If your bank goes bankrupt your debts won’t disappear

Oct 072008

With all the madness that has been going on over the last few weeks in relation to the stockmarket and the economy it is easy to get caught up in it all. There is nothing but doom and gloom pouring out from every TV channel and news website.

The simple fact of the matter is that you have nothing more to worry about than usual and here’s why.

If you are in debt and owe the bank money and that bank goes bankrupt then you STILL owe the bank that money. You do NOT have your loans written off – in fact your loan is seen as an asset of the bank because it generates income for them. As a result your loan stays in place.

Unless you have thousands of dollars invested in the stockmarket, then your main concern should still be to repay your debts. On the other hand if you do have thousands of dollars invested in the stockmarket I would ask you, retirement funds aside, why haven’t you used these funds to pay down your debt?

No matter which way you cut it, your number one focus should still be on debt repayment.

Job losses

This is a legitimate concern but given the unstable nature of working life these days it was probably a concern you had long before now. It is true that if things continue the way that they are going then there will be a lot of people losing their jobs and not just on Wall Street. Even as it stands there are thousands of people who are losing their jobs each month.

To those of you who still have a job and are concerned about losing it I would say get your house in order. There is a reason why the motto of the Boy Scouts is ‘Be prepared’.  I wrote a previous article called ‘How long could you survive if you lost your job?’ that will help you understand what you need to do in order to weather the approaching storm.

Stick half of your head in the sand

This is the best advice I could give to someone who is worried about what is going on in the world today. I give this advice on the understanding that you have your financial affairs in order and that you are focusing on paying down your debts and building an emergency fund. I wrote an article called ‘Stop talking about recession, I don’t want to know’.

In this article I outline how I actually made some money during a recession by ignoring the negative financial self talk and hiding away from the bad news. It was a case of ‘ignorance is bliss’.

Nothing changes much

If you are on a debt freedom journey then do not allow a recession or talk of recession throw you off course. It is now more important than ever to be seeking debt freedom. At least that way if you are debt free (or at least on course to being debt free) and things get really bad you can be safe in the knowledge that you are in a much better position than a lot of people are. Ultimately whatever happens it is how well prepared you are that will determine what shape you will be in when you come out the other side.

For more of my musings on Debt management and Personal Finance please subscribe to my RSS feed. Alternatively if you would like a free copy of my Debt management ebook “Understanding and getting out of debt” please sign up for my free newsletter.

Debt free solutions

Sep 262008

Debt free solutions? Every so often you read a piece of advice that you think is too simple to be effective. This happens me quite a lot. I don’t know why but some part of my brain seems to equate the value of a piece of advice with how hard and complex it is to implement.

The more complex the advice the more valuable it is to me.

I know its very strange logic but I think a lot of us have been wired that way. Take diets for example. Its common knowledge that if you want to lose weight you need to consume fewer calories than you use up during any given day. So simply eat less. However if everyone thought it were that simple then there would be no multi-billion dollar diet industry.

I think as humans we need to feel that when we have a problem we need a unique and magical solution to solve it. A simple straightforward solution just won’t cut it.

A lesson learnt

When I first started to get serious about debt I started to research how to solve my debt problem. I was confronted with a myriad of solutions, everything from debt consolidation to debt management plans. I was looking for some magic bullet.

One piece of advice that kept coming up again and again was simply

‘Spend less than you earn’

Simple right?

It was not good enough for me though. I wanted something that said ‘buy XYZ software package and your debts will repay themselves’ or ‘refinance all your debts and have only one small monthly payment’.

Eventually I came round to the simple way of looking at my debt.

‘Spend less than you earn’

This brought me to my next problem. How much was I spending?

How much?

I had no idea how much I was spending. All that I knew was that at the end of every month my bank account was always in overdraft and my credit card balance had increased.

At the time I remember reading another piece of really simple advice in the personal finance book Your Money or Your life. The advice was to write down and record absolutely everything that you buy everyday. Be exact in your figures, record it to the cent.

This was a compelling idea for me. It was so simple that anyone could do it. At the same time the sceptical part of me was thinking that it was a bit too simple.

Anyway for one month I recorded everything that I bought. I had a little pocket book with a small pencil on a string attached to it. Every time that I bought something I would write it down. I didn’t let anyone see what I was doing and I would wait until I was alone before I would record the expenses. I didn’t want to be marked as some kind of crazy note taking type of guy.

What happened?

Being the dutiful geek that I am I created an excel spreadsheet to formally record my expenses. This is where it got interesting.

On my spreadsheet I had what I called a fixed costs column; these fixed costs included my loan repayments, my rent, my car loan etc. Basically my fixed costs were items that I had to pay each month or face trouble. Then in a second column I had what I called variable costs. These were the cost that I was tracking every day in my expenses notebook. These included items such as newspapers, coffees, lunches…you get the idea.

Prior to tracking all my expenses I would have estimated that my variable costs were probably about $200 a week. I was in for a big shock. When I tallied up my variable costs the average I spent per week on them was $420. Unbelievable!

I was spending more than twice what I thought I was spending on discretionary items. This was a serious wake up call. When I examined what I was spending most of my money on a few things became clear. I was spending a small fortune buying gourmet coffees and the daily newspapers.

More interesting though was that I did most of my food shopping at convenience stores that were close to where I lived. Convenience stores by their very nature tend to be much more expensive than large supermarkets on the edge of town. You pay the extra money for the convenience of the convenience stores. Generally they tend to open much later and they are usually very well located in urban areas.

What next?

I adopted the simplest solutions I could think of. I cut down on the coffees and newspapers but more importantly I started to do all my food shopping in the large supermarkets. I continue to record all my expenses in my notebook and in the month that followed my weekly average spend was $270 – a major improvement.

Once I was on the right track I began to gradually cut my discretionary expenses further and further until I got to the point where my bank balance at the end of the month, while not very much, was positive.

Simple is usually best

It took me a long time to realize that the best and most effective solution to my debt problem was the simplest. For too long I was lost in a world of false promises and advertising overload. It was a painful process for me to recognize that I was wrong in my thinking and in my search for some new fangled complex solution.

How about you? Are there things in your life that you are trying too hard to solve? Are you looking at ultra complex solutions for problems that could be solved more effectively and efficiently with a simpler solution?

Debt – balancing the big picture with the little picture

Sep 182008

I touched on this topic yesterday in my article ‘Renting is better than buying and here’s why’. In the article I made the point that the vast majority of people have their minds so focused on their own financial problems and worries that they don’t have time to consider what is going on around them in the economy and the wider world.

I called the economy ‘big picture’ and the personal and financial problems that people have ‘Little picture’. Just to note that I am not having a go by calling people’s problems ‘little’ – far from it. I am simple making the comparison between the ‘big’ problems that affect all of us (in this case the economy) and the different problems that people have that are unique to their situation.

Balancing Act

If you have a debt problem it should have 100% of your focus. You should focus on it until the debt is no longer a problem. That said there is a problem with focusing 100% on your debt and that problem is what is happening in the wider economy at any given time.

Is the economy on the up? Is the economy on the way down? Where are interest rates heading. How much does gas cost? What is the unemployment rate? What is the rate of inflation?

All these things are very important when it comes to repaying your debt. For example, if you decide to go for a better paying job. If the economy is on the way down there may not be any better jobs out there for you to go for. Another example of looking at factors in the wider economy would be something like the price of gas and the impact it has on the type of car that you buy.

The danger is that people in debt develop financial coping strategies without taking into consideration the various economic factors that could have a direct impact on them. In a lot of cases people determine their budgets based on their current status quo and do not factor in something like getting laid off. This is where an emergency fund is crucial and it is one great way to counter the effects of a declining economy.

On the flip side of this argument is that you can become too wrapped up in the state of the economy. You might never seek out a better paying job just because the economy is not in great shape. Some people are doom merchants and any hiccup in the economy sends them running for cover. This is no way to live either.

Start learning

To maintain a healthy balance between the focus you put on repaying your debts and the focus you put on the state economy you need to learn how events and factors in the economy affects you. No you don’t need to do a PHD in finance. By simply researching online and reading blogs about the economy you will pick up the necessary information about how events will affect you.

A lot of people don’t pay much attention to the price of a barrel of oil and yet they wonder why the price of gas has become so expensive. Had they known about events in the economy and the wider world they may have been in a position to develop a strategy along the lines of car pooling or taking public transport or even buying a more fuel efficient car.

I find learning about the economy and world events to be fascinating. Things that happen thousands of miles away can have a direct impact on your pocket. It pays to know about these things. If you do you research about economic events it is possible to put yourself in a position where you are largely insulated from them.

For more of my musings on Debt management and Personal Finance please subscribe to my RSS feed. Alternatively if you would like a free copy of my Debt management ebook “Understanding and getting out of debt” please sign up for my free newsletter.

Back to basics for me

Sep 122008

Reading this you could be forgiven for thinking that I am some sort of holier than thou debt management wannabe guru. I apologize if I come across that way. I am passionate about Personal Finance and helping people to get out of debt. It’s just the way I am. It’s my dirty little secret.

The thing is that I am far from perfect when it comes to my own financial state of affairs. My financial health and net worth would resemble more the trajectory of a rollercoaster ride than a NASA rocket. Instead of my financial situation improving in a straight upward line, it goes up and down and down and down then maybe up.

I don’t think I’m alone in this experience. I have had so many financial highs and lows that I’ve really lost count. I think it is this experience that puts me in a better position to help others with what they might be going through. I still have a lot to learn though and I’m not afraid to admit it.

Back to basics

Recently I’ve become a little lazy with my own financial affairs. I just kept putting things off until there were problems that urgently needed to be solved. I did feel like a bit of a hypocrite writing about debt management when at the same time my own affairs were sliding, but I am now admitting responsibility for my mistakes and I am looking to fix them fast.

The problems that I have been having recently are simply caused by nothing more sinister than overblown day to day expenditure. Ok I did get hit with an expensive car repair bill but apart from that it has been the small daily things that have been hitting me hard.

Debt from a thousand cuts

I’ve been on the go a lot lately and as a result I have tended to eat out quite a bit, nowhere expensive just regular places. I might eat out for lunch and then maybe dinner depending on where I am. As a result these expenses are really starting to bite. I have been living like this for about 2/3 months and have been quite busy.

The net result is that my budget is shot to pieces.

The obvious problem is that my lifestyle hasn’t helped. The fact that I was on the go a lot and not getting home until late meant that I was too tired to cook. In the evenings I would simply buy ready made meals or get takeout.

Not good for my health or my wallet and I knew that. The point I am trying to make is that it is so easy to slip into a bad routine and then wake up one day with a gaping hole in your finances. This is what happened to me.

For me now it is a case of going back to basics.

What this means is a complete scaling back of my daily expenditure. For a while I was really good at keeping track of my daily expenditure. I would keep all the receipts and record how much I spent at the end of the day. Then after a couple of weeks of doing this I would analyze where I was spending the most and where I could cut down.

I found this to be an excellent way to manage my expenses. The only thing was that there was a lot of effort involved. It was hard work keeping up to date on all the small daily expenses. Make no mistake it is tedious hard work keeping track of all your daily expenses. I have tried to do this numerous times and failed at it numerous times.

I now realize that the fundamental key to long term debt freedom is managing your daily discretionary expenditure i.e. the money you spend on food, newspapers, magazines, coffees etc everyday. If you can contain these expenses then you will eventually break the back of your debt problem.

Look after the pennies

The saying “look after your pennies and the pounds will look after themselves” holds a lot of truth. By building up the discipline to manage the small and relative insignificant daily expenditure you are laying the foundation for greater financial discipline when it comes to the big expenses. There will be less of a financial bottleneck when you come to pay your bigger expenses.

However, there is a danger of being “Penny wise but Pound foolish”. This is where you are so focused on minding the small expenses that you neglect to look at the bigger picture and your bigger expenses.

There is a call for balance and my hope is that over the coming months – because it will take me months to rectify – that I can find that balance between looking after my small daily expenses while at the same time keeping an eye on the bigger picture.

Payment shock – and how to avoid it

Sep 032008

Taken from Investopedia.com

Payment shock

The risk that a loan’s scheduled future periodic payments may increase substantially. Payment shock can be the result of several things, including the expiration of an initial or temporary start interest rate (sometimes known as a teaser rate), the end of a fixed-interest rate period, the end of an interest-only payment period, an increase in an adjustable-rate mortgage’s fully indexed interest rate or the recasting of a payment option ARM.

My payment shock came in the form of an introductory low interest rate offer on a credit card. I had transferred the balance off a couple of my credit cards onto a single credit card that had a really low introductory offer. The offer was 0% for six months on balance transfers. I jumped at the chance.

Six months later I was so use to getting my monthly statement with the same balance on the account that I didn’t even bother opening the statements. I wasn’t using the credit card to buy anything so the balance wasn’t moving. I got lazy. I sailed through the six month period without even realizing that it had ended.

About three months after the introductory offer period ended I went to check my credit card statement. I got what I now know as a ‘payment shock’. My credit balance had shot up in the three months since the end of the introductory offer period. I was now paying interest on interest. I was very alarmed and annoyed that I let it happen.

I learnt a hard lesson and I learnt all about what it means to suffer from “Payment shock”.

That said I think I was lucky. I am currently renting but about two years ago I was looking to get a mortgage. There was some scary stuff out there. Interest only options with teaser rates. From my experience with the credit card payment shock I was in no rush to be seduced by these low monthly mortgage payments. From what I could see most of these low rates only last about 2 years. Then they reset and you have 28 years of trying to pay the much higher rates. I held off and I’m glad I did.

I suppose that was what the whole subprime meltdown was all about. People who could not necessarily afford the standard mortgage payments were seduced by these low low teaser rates and some slick salesmanship.

The offer was simple and I imagine it went something like this

“You can have the home of your dreams and it will only cost you $600 per month, then when the rate resets in a couple of years you can refinance or sell as your home will have gone up in value.”

How could you not be seduced by this? I mean here was your dream handed to you on a plate for a very reasonable and manageable monthly payment.

When you take it at face value it looks like an amazing offer. You get what you want for a very little monthly outlay. Many people bought into this and I can completely understand why.

Unfortunately the danger lay a year or two down the track. Like what happened to me I imagine that a lot of people got comfortable and use to making the monthly payment and not even thinking about the rate reset. Like me they were in for a very nasty payment shock.

I’ve read stories online about how people were seduced by the low interest only rates only to find that they simply couldn’t afford the repayments once the rates reset. Here is a link to one such story from the New York Times – Mortgage Crisis Spreads past subprime loans.

How to avoid payment shock

Hindsight is 20:20. When you look back on an event that has occurred it is so easy to say ‘I should have done this or I should have done that’ but in reality the event is gone forever and there is no point beating yourself up about something that you cannot change.

That said there is still value to be had by analyzing past mistakes. The value is to learn from your mistakes and the mistakes of others so that you are less likely to repeat them.

I learnt a couple of lessons from my payment shock.

The first lesson I learnt is to always go into these things with your eyes open. I knew what I was getting into with the low introductory credit card rate but what I wasn’t 100% clear about was when exactly the period ended and what, if any, obligations I had once the period ended. To be honest I wasn’t even sure about what rate I would be paying once the period ended.

So my advice is to do your homework completely before you enter into any sort of introductory or low interest offer. There is no such thing as a free lunch and the more you know and understand about the offer the better you will be able to evaluate it and decide if it is suitable for you. Use the power of the internet to connect with other people who may have already signed up for the offer and find out what their experiences have been.

One key piece of information that is crucial in your decision is whether or not you can afford the repayments when the rate resets. So you need to find out exactly how much the new rate will be in a worse case scenario. If you have a mortgage then this means calculating how much you will have to repay when the rates reset but also assuming a worse case scenario that the interest rates in the economy will rise as well. Then ask yourself if you can sustain that level of repayment indefinitely or will it be a strain on your finances?

The second lesson I learnt is to use the time of the introductory offer to good effect. In the six month interest free period I sat back and did absolutely nothing to tackle my credit card debt. I should have looked on this as a window of opportunity to make serious inroads into my debt so that when the interest free period ended there was no debt for the credit card company to charge interest on.

If you have a low interest period on a loan, credit card or mortgage then use it to good effect because you can be certain that when the interest free period is over you will face higher repayments.

I can understand why someone buying a house would like to avail of the interest only option. When moving house there are lots of new things that may need to be bought and unforeseen expenses that can occur. That said I think that it would be prudent to start working backwards from when the introductory period ends.

As mention above you should find out what the new repayments will be after the introductory offer period ends. With this new worse case scenario repayment figure in mind you should start budgeting your finances accordingly.

For example if you currently repay $600 on your mortgage but you know that in 18 months that it will reset to $750 then you should start to budget your current finances on the basis of the new figure of $750 even if it is 18 months before the new rate kicks in. Start paying the new rate of $750 now. Don’t wait for the rates to reset in 18 months.

The logic is simple, by the time the new rate kicks in you will have adjusted your finances accordingly and the payment shock will be neutralized. In effect you are bringing the payment shock forward and allowing yourself to deal with it on your own terms.

In the example above there is a difference of $150 between the current payment of $600 and the project rate reset figure of $750. When you start to budget your finances using the new figure even though it is 18 months before you actually need to start paying $750 you should save the difference of $150 and place it in an account only to be used to help you smooth out the transition to the new higher rate.

Payment shock – the real key to avoiding it.

In my article called ‘Prudence in all matters relating to your debt’ I made the point that to be prudent with your finances you should expect more bills and expect less income. To avoid payment shock you should apply the prudence principle. If you estimate that your repayments after the rate reset will be $750 then you should budget for $800. By doing this you are allowing for any hidden or unexpected charges.

The only real way to avoid payment shock is to go for the fixed rate option where you repay principal plus interest each month. You know exactly what your repayments will be for the entire period of the loan. It may cost you more initially but in the long run you avoid any payment shock that could throw you financial plans into disarray.

Finally if you are caught on the wrong side of a payment shock like I was don’t just sit there looking at it. Get the calculator out and start doing your sums. Contact the lender and ask for help. Research your options on the internet. Take action. Get moving on it and keep moving on it. Come at the problem from different angles. More often than not a few choice cuts in your budget can help soften the blow.

Just remember that the faster you move the less of a shock it will be.

Debt Management software

Aug 132008

There is only so much reading about debt management and Personal Finance that a person can do. While there is huge benefit to be had from learning as much as you can about debt management and personal finance there comes a time when you must go about implementing what you have learnt.

To this end I have come up with a way for you to do just that. I have recently bought the commercial licences for a number of financial calculators and budget templates. I bought these calculators so that I could add value to this site and improve the user experience.

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Javascript is disabled, Please enable it.

[script type="text/javascript" src="http://www.debtconsolidationcare.com/affiliate/js/signup-form-code.js"][/script][/inline]

I have decided to allow readers to use these calculators for free as I don’t believe in charging people for something that is supposed to get them out of debt. I don’t want to push people further into debt when the goal of this site is to help people out of debt.

These calculators are located here – debt management software.

This debt management software is completely FREE for you to use. You can use it as often as you like. You do NOT have to sign up for anything. You can simply visit the debt management software page and start using them.  So please just work away and get started on getting your finances in shape.

The calculators are easy to use and there are instructions as to what to enter into each field.

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.

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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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

May 302008

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

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

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

What are you trying to achieve with your paperwork?

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

Cardboard box clarity

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

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

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

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

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

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

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

X marks the spot

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

Don’t be afraid to ask questions

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

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

Destroy the evidence

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

How long should you keep paperwork?

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

Storing your paperwork

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

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

In Summary

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

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

In Debt? – Let go and move on

May 272008

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

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

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

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

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

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

Debt Magic – Clear your mind first

May 192008

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

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

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

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

Freeing up mental capacity

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

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

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

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

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

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

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

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

Where is my money? Clarity is the key

May 122008

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

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

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

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

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

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

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

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

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

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

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

In debt? Where do you start cutting?

May 092008

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

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

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

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

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

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

Prioritizing is the key

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

Fast ways to eliminate credit card debt

May 082008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

May 072008

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

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

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

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

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

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

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

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

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

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

Shopping – your drug of choice?

May 052008

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

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

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

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

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

From high to low

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

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

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

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

What to do?

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

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

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

In debt? Your banks don’t care about you

Apr 212008

The banks are hurting. The recent meltdown in the subprime has hit their bottom line hard. Do I have much sympathy for them? No, not really but I am concerned about their financial health. Why you may ask? Do I own stocks in the big banks? No. The real reason that I am concerned about the banks is because of you.

You see when the banks feel pain they try to pass the pain on to us. Now some may argue that it was us who got the banks into trouble in the first place by being late with our mortgage payments. My response to that comes in the form of a stack of bank letters that contain offers of loans, credit cards and mortgages dating back a couple of years. These were allsorts of sweetheart deals just to get me to sign up for one of their financial products. If we were the cause of the problem then I would say that it takes two to tango Mister Bankman. You were my best friend two years ago.

Passing on the pain

So interest rates have been cut but the banks don’t seem too eager to pass on the full cuts? Why is that? Well the simple answer is that banks have become so distrustful of each other that they are reluctant to lend to each other let alone lend to me or you. As a result of this credit crunch when the banks do lend to each other they lend at higher rates of interest because they are now a lot more worried about the risk of default. The credit crunch is hitting the bottom line hard. Banks and financial institutions have become more focused on controlling the quality of the customers that they try to sell their products to.

What this means for you

The financial pain being felt by the banks has wide implications for you. Even if you have an impeccable credit history with very little or no debt and a good income the banks will still be reluctant to lend to you. This means that if you want to get a mortgage you will have to jump through a lot of financial hoops to get it.

It’s nothing personal – it never is with the banks. You are simply just another number to them. They have their computer models that determine whether or not you are creditworthy. If the computer says you are creditworthy then great, if the computer says you are uncreditworthy then you get cut. It’s as simple as that. However in recent years the models that the banks have used seem to have been thrown out the window. People who clearly had very little means to repay their mortgages were give large sums of money to buy houses with. When these people eventually stopped paying the banks woke up and started to re-evaluate the way they lent money. A little too late I might add.

Since the bank looks at you not as a person of ability but instead as a set of numbers it is time for you to start thinking in a similar way. If you want to be financially successful and rid yourself of the burden of debt then you need to start looking at your financial life as a set of numbers. The key numbers in your financial life will be

1. Your credit score

2. Your income

3. Your total credit card debt

4. The number of years until you plan to retire

5. Your overdraft

6. The amount and number of outstanding loans

7. Your mortgage and how many years are left on it

By reducing your financial life to a set of numbers you begin to speak the same language as the bank. No matter how emotional your appeals to the bank are in relation to your debt situation they will fall on deaf ears. The reason why they will fall on deaf ears is because you are not speaking the same language as the bank. As soon as you start speaking the same language as the bank things will start to open up for you.

You need to see things from the banks perspective. They have automated all their lending decisions based on your credit score which in turn is based on your credit history. To get ahead and get on with the bank you need to keep on top of all the key financial numbers in your life.

Dealing with banks and financial institutions – one of life’s great mysteries

Apr 212008

Countless times I’ve hung up in frustration when I’ve called my bank. The automated voice on the end of the phone simply doesn’t seem to understand the urgency. ‘Your call is important to us’ – Yeah well obviously not that important because otherwise you would have answered the phone!!! Argh! Why do I waste my time? At one stage my attitude was let them call me when there was a problem. The thing is if your bank is calling you, you know you have a big problem.

If you do insist on calling the bank once the call gets answered you invariably get talking to someone who doesn’t like their job and has very little interest in your situation. Now some may find this a bit harsh but this has been my general experience. If you are already stressed about your financial situation the last thing you want is someone dealing with you in a cold and detached manner? Unfortunately that is almost exactly what you always get.

If you have a financial problem you want suggestions and solutions to it. You don’t want to talk to some one who sounds like a robot reading from a rehearsed script.

The reality of working in a call center for a bank

Many moons ago as a student I spent sometime working as a credit card salesperson for a large financial institution. The pay was poor and the conditions cramped and the work was awful. My job was to ring people and ask them if they wanted to buy additional insurance as part of their credit card package. It was cold calling at its worst and a very tough job at that. To be honest I didn’t last long. I could handle the rejection but I simply couldn’t handle the repetitiveness of reading from the same script over and over again. I almost always invariable ended up going off script and talking about things like football. As a result I would get reprimanded for not making enough calls per hour and not sticking to the script.

I did find it a very useful experience though. I gained a valuable insight into the workings of a financial institution’s call center and the things that customers who call looking for help can do to improve their chances of a successful call.

Okay so here are my top ten pieces of advice when it comes to dealing with financial institutions over the phone.

1. Mentally prepare yourself. What this means is have a clear idea in your mind of what to expect from the call and exactly what you want from the call. Don’t expect the person on the end of the phone to be your friend. Don’t expect a miracle solution to your problems. Do have a clear idea of what you deem to be a successful outcome to the call.

2. Have your paperwork, facts and figures prepared and to hand when you make the call. There is nothing more frustrating to someone working in a call center than someone who does not know their account details or who has to fumble about for the details of the payment they are querying.

3. If your call is answered by a person whose first language is not English then please be patient. More and more large banks and financial institutions are outsourcing their call centres to places like India and Poland to take advantage of the lower wage cost. The thing is these people are usually highly educated and often people are too quick to label them as stupid simply because English isn’t their first language. The best strategy is to be patient, speak slowly and clearly and treat them with respect. Remember an angry person in anyone’s language is still an angry person.

4. Take the full name of the person you’re dealing with. If you’re happy with them and have further queries you will want to call them back. This might seem obvious but how often have you rang the bank back only to forget the name of person or worse still you remember their first name as ‘Jane’ and then you are told that there is 8 women called ‘Jane’ working in the place. You have to realise that these call centers are huge with hundreds of employees working side by side. The staff turnover is usually quite high so the chances of you finding Jane again are slim if you do not know her second name. So the key is to get the full name of the person you are dealing with.

5. Related to number 4. If you are unhappy with the person you are dealing with simply call the bank again at a different time and explain your situation to someone different. Repeat this process until you are happy with the customer service rep that you are dealing with. Try to vary the times that you call. So if you called at 10am in the morning call back later in the evening. Hopefully this way the shift will have changed in the call center and you will have avoided the chance of getting the same person on the phone. If you do happen to get the same person on the phone simply hang up.

6. Keep calm. Dealing with financial problems can be emotionally draining. For a lot of people dealing with the bank can be an intimidating experience. It is easy to get frustrated and upset when you are kept on hold for 20 minutes only to be told that you are in the wrong. Keep calm. It will only make your interaction with the bank more awkward if you get the reputation for being a difficult customer.

7. Be persistent – resolve yourself to the fact that when dealing with your bank you are most likely in for the long haul. If you are having financial problems and need the co operation of your bank to help you solve those problems then your are going to have to be persistent. The pace of progression will be slow and you will meet with a lot of frustration but the key thing for you to be is persistent. You have to remember that you are dealing with a faceless monolith of an organisation that cares very little for you or your problems regardless of what they might say. The only solution to their inertia is the overwhelming persistence that you will bring to bear on them.

8. Anything that is agreed between you and the customer service rep. during the call have agreed in writing if possible. Ideally it would be great if you could get an email confirmation of everything that you agreed with the customer service rep. This will help avoid any confusion as to what needs to be done and who needs to do it. At the end of every call simply call back the facts to the customer service rep. Say something like this “okay, I just want to confirm what we just discussed. I need to do XY and Z and you are going to do AB and C…is that correct?” This will help clarify the situation.

9. Complete the tasks that you agreed to do with the Customer Service Rep. This shows that you mean business and that you are determined to solve the problem. If possible mark any documents that you send to the bank for the attention of the customer service rep. This should help speed up the process.

10. Patience my friend is a virtue or so the slogan of the banks and financial institutions that I’ve had to deal with should read. To understand why the process of dealing with the banks takes so long you have to try to imagine the size of the bank. Generally there are thousands of people working for the bank. There are hundreds of departments. With in these departments there are dozens of teams. Each team deals with something slightly different than the others. As a result when you have a query with the bank it has to be filtered through multiple layers of the organisation to find an answer then the answer has to be filtered back through the same layers to you. Generally the banks are well set up to cope with these queries but as you can imagine the sheer size and scale of the organisation can result in delays in getting a response to you.

Some banks and financial institutions are better than others when it comes to dealing with customer queries. What we as customers need to realise is that we have to prepare for our interactions with the banks. The more prepared we can be in terms of documents, facts and figures and more importantly attitude the more easy it will be for us to get what we want from them.

Up to your eyeballs in debt – so what?

Apr 172008

So you’re up to your eyeballs in debt and you’re beginning to get stressed about it? Don’t bother. More and more being in debt is seen as a lifestyle choice rather than an affliction of the cash poor. How many of your friends have debt? Quite a few I’d say and I bet a lot of them have well paying jobs? Yet they seem to progress through life just fine. Why not you? Where is it written that you have to get stressed over your debt?

You can sit there confused as to what your next step should be or you can simply acknowledge that you are in a whole load of debt, accept this fact and get on with your life. The choice is yours. Sure if you want to have the joy of the knowledge that you will be debt free some day then great – go ahead and read some of the articles on this website and they will help you on your way. For the vast majority of people becoming debt free is simply a pipe dream. I’m not being mean spirited. I believe people can change but if we are realistic and look at our debt situation in its entirety – short of winning a nice lump of cash a lot of us may never be debt free. Unless people change the spending habits of a lifetime (which is a very hard thing to do) then they are likely to go on spending and spending. So why even bother trying to change?

Now if the thought of being in debt for life depresses you then don’t let it. The vast majority of the people you know are probably in the exact same position. You can either fight against this and get stressed and worried or you can go with the flow and do the best you can to make the most of your current situation with a view to managing your debt or at least getting it down to a more manageable amount.

Accept that you will be in debt for the rest of your life and make peace with that fact. Like going to a job or taxes accept debt as a simple fact of your life.

How a stress free debt laden lifestyle would work

In order for this to work you are going to need a regular sustainable flow of income. This income can come from anywhere – rent out a room, benefit payments, salary. The key thing is that it is regular and that it is sustainable.

The main idea behind living a stress free debt laden lifestyle is that you learn how to better manage the flow of cash in and out of your bank account. In some cases you will need to be creative and may even need to rob Peter to pay Paul.

To manage your cash flow better you need an income and expense management system. This sounds very grand but this is simply a method of keeping track of your income and expenses each month. This system will help you identify who you can pay now and who you can hold off on paying while also allowing you enough cash to have a life.

To build this system all you need is a sheet of paper, a pen, a calculator, a calendar and details of when your loans, utility and mortgage/rent payments fall due each month. You also need to know the date when your salary/income is received.

Take the sheet of paper and list all your recurring monthly expenses. Beside each amount put the date when it falls due. At the top of the page put the amount of the salary and the date you will receive it.

Now here is the tricky part. You need to look at each expense and assigning an importance level to each. For example your mortgage would be considered highly important. The way to assign the importance to the expense is to think about it this way – what is the worst that can happen to me if I do not pay this bill this month. If your electricity is about to be cut off then it would be regarded as highly important.

Once you have assigned an importance level to each item you then need to allocate the available resources (your monthly income) to the most important expenses. At least this way you are managing to keep on top of the most pressing expenses.

Timing will play a big factor in this lifestyle. If you time your expenses correctly you can free up some cash. Here is an example of what I mean. Let’s say I’m ambitious and I want to pay off my entire credit card bill as it falls due. I know that if I purchase anything with my credit card after the 10th of the month I will only have to pay the credit card bill 56 days later. This gives me two months to raise the funds to pay it. With this knowledge I know that I will only have to take half the amount out of this month’s salary and the other half out of next month’s salary. Once I have allotted this amount and mentally prepared myself for the bill I don’t feel as much pain as I would if I had to take it all out of one month’s salary.

This is a simple example and you might say why bother paying off your credit card at all. Again this is a choice that you will have to make.

The things you need to do to maintain this lifestyle

Pay off more than the minimum amount each month on your credit card. This will help absorb any interest amounts that are applied to the balance and eventually it will help you pay down the entire amount – I did say eventually.

Pay the bills that absolutely must be paid – your mortgage, utility bills, phone, electricity etc.

Put limits on the amount of new debt that you are prepared to take on. To stop this ship from sinking you have got to stop taking on water, well at least until you have repaid some of your existing debt. So resolve that while your goal may not be to become debt free you need to be careful about taking on additional debt. This method looks to maintaining the status quo while letting you reduce some of the emotional pressure you may be feeling.

Remember the goal of these changes is not to make you debt free. The goal is to allow you to maintain your current lifestyle with only a few minor changes. You need to adopt a positive attitude towards you debt. Strange isn’t it? But it makes sense if you think about it. The less you resist your debt and fight with it the less of a problem it will be once you know your limits.

A word of warning

The one major drawback of this approach is that you are like a rat on treadmill. You can’t afford not to work or risk your income. It requires a lot of energy and focus on what you can afford to pay this month versus what you must pay this month.You are at the mercy of your boss and the economy.

For those of you that not happy with being in debt there is a way to become debt free. It’s not easy and it will take a lot of hard work but it is possible. Check out the articles in the archive section for more details.

Debt help program – do it yourself and save money

Apr 152008

The essence of any debt help program is that it is realistic. The debt program needs to be tailored to the individual’s situation in order for it to be of any help. There are many template debt programs out there that will apply standard rules to any given situation. Cut back spending pay off credit card debt first etc. In my mind this is like trying to fit a square plug into a round hole. The standard debt programs have things in them that will not apply to everyone and there are things missing in them that some people may need. For example a retired person in debt is going to have different priorities than a twenty five year old in debt.

What’s the alternative to using the standard debt programs? The ideal situation is where a debt help program is tailored to the individual, their resources and to their needs. In most cases you are going to have to pay for someone to tailor a debt program to your specific needs. The only other alternative is if you create your own debt help program to your own specific needs.

But I don’t know anything about debt management.

Ok – but what you should be saying is ‘Where can I learn more about debt help programs?’

The point is that if you really want to tackle your debt problems then you need to take charge of where you get your information from and how you apply that information.

With standard debt help programs the individual is told exactly what to do. Now most people don’t like being told what to do – it reminds them too much of school. Telling people what to do does not solve the problem. In the short term there may be relief as the people begin to follow the program but long term the problems with debt tend to persist.

Give a man a fish or teach a man how to fish

The old saying of ‘Give a man a fish and you feed him for a day, teach a man how to fish and you feed him for a lifetime’ holds particularly true in relation to debt programs. The saying could be rewritten along the lines of ‘Give a person a debt relief program and you give them debt relief for a day, teach a person how to build a debt relief program and you give them debt relief for a lifetime’.

By simply trying to research and build your own debt program you will gain an insight into how money really works. You will discover ways of managing the money that you have and paying off your debt in a manner that is suited to your situation. You’ll gain valuable skills in how to create and manage budgets. You’ll learn how to be creative with the limited resources you have.

Debt help program that suits you

The reason why a self made debt help program has a much higher chance of success is because you have tailored it to your situation, your needs, your income, your expectations, and your self knowledge.

If you are honest with yourself and try to be as objective as possible with your situation it is possible that you can create a very effective program.

The problem with self made debt programs

Ok I’m not doubting that you are intelligent, not one bit. I know you can research the information on this website and on the internet and combine what you learn into an effective debt program. The problem is that it was you who got you into this debt situation in the first place. You are effectively going to be creating a debt program with a bias towards your existing debt behaviour. You are either going to be too hard on yourself trying to purge the guilt from past overspending or you are going to be too soft on yourself telling yourself that you’ll start this great new debt program next month.

If you can balance the urge to quickly get rid of debt against the urge to go easy on yourself then you have the foundation upon which you can build a good debt program. That foundation needs to be solid. There is no point building the debt program on a foundation of sand. If you are not prepared to go that extra mile and acknowledge the issues that you have with debt then you may as well pay some finance company to manage your debt for you.

In Summary

1. Self made debt programs can be more effective than standard template programs. This is because they are tailored to an individual’s needs.

2. By building the program yourself you gain useful skills that will last you a lifetime and help keep you debt free for life.

3. Be careful to allow for your existing feelings on debt when building the debt program.

Credit debt solution

Apr 142008

As the housing market cools and the credit crunch bites a whole industry has grown up around Personal Finance but also debt and Bankruptcy. How often have you seen those ads on TV and the Internet offering to solve all of your life’s problems in one easy step…for a fee of course. A big one at that. So to solve your debt problem they are going to ask you for more money which in turn may have the effect of putting you further in debt – Nice.

Now I’m not saying that all these services are bad but the cynic in me just wonders have they your best interest at heart?

Queue the broken record: As I said before and I’ll continue to say it until I’m blue in the face – the ONLY person who can help you out of debt and bankruptcy is YOU! But what about my credit counsellor or my attorney? Well to be honest they can only do as much as you let them. Their effectiveness is directly impacted by how willing you are you go along with their suggestions…you can bring a horse to water but you can’t make them drink.

In reality for someone who is in debt or facing bankruptcy the emotional challenges (never mind the financial challenges) are huge. To tackle the financial issues in isolation of the emotional issues is recipe for disaster. The reason is because if the person tackles the debt and manages to pay off the debt without trying to understand why they go into debt in the first place then they’re doomed to repeat the behaviour.

No it’s not fair but that is simply the way it works. You can sit there and bemoan your situation or you can get angry and seek to change it in a positive way.

Change is possible

In order to restore your financial health you need to treat these two key elements.

Emotional financial health

Financial management habits

This may sound intimidating but if you can gear yourself up and are prepared even the smallest steps in the right direction then it will be as easy as painting by numbers because that is exactly what you will be doing and we all remember how much fun that was.

But please remember that it is up to you.

Over the coming weeks I have set myself the goal of posting on the key Debt management topics. My aim is to provide you with a comprehensive understanding of why you are where you are and how you can get to where you want to go in the shortest possible time. I’ll be placing a big emphasis on the emotions that debt and money cause and how you can spot the problems and solve them quickly. I’ll be looking for feedback, so please feel free to comment on the posts and let me know if they are useful.

Debt Free – Starting from where you are

Apr 072008

Do you really have a problem with Debt? The simplest rule of thumb to decide if you do is to take the stress test. The stress test is simply this – when the word ‘Debt’ is mentioned in general conversations do you feel your level of stress increasing? If yes then read on – if no then I suggest you find out why you are on this website but not yet stressed about your debts.

The real problem with Debt is that it’s not a sudden thing. It’s more a case of the frog being slowly boiled to debt in a pot of hot water than being dropped into a boiling pot of water and then jumping straight out. Mortgage aside – I’m sure that if some one said to you when you were fifteen – you are going to grow up into a responsible adult with a mountain of debt you would have said straightaway – no thanks!

Commitment

Ah the C word – yes it’s almost like a marriage. You are effectively married to your debt…until debt do us part. Well the sad fact is that the majority of relationship break ups are caused by financial problems. With Debt you can’t always up and leave the relationship. Yeah sure you could file for bankruptcy but then the shadow of your debt will still follow you around for years to come.

So you are effectively committed to your debts whether you like it or not. That’s the unfortunate reality of the situation. Your creditors have you. They own you.  It’s not nice to hear it being put like that but that is where you are starting from. You are effectively a slave to your debts and to your creditors. Each morning when you go to your ‘Wonderful’ job keep in mind that you are in fact going to work for creditors and they are laughing at you all the way to the bank.

Does this upset you? I sincerely hope it does. The reason why is not because I like making people feel bad but because you can harness the good from these negative emotions.

You have two choices – let the anger and frustration at your situation grow into despair and inaction or you can use your and anger and frustration as energy to push you to tackle your debts.

The cause and effect principle

If you do decide to tackle your debts the actions you take now will have a long term positive effect on your life. If you do nothing and let your debts continue to mount then you will pay the price in the long run.

Pay the price now in terms of discipline and action or pay the price later in terms of despair. Your call.

How to stop debt before debt stops you

Mar 272008

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

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

If you’re in a hole stop digging.

The simplest way to stop debt is to stop everything.

Stop eating out

Stop buying luxury goods

Stop living beyond your means

Stop whatever it is that is causing your debt

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

Here’s an example of what I mean.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inability to pay credit card debt

Mar 092008

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

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

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

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

How to solve the problem.

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

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

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

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

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

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

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

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

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

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