – both physical and mental – is suffering as a result of you trying to dance the merry dance with your debtors or your family. Put yourself first. Be selfish – initially at least. Be selfish until you can steady your ship and get your finances in order. What use are you to anyone if you sit up half the night worrying and stressing and are too tired during the day to do anything about your debt?

Too often people try to tackle their debts when they are emotionally and mentally exhausted. Their efforts tend to be half hearted and misdirected. Their energy levels have been sapped by months of stress and worry. As a result their efforts tend to have minimal impact and they end up becoming more and more frustrated.

So how to put yourself first and your debt second?

Your goal is now to focus on giving yourself some breathing space so that you can get some perspective on your problem. I’m not saying you should go on an expensive holiday – far from it. I’m saying that you take a day or two to sit down somewhere quiet and brainstorm two lists.

The first list is all the things that you can do that will improve your mood. These activities have specifically to be low cost or no cost. Things like improving your diet, more exercise, more time with friends and family, a new low cost hobby. You get the picture.

The second list is a list of all the things that you can do to get yourself out of debt. These things can range from the simple to the hard – from selling your home to collecting coupons. Write them all down.

Now for the hard part, take one item from each of the lists and do them. Continue to do them until they are having a positive impact on your debt and on your mood. Once you have established these items as habits move on to the next item.

The key message here is to look after yourself – both mentally and physically. Otherwise you won’t be able to look after your debt. You will be no use to anyone if you’re a burnt out physical wreck.

Affluenza – the credit party is over

Jul 182008

So now that the easy credit party is over and we are all feeling the effects of the debt hangover the question I have is ‘was it worth it?’. Were the few short years of fast living and easy money worth the pain we are feeling now?

I’m as guilty as the next person of over indulgence – if I wasn’t I wouldn’t be writing this article about trying to understand and make sense of debt.

I have often wondered what led to the furious spending and house buying that we have witnessed in the last few years. I think that while easy credit played a huge part in the madness there must have been something else at play. I always got the feeling that there was almost a collective agreement in society that it was good to spend your way to oblivion. Tacit approval to use your credit card was everywhere. Everyone else was doing. It was the case that ‘we are all in this together’ so don’t feel bad.

Then about a year ago I came across the concept of ‘Affluenza’. I thought that it was just the latest buzz word and would soon be consigned to the annals of history but then I dug a little deeper. The concept of affluenza was a perfect fit for that collective urge to spend that I had felt a part of.

Taken from Wikipedia.

affluenza n. 1. The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses. 2. An epidemic of stress, overwork, waste and indebtedness caused by the pursuit of the American Dream. 3. An unsustainable addiction to economic growth.

I couldn’t agree more with the definition above.

In reality we were taking part in a competition that we could never win. There was always going to be someone with a faster car or bigger house than us. It was a giant ponzi scheme and we are the suckers who will have to pay the price.

I’m not bitter and I don’t think you should be either. Ultimately it was through my own decisions that I ended up in debt. Had I don’t things differently I wouldn’t have this debt problem. Being bitter about your situation serves no purpose. Sure you want someone to blame and lash out at but in the end the answer is always the same. It was you who signed up for the good stuff and now you must take the bad stuff that comes with it.

Take the rage and anger you have at your situation and use it as the driving force to get you out of debt and cure you of affluenza. Channel that negative energy and get some positive out of it. Show the banks and financial institutions that while you may have been a little naïve in your spending that they won’t be able to count on your contribution to their bottom line.

The theory and research into affluenza are fascinating. If you want to learn more about what affluenza is and why and how it has such an impact then I recommend you read this book. Get it from the library or buy it second hand on amazon.

Affluenza: The All-Consuming Epidemic (Bk Currents)

As a cure for affluenza I can’t recommend the following book highly enough. This book takes a very different approach to personal finance. You will like it – its far from your average dry and boring personal finance book.

Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence

Prudence in all matters relating to your debt

Jul 172008

Want to run your financial life like an accountant? Manage your debt with ease and pay it down as fast as possible? Then I suggest there is one key accounting principle that will put your finances in the same league as those of the best accountants. If you can understand and apply this concept to your finances then you will solve your debt problems much faster than you thought possible.

The accounting concept that I am talking about is Prudence.

Taken from Businessdictionary.com

Prudence

“Accounting concept that requires recording (recognizing) the expenses and liabilities as soon as possible, but the revenues only when they are realized or assured. It implies that only that method of determining asset value or net income which yields the lesser amount should be used.”

What prudence basically means is that when you have incurred an expense or bill you make sure to recognize and acknowledge that expense as soon as possible. So if you buy something on your credit card but won’t receive the bill for a month, instead of waiting for a month to receive the bill you act as if you have already received the bill and are making plans to pay it. The key here is your plans to pay the bill. You need to acknowledge your expenses as soon as you incur them not when you get the bill for them.

From an income point of view the prudence concept is clear – don’t count your chickens before they hatch – in other words don’t count on income from any source until it is in your bank account. The income aspect is perhaps not so relevant to someone in a job that is paying a regular salary but if someone whose work involves overtime or commission then the prudence concept is very useful.

While the accounting concept of prudence was primarily devised for businesses where their income and expenses vary on a month to month basis it is an incredibly useful concept to use when managing personal debt. You need to think about how you run your finances as if you were running a business. That’s how serious you should be about your personal finances.

Expect more bills and less income

To really get things going for you on the debt repayment front you can bring the prudence concept one step further. Overestimate your bills and underestimate your income. Say for example you overestimated your monthly bills by $200 and your underestimated your income by $100. This may seem like a crazy idea but at the end of the month you have a positive difference of $300.

This ‘spare’ $300 can have an enormous positive impact on your morale and motivation. If you see that at the end of each month you have spare cash in your bank account you are going to feel wealthier and more in control of your finances. One great benefit of creating this float of cash is that you can meet any financial emergencies with confidence as you will have created a cushion of cash without even realizing it.

The simplest way to create this cushion is to inflate your expenses by 5% and deflate your income by 5% when you are creating your household budget. I know this sounds a bit counterintuitive and it might seem like a lot of extra hassle but you will be sure to notice the difference in a couple of months. If you can mentally prepare yourself to receive less in your salary each month then you will get a pleasant shock when you see that you have actually received more than you expected.

By overestimating your bills and underestimating your income you are not changing your real financial situation – not initially anyway – what you are doing is changing your perception of your financial situation. You are mentally creating a financial situation where you are earning less and paying more – it sounds crazy I know but in time it will create a very real positive effect. Remember perception is everything and in order for you to change your real financial situation you need to change your perception of it first.

Also remember that its all in your mind.

Time is money

Jul 162008

I want to talk about the idea that time is money.

Take from phrases.org.uk

TIME IS MONEY – “While this familiar maxim may seem like an invention of our hectic and impersonal modern society, it actually comes to us from the ancient Greeks. Antiphon, an orator who wrote speeches for defendants in court cases, recorded the earliest known version of the saying in ‘Maxim’ (c. 430 BC) as ‘The most costly outlay is time.’”

If time is money then lack of time means lack of money. In turn lack of money means more debt. So this can be read in another simpler way – lack of time equals more debt.

Now let’s turn this equation on its head – more time equals less debt.

So in theory if you had more time you would have less debt? Not quite but very close. The best application of the idea more time equals less debt is that the longer you give yourself to pay off your debts the more likely you are going to achieve that goal.

Often when we are in debt the urge to escape can be immense. We want to be free from this burden as soon as possible. Unfortunately the remedy for debt usually takes a long time. It is this fact that most people over look when they are designing debt management plans which in turn is one of the main reasons those plans fail. The ‘have it all now’ attitude that got them into debt in the first place is still present in their desire to get out of debt. They want to get out of debt in an instant.

If you have been in debt for any time at all you will know that it does not work that way. Going back to the time is money concept or more specifically more time equals less debt, the longer you work on reducing your debt the quicker it will happen. Ironic I know but the people who make a crazy dash to pay off all their debts in three months generally end up frustrated and disillusioned while at the same time their debt burden still exists.

Slow and painful? Yes and no. Yes it can be slow and painful but it doesn’t have to be if you plan it well and most importantly give yourself plenty of time. Time is of the essence in that you must act fast on taking action on your debt but my advice is not to expect to get out of debt fast. Slow and steady wins the day every time. You need to consistently apply the things you learn on this and other websites. If you do then you will come out of your debt a lot faster than you thought possible.

Motivation to act on your debt

Jul 152008

I’m generally not into using scare tactics to motivate. I’m much more of a carrot than a stick type of person. My attitude is that you attract more bees with honey than vinegar. I have an encouragement philosophy when it comes to motivating. Rewards and gold stars are the order of the day.

However every once in a while I tend to go over to the dark side and use scare tactics. I don’t like doing it but I sometimes find it extremely effective. Often when I am trying to motivate myself and others I find that the softly softly approach only gets you so far. The results are much better when I stop being so nice and I focus on getting the job done by whatever means possible.

So now it is your turn.

Up to this point I have been encouraging you to tackle your debts in a nice positive way. Telling you that it will be alright and that everything will be fine if you just tweak your budget a bit. When in reality if you are not moving towards your goal of debt elimination and if you are not taking serious positive action then you are heading for trouble.

They say you have to be cruel to be kind and I think this is definitely one of those situations. I’m not doing this to hurt. I’m doing this to scare you into action.

I want you to read the following articles and imagine the torment these people must be going through. How tough and difficult life has gotten for them. I’m not trying to belittle them in anyway I simply want you to look at their situation and how it got so bad for them. I want to shock you out of your mental paralysis when it comes to your debt. Debt can happen to anyone of us and when the consequences come they tend to come thick and fast.

The Foreclosure Story Number 2: $136,000 a Year Income to Foreclosure.

Foreclosure, a personal story

Tent city

California town creates parking havens for homeless

Now that you have read the articles I want you to use the fear of those situations to motivate you to take action NOW. Every minute you wait means that it is a minute longer that you have to spend in debt. Make that call, find that bank statement, pay that bill. DO IT NOW.

The fastest way out of debt

Jul 142008

I’m going to do a bit of extremely optimistic thinking. I want to imagine a world where when people say that they will do something they actually do it – immediately without reservation. In this world there are no emotions and complex relationships with money don’t exist. In this world people deal with cold hard facts – logic is the order of the day. Mr Spock would be proud of this logic driven utopia.

It’s not that I don’t have faith in humanity to achieve. I just know from personal experience how hard it is to tackle financial problems in an orderly and logical fashion. In my opinion it is near impossible for people to remove the emotion from money. That is why in this article I want to create a world filled with what are essentially robots.

Ok so in this logic driven world I am going to suggest what I think are the ten things that someone in debt could do to get themselves out of debt in the quickest time possible.

Learn everything you can about personal finance and budgeting

First and foremost this will be the foundation to get you out of debt. Learn as much as you can about debt management, budgets and personal finance. This knowledge when applied will serve you well for a lifetime.

Get your family and friends involved

Let your family and close friends know what you are trying to do. Don’t expect handouts because that’s not what we’re about but take any help that they are prepared to offer. The biggest form of help that they will give is the form of emotional support. (But in this world you are a robot so you have no emotion!).

Sell absolutely everything that you do not need

If you have two cars then sell one. If you have mountains of ‘stuff’ lying around your house that you do not need then sell it. Sell everything. There is no room for sentimentality. Strip your life down to the bare bones. Get rid of your possessions by selling them. This will give you a much needed cash injection and it will also declutter your home.

Consolidate your credit cards to a low introductory offer

Take all your credit card debt and look for a new credit card that offers you a low interest rate on balance transfers. Once you find the right card transfer all your existing credit card debt on to it. There are some great deals out there you just have to take the time to find them. Be careful though and remember to read the small print.

Shop around

It pays to shop around. You can make some serious savings on everything from your mortgage to your lawnmower. Use the power of the internet to compare costs.

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Rent out a room or move to a lower cost area

If you own your home then rent out a room if it is feasible. If you rent your home consider moving to a lower cost area or consider moving closer to work to save on transportation.

Get a second part time job / work overtime

If it’s feasible get yourself a second part time job and ring fence any of the money that you make for your debt. So basically any money that you make goes directly against your debt. Alternatively if you can work overtime in work then do it.

Eliminate all your discretionary spending

What this means is that you shop for groceries only. You don’t spend money on luxuries – no daily latte, no daily newspapers, no smoking, and no gourmet sandwiches for lunch. Ok you get the picture. The aim is to reduce your spending to essential items only.

Cut up your credit cards

Once you sufficient cash flow built up to allow you to buy your groceries and meet your daily expenses then simply cut up your credit cards so that you are no longer able to use them.

Focus all of your attention on improving your financial situation

In order to get out of debt quickly you need to give 100% focus to improving your finances. Give it all the energy that you have. Like a laser beam cutting through butter you will melt away all obstacles in your path if you would just give your finances your full attention. When I say full attention I mean full attention – minimize everything else in your life so that you have no distractions.

The above list is by no means exhaustive and there are plenty of things that could be done immediately that would have a big impact on your debt. For me the key point I am trying to make with this article is that we all know what we need to do in order to reduce our debt. Its not rocket science. It can be reduced to the simple formula of reduce your spending and increase your income. It’s that simple.

In reality it never is that simple. That is why I wanted to stress the ideal nature of the items outlined above. We would need to be robots and devoid of emotion if we were to execute these items immediately. Even in the direst of circumstances it is with great reluctance that we do the items on the list. We know we should be doing them but getting round to doing them is another item altogether.

While the items outlined above are ideal that doesn’t mean that they are impossible to do. To me money and debt are all about emotions. You need to manage your emotions and your mental attitude towards debt before you can truly manage debt. If you can manage your emotions then you will get out of debt a lot quicker than you thought possible.

Right now you are probably in a place of fear and dread. These negative emotions are slowing down your ability to respond. Don’t worry this is a natural reaction to the realization that your finances are in trouble. Keep moving. It is important to realize that you need to go through these negative emotions in order for you to progress with your situation. Feel these emotions deeply – let them wash over you – then move on.

Simple? No. But no one every said this was going to be easy.

Life plans instead of debt management plans

Jul 112008

One thing that use to get me as I struggled with debt is the idea that all debt management plans seem to be focused on the financial side of life. Duh! I hear you say ‘Of course debt management plans are going to be focused on the financial side of your life’. You see initially I made that mistake too.

For years I would struggle with the one sided nature of the debt management plans that I created or that were created for me. The huge problem with the debt plans was that while they very adequately covered my need to repay debt they offered absolutely no guidance on how I was to live my life on a day to day basis. All that debt management plans ever showed me was a bunch of numbers on a page and a set of targets that needed to be reached.

Now I don’t know about your experiences with debt management plans but in between all those numbers on the plan you have to squeeze in a life somewhere, somehow.

Honestly do they want us to become monks? Live a life of servitude to the banks? Ok we got ourselves into this and we are the only ones that can get us out of it and I wholly accept that. I have written about taking responsibility before but the point I am trying to make is that the vast majority of debt management plans are unrealistic and excessive. People don’t change overnight – old habits die hard.

Why are debt management plans so oppressive?

It primarily depends on who designs them.

If you design your own debt management plan, initially at least you will tend to be over optimistic with what can be achieved. Trust me on this. I have done it over and over again. I start out with what I think is a tough but achievable debt management plan but it suddenly turns into a punitive anti social whip which I use to beat myself if I strayed from it. I never allowed for everything and even when I thought I had been thorough I would miss something. After a couple of weeks on the plan I will slip back into my old routines and habits. I would come away from the whole experience dejected, disillusioned and still in debt.

If someone else creates a debt management plan for you then they tend to be even tougher still. Let’s say for example you decide to use a debt consolidation company. The person on the other end of the phone does not know you and unfortunately probably does not care too much about you as a person. They will see your income and expenses and using the latest debt management software optimize your spending. Needless to say the software will simply take every spare cent you have and put it against your debts not taking into account the softer things in your life like the daily newspaper or the occasional trip to the cinema. No it’s off to live in a cave for you.

What’s the alternative?

I found through hard fought experience that the best debt management plan is the one that incorporates a life plan.

What this basically means is that you cannot and should not create your debt management plan in isolation from your life. By life I mean the elements that make up your day to day living – things like your daily routines and habits, the time you spend and how you spend it with your friends and family, how you relax and unwind, how you have fun.

You have to look at the WHOLE picture of your life when you are creating a debt management plan. There is no point in sitting and hoping that you can stick to some ultra rigid debt management plan that will help you pay off your debts quicker but will mean that you will sacrifice a lot. Don’t get me wrong there WILL have to be sacrifices if you want to get out of debt. There WILL be changes if you are to shake off the shackles of debt. BUT you need to get perspective on the whole process. No debt management plan will succeed unless you make allowances for who you are.

My advice is simply this – don’t push the boat out too far when you are creating your debt management plan. Yes I know you have an urgency to get rid of this horrible debt that has been tormenting you but please be patient. You need to take a measured and realistic approach to it. If that means that it will take an additional year or two longer than you hoped then so be it. The end goal is the same. What you are trying to avoid is the endless start stop cycle that so many people trying to get out of debt get stuck in.

It’s like starting any new venture – you’re going to make mistakes – lots of them. The key thing is to try to do as much preparatory work by educating yourself so that you can try to avoid as many of them as possible. Can you avoid all the mistakes and make a perfect debt management plan? – No chance. You’re going to make mistakes but that’s a good thing. I’m just asking you to try to map out a plan that will help you avoid the main mistakes that people make as outline above.

The end of your debt is nearer than you think you just have to focus your time and energy on it.

Frugalistas – Frugality goes mainstream

Jul 102008

I knew it wouldn’t be long before it happened. For the fashion conscious among you the credit crunch is starting to show a silver lining already.

It appears that being frugal is becoming very fashionable. The credit crunch and how to be frugal are now the latest hot topics at dinner parties. I have to admit that I am impressed by the fashion industry’s ability to take advantage of what most other businesses would regard as a crisis.

Fashion companies, instead of sitting there moaning about how their sales have collapsed are embracing the whole credit crunch with gusto. At the same time they are capitalizing on people’s concerns about the environment too. The articles in the links below go into great detail as to how big business is cashing in on new economic and environmental trends.

The cynic in me thinks its just good business sense for the fashion industry. Another part of me thinks that anything that makes frugality more socially acceptable is fine by me.

Have a read of the articles below and make up your own mind. There are some great tips on saving money and some unique ideas on how to make it fun. As they say – frugality is the new black. J

The Frugalistas: Meet the women who can show you how to beat the credit crunch in style.

Penny Pinching Looks Great

Proud to be prudent: Meet the new army of frugalistas

Stop talking about recession. I don’t want to know.

Jul 092008

I’ve touched on the theme of a media diet  before and I think that one of the points that I made in that article deserves an article all of its own. Recession and negative financial self talk.

As the talk grows louder and louder about the looming recession I just want to runaway and hide in a cave. The drumbeat seems to go on and on – recession recession recession. Stop it! I can’t take it anymore. Everywhere I look I see and hear talk of recession. The newspapers, the TV, the radio, the people in the local coffee shop – all they talk about is recession. Would someone please turn down the volume?

If you are in debt you have enough to be worrying about already. You don’t need to take the ills of the whole economy on your shoulders.

What difference will it make to you if the economy is in recession? Honestly? You may lose your job and I accept that this would be a huge blow. But I would argue that it is this threat of losing your job that means you should be trying even harder now to pay down your debts.

Being bombarded each day with talk of recession adds no value whatsoever in your fight to pay off your debt. How could it? I mean realistically all it is going to do is slow down your thinking and keep you from focusing on what is important.

The more you hear about a recession the more you are going to adopt a recession mentality. Conversely the less you hear about a recession mentality the less you are going to feel like you are in a recession.

Back just before the dotcom crash I took to paying a monthly instalment into an investment fund that was 100% invested in equities. I thought I was doing a smart thing. As you can image the fund tanked during the crash but what was even worst was that I was locked in for five years. I was legally obliged to continue to pay into the fund and I couldn’t touch the money until the five years were up.

Needless to say that I watched in horror as the value of the fund sank completely underwater. As far as I was concerned it was a disaster. For about the first year and a half the fund was worth far less than the money I put into it and it continued to slide even as I put more and more money into it each month. I decided after about a year and a half to stop checking the price of the fund. I made a conscious decision to simply forget about it and not to check the fund price.

For about two years I simply looked on the money going out each month as an expense. I lost complete interest in knowing the status of the fund. Really it was just another expense to me. I even stopped looking at the stock market because the news had become so bad. I closed my mind off to the cash that I was losing and I just focused on ways I could save on my other expenses to match off the money I was losing in the fund. I then began to focus more on my job and on trying to do a better job so that I could get a raise.

After about three years I remember getting a statement on the value of the investment fund. Up to that point I didn’t know what the value was and I would have assumed that I had lost a lot. Amazingly the fund had been turned around and the stock market had rebounded. The fund was up 15% on the money I had invested. I was thrilled but the best part of it was that I had not spent two years wishing and waiting for the fund to recover. I simply put my head down and got busy with the rest of my life. Doing what I could to improve the other areas of my finances.

I was lucky and I admit that but I think that you can use the same logic now that we are faced with a recession.

I’m not saying stick your head in the sand. What I am saying is to ignore the all this negative financial self talk and depressing news in the media. Use this downturn as an opportunity to consolidate your financial position by focusing on paying down your debt and reducing your expenses. Do as much as you can to pay down you debt as fast as you can. No one knows when they might be next to lose their jobs so you want to make sure that if it happens to you that you have your financial ark ready and that you can sail through the flood. The best way to build your ark is by getting rid of your debts now.

Stoozing – Use your credit cards for profit

Jul 082008

No I didn’t believe the headline either. Not at first anyway. That was until I was introduced to the wonderful world of stoozing. Now at this point I will let Wikipedia offer you a definition of stoozing.

“Stoozing, derived from the verb stooz, is a slang term used to describe the act of borrowing money at an interest rate of 0%, a rate typically offered by credit card companies as an incentive for new customers. The money is then placed in a high interest bank account to make a profit from the interest earned. The borrower (or “stoozer”) then pays the money back before the 0% period ends. It is important to note that the borrower does not typically have a real debt to service, but instead uses the money loaned to them to earn interest.”

So how you make money is that you borrow as much money as you can from credit card companies that are offering introductory offers of 0% and then you place all this money on deposit at a higher rate of interest say for example 5%. Then at the end of the introductory 0% period you take your money out of your deposit account and repay your credit card company. In effect you have made 5% interest on the borrowed money.

There are a number of things to take into consideration before you engage in a stoozing campaign.

How much can you borrow?

How long does the 0% interest rate last?

What are the balance transfer fees?

What rate of tax will be applied to the interest that you earn?

What deposit rate will you get? You need to have a high yield instant access deposit account in order to make your stoozing effective.A couple of other things that need to be considered include.

You will need to continue to make the minimum monthly payment on your credit cards.Stoozing works best if you have little or no debts as your existing debts would be better served if you transferred them to the 0% card and focussed on paying them off.

There will be a lot of administration and form filling involved so if you are not comfortable with this then may be stoozing is not for you.

There are a couple of excellent websites that cover the topic of stoozing in a lot more detail than I could hope to so I will direct you to them. One is focused on the UK market and the other is focused on the US market. I suggest you look at both sites as the principles of stoozing are the same and the only differences are the types of cards and interest/tax rates that apply.

Stoozing.com

Moneyeconomics.com


Remember this is a potential way of earning a small but not insignificant extra bit of cash. So while it may not be for you I recommend that you take the time to learn about it because it gives a useful insight into how you can be creative with your credit cards.

Competitions – a fun way out of debt? Follow up.

Jul 072008

For those of you who thought I was losing my marbles when I suggested in a post that Competitions could be a fun way out of debt – take a look at the following article. It offers plenty of hope to those of us in debt and are looking for alternative ways to get out of it. Meet Britain’s luckiest woman.

Fires and foreclosures – not the smartest way out of debt

Jul 072008

Faced with foreclosure people will do allsorts of things to stay afloat. The need is real and pressing especially with the bank breathing down your neck. They say that desperate times need desperate measures and I couldn’t agree more. However the line has to be drawn somewhere and I think the line has to be drawn at illegal acts such as fraud and arson.

There has been a worrying trend forming in the last year or so. Anecdotal evidence suggests that some homes that have been up for foreclosure have been torched by their owners. Recent media reports suggest that while no hard evidence exists of a link between the rising foreclosure rates and the increase in the number of arsons there is a feeling that the two are strongly connected.

Arson – why would some one do it?

Simple really they can see no other way out of their debt or the ways that they do see will take too long and be too hard for them. They look on arson as the easy option. One little fire and puff my debts go up in smoke. They hope that the insurance company will pay out on the burnt down house and the money can then be used to solve their financial problems. If only it was that simple.

Some people adopt the attitude that ‘If I can’t have it then no one else can have it either’. This is the attitude of someone who is both desperate and angry. Both emotions that I can understand and relate to but I could never condone burning down a house to get back at someone or to solve your debt problems. Its just plain wrong.

Fire investigators can spot arson easily – what makes their job easier is if there is a big ‘for sale’ sign at the front of the house. Straightaway whether they admit it or not they will be thinking that it is another case of arson.

There are a few other telltale signs that the fire was as a result of arson. If pets and expensive electronic equipment were removed at the time of the fire then it can be obvious that something suspicious was going on. Some people stop paying all their bills except their home insurance – if this doesn’t scream arson then I don’t know what does.

Generally speaking people who do start fires do so out of desperation and do not cover their tracks very well. As a result the chances of getting caught for arson are very high.

Not only does arson NOT solve your debt problems it could also ruin your life. Aside from the very obvious dangers that come with playing with fire you could end up spending a long time in prison if you get caught. The simple fact of the matter is that you will get caught if you burn down your house or burn out your car. The police and fire investigators aren’t stupid. They spend all their working lives investigating crimes like arson and fraud.

The ironic thing is that a lot of people think that insurance companies will just pay out to avoid the costs of having to investigate and the hassle of bringing someone to court. This could not be further from the truth. It is in the best interest of the insurance company to investigate each suspicious fire. The reason is simple – if they set a precedent of not investigating fires then everyone will start doing it. Insurance companies need to be seen to be tough when it comes to fraudulent claims and arson.

What’s the alternative?

There are always alternatives to arson for profit. If things are so bad that you are considering arson then I think that bankruptcy is by far the lesser of two evils. Bankruptcy may set you back a couple of years in terms of your financial situation but arson can send you to prison. I know which one I would prefer.

Be safe in the knowledge that if you do burn down your house or your car that you will get caught. The simplest thing to do is to rule it out as an option and focus on something that will solve your problems. Talk to your lender. See if they can do anything.

If your lender can’t help you then research your options online. There are thousands of people facing the same difficulties as you are. There are hundreds of solutions and viable ways out debt. This website contains many ideas on how to eliminate your debt and the internet is filled with great ideas to help you. So I say start researching and learning how to get out of debt legally and put those matches away.

Is Inflation a debtors’ best friend?

Jul 042008

Inflation is defined as the rise in general prices of goods and services over time.

Inflation erodes the value of a currency over time. Or put more simply in an inflationary environment a dollar today will buy you more of a good or service than the same dollar will buy you in a years time. So over time the value of the dollar in your pocket is worth less and less.

Inflation has been portrayed as the great bogeyman of the world economy. In Europe following the Great depression and hyperinflation in Germany the Nazis came to power. It wasn’t the only reason for the rise of the Nazis but it was a very significant contributing factor. For more on this read this Wikipedia link.

Ok history lesson over let’s get back on topic. We’ve established that inflation is seen as the biggest threat to the world economy. But does that mean that inflation is bad for everyone? Not necessarily. There are people who can gain from inflation. The people who gain the most are people in debt.

Sure you are paying more for your groceries and gasoline but let’s imagine the situation where you have a lot of debt – student debt, credit card debt, personal loans. When inflation is on the rise you benefit as the amount of money you owe is less over time. Inflation erodes the value of money. Inflation is eroding the value of the money that you owe so in theory you owe less.

Hey whoooah easy tiger I’m not finished yet. Before you break out the champagne there are a few criteria that must exist in order for inflation to eat into your debt.

First off to really see the benefits of inflation you to need to have your debt at a fixed rate of interest. The reason for this is because as a general rule of thumb governments and central banks raise interest rates to combat inflation. If the interest on your debt is at a variable or floating rate then you are going to feel pain as the interest rates will increase your repayments. If your debt is at a fixed rate then you need not worry about the rising interest rates and you can relax as inflation erodes the value of your debt.

Secondly to see even more benefits from inflation you need to be in a job or position where you can negotiate a pay rise to match the increase in the cost of living.

If you can negotiate a pay rise of say 4% and inflation is currently at 3% then that is a net gain to you of 1%. It is this additional 1% that can then be used to pay down your debt. Better still if you have fixed the interest on your debt then your additional 1% will go even further.

However even for debtors inflation is a double edged sword

While the scenario outlined above is quite positive for debtors the reality may be somewhat different. The view I have presented is simplistic. There is a reason why inflation is seen as a bogeyman for the economy. As things get more expensive – oil, gas, food – businesses can struggle. When employees start demanding more pay increases the businesses can struggle further still. Eventually a lot of companies go out of business and a lot of people lose their jobs.

So you see while inflation can help the debtor who has fixed their interest rates the chances are that their may be a risk to jobs. So while you may think Inflation is a great thing from a simple erosion of debt point of view be wary that it is not also eroding your job. No matter how bad your debt is at least if you have a job or an income there is more hope than if you don’t have any income at all.

Who is trading in your debt?

Jul 032008

A market exists for your debt. A market where debts that you thought were gone and forgotten are sometimes brought back to life. As a debtor it is important that you have at the very least background knowledge of how the debt collection industry works and what practises the debt collection agencies use once they buy your debt.

Companies are trying to profit from the misery that debt brings. Instead of being creative and trying to help people in debt come up with solutions to their debt problems a lot of these companies compound the misery of debt by instilling fear.

I have done a lot of research on the web and I have found three very useful websites and articles that will give you an insight into how the industry works. Use this information to your advantage. Learn from other people’s mistakes and learn how the system works so that if the debt collectors do come calling that you know your rights.

For a detailed overview of the debt collection market and how it came about read this article by Bob Hunt. Collecting Consumer Debt in America. Bob gives a very good analysis of the debt collection industry and the factors that have influenced its development. Very interesting and worthwhile reading especially as it shows the trends in the industry.

The Boston Globe website has a special report that takes an in-depth look at how debt collection agencies conduct their practices in the pursuit of outstanding debts. This special report provides valuable information and details of other people’s stories about how they have been treated by debt collectors. It can serve as a warning that when the debt collection agencies get involved you know that you are in for a tough time. The series is called Debtors’ Hell.

Finally PBS did a great frontline show that can be watched online. The program is a few years old but the same things still applied today. In fact they apply more so today than ever. The show is called “Secret history of the credit card” and I highly recommend that you watch it.

Knowledge is power. I have said it before and I will continue to say it, just like a broken record, the key to escaping your debts is by increasing every aspect of your financial education. The more you can learn about debt and debt management the quicker you will eliminate your debt. The resources listed above are great places to start.

Do we have a moral obligation to pay our debt?

Jul 022008

Moral obligation is defined as “A duty which one owes, and which one ought to perform, but which one is not legally bound to fulfil.”

With debt you are legally bound to pay but do you also have a moral obligation to pay? If you simply avoid paying your debts by say filing for bankruptcy would you feel guilty? Or would you just carry on as if nothing happened?

Most people’s initial reaction would be that we do have a moral obligation to pay our debt. It is this moral obligation that causes a lot of people mental anguish as they struggle with their debts. Wouldn’t it be nice if we could just walk away from our debts and not think twice about it?

Sometimes I hear the attitude that credit card companies and banks have been making a fortune from us on the back of high interest payments – wouldn’t it be nice to get one over on them? I don’t know how comfortable I am with this attitude. I am a firm believer in karma and what goes around comes around. If I were to default on my debts without making any attempt to pay them back then one very obvious consequence for me is that my credit rating will be shot to bits.

So where does this leave the question of moral obligation? The reality is that if you have debt but have no money then moral obligation or not you are not going to be able to pay your debt. The feeling of moral obligation is just going to hinder your progress with coming to an arrangement with your creditors. You are just going to be weighed down by this and won’t progress until you have resolved this inner conflict.

My feeling is that if you can honestly stand up and say that you have done everything in your power to pay off your debts and that you have explored every avenue to find a solution then I think that you can move away from the notion that you have a moral obligation to pay your debts. Of course you still have your legal obligations but you can go into any arrangement with your creditors with the feelings that you tried your best and unfortunately things did not work out for you.

The feelings of moral obligation are entirely a personal thing. Some people will feel little moral obligation to pay their debts especially if they have been treated badly by banks or feel that they have in some way been duped into taking on more credit. For most others the thoughts of not paying their debts cause allsorts of internal feelings of dread and worry.

In order to effectively tackle your debts then you need to decide where you stand on the position of moral obligation. This is entirely a personal choice. It doesn’t matter what other people say or do because at the end of the day it is you who will be carrying the can.

Once you have decided on your position then act accordingly. But don’t try to cheat your creditors if you think you can or want to. That will surely lead you to a place where you certainly don’t want to be. If you don’t feel morally obliged to pay your debts then go about arranging a legal agreement that suits all parties if possible. Just because you might feel that you want to get back at your creditors don’t end up making things worse for yourself. Effectively you will be cutting off your nose to spite your face.

If you do feel morally obliged to pay off your debts then use it as a motivating force. Don’t succumb to the negative thinking that your creditors are out to get you. Make a pact with yourself that you will do everything in your power to pay off your debts as soon as you can. However, one thing you must avoid is self flagellation. If things don’t go your way and you end up not paying your debts and in bankruptcy – don’t beat yourself up. Be happy that you did your best and instead use that energy to propel yourself through the tough times.

Selfish acts of charity

Jul 012008

I read a very interesting article recently on the oftwominds.com website entitled “The art of survival, Taoism and the warring states”. In the article the author Charles Hugh Smith talks about what he thinks is the best strategy to survive a meltdown in society.

There were a couple of things that stood out for me. The author questions the long held assumption that the best place to survive the Armageddon is in a rural area – the more remote the area the better. At first this would have been my preference for waiting it out but the author makes a compelling argument as to why this is not the case.

The author outlines what he thinks is the best strategy for surviving such an event. In a nutshell he says that in order to maximise your chances of survival your best bet is to move close to a town and begin to form strong close relationships with the people who live in the town. Begin to bond with people and play your role in the community. The benefit of this and the whole key to your survival is that you will now have people who care about you and want to ensure your survival because they like you and you contribute to the community. You will have a support network.

As usual this got me thinking about debt and I wondered if a similar strategy could be used to help someone who is in debt.

The answer of course is yes.

I have come up with a strategy that I call “selfish acts of charity” to help you survive the debt meltdown. It is based loosely on the strategy in the article with more of a focus on your giving now in the expectation of receiving later when times get tough for you.

Cynical? Maybe, but wait until you have heard the strategy.

The simple strategy can be summed up in four words.

Help people in debt.

Pretty obvious? Well no, not really. It’s not as obvious as you might think. You see when you are in debt you tend to be focused on your problems and your problems alone. There is a tendency to be insular when confronted with what is a very personal problem. I can understand this tendency completely – who wants to air their personal problems in public? Many times I have said that the only person who can get you out of debt is you but that does not mean that you have to go it alone.

Reach out.

The chances are a lot of your friends are probably going through something similar. Debt’s icy hand has a hold on a lot more people than you would at first think. I say reach out to your friends and help them. The help doesn’t have to be in the form of money. The help you give can be in any form. Simply listening to your friends debt problems could be enough help to get them though a rough patch.

Expand this concept even further. Why not help people in debt who are not your friends? Maybe join an online forum and start offering moral support to people in debt? Or perhaps even join Debtors anonymous?

The point is that while you reach out to people who are in debt you will find that people in debt will start to reach out to you. The feelings of isolation and desperation will be hugely reduced because while you are trying to solve your debt problems on your own you are making sure that you are not alone.

Ok I admit the title of the strategy “selfish acts of charity” is a bit of a misnomer but I wanted to get your attention. Humans are social animals in that we crave human attention and interaction. In order to survive and thrive we need to build and maintain relationships with other human beings. If you are to survive and thrive through your debt problems then you will need to build and maintain relationships with others who can help you.

Help yourself first but don’t be slow about helping other people. If you are in debt then stabilize your situation but as soon as you can go try help other people in debt. There is the saying that “you only get what you give” so if you don’t give any help then don’t expect to receive it when your turn comes. On the flip side if you have helped a lot of people and formed strong relationships then you can be assured that you have the support network in place to help you weather your debt storm.

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