Intro to Debt Management | Till Debt Do Us Part

$40K in Debt so what difference does another $1000 make?

Sep 082008

Generally my thinking is that when you’re in a debt hole that you should stop digging and look up. Sometimes I hear people say something like “I’ve already got $40k in debt so what difference will another $1000 make? If I can emotionally handle $40K of debt then $41K isn’t going to be too much more difficult”. Fair enough you might think.

When your debt gets to such a large amount the difference an additional $1000 makes is small. I suppose you can think of all debt as relative. If you had an existing $1000 in debt then an additional $1000 would effectively be a 100% increase or a doubling of your debt. Whereas an additional $1000 when you already have $40,000 in debt is only going to increase your debt by 2.5%.

But to deal in percentages of debt increase is simply a wasted exercise and is avoiding the real point. In the end the percentage increase is not important if you don’t have the cash flow to meet the repayments.

Can I meet my debt repayment obligations in the long term if I take on more debt?

This is the key question that anyone who is considering taking on more debt now should be asking themselves. If you are struggling with debt now then how will you manage in six months time?

Too often I have heard stories of people getting too comfortable with their debt and letting themselves slip into debt oblivion. They grow so comfortable with the idea of debt that it seems like the easiest option is to take on more debt rather than acquire the discipline and work ethic necessary to save and earn.

But I don’t want to lump everyone into the same category so the question that has to be asked is.

Why more debt?

I suppose the other very important consideration is why would anyone want to take on more debt if they are already $40k in debt? If someone is frivolously spending an additional $1000 on clothes or the latest gadget or a holiday then the question has to be asked is why? Why more consumer spending?

That said if someone is taking on more debt to pay for healthcare or education then you can see the logic behind it.

So you can see from the two examples why taking on additional $1000 of debt is necessary in one case and totally unnecessary in another case.

The difference between the two types of spending

In the frivolous spending scenario that person is way too comfortable with their debt. The end result is debt oblivion or more commonly known as bankruptcy. The problem isn’t debt per se; the problem goes much deeper and relates to psychological issues rather than financial ones. The financial situation is the end result, debt is a symptom rather than the cause of the problem. The problem is probably caused by some deep rooted emotional issues. I honestly don’t know but I know that a psychologist would probably have a lot to say about it.

In the necessary spending scenario the debt can be justified but that person also has to ask how the debt arrived and why is it still building up? In the case where the debt is being used to further education or to pay medical bills then the argument can be made that it is in effect a kind of “Good Debt”. (Good debt in itself is an elusive concept and one that deserves and entire article of its own which will follow soon.)

The difference an additional $1000 will make to your debt

The difference to me is one of need versus want. Do you want the latest gadget or do you need the latest gadget? If you allow yourself to be duped into believing the flawed logic of relative debt size as I outline at the start of this article then you have a problem. The chances are that you have become too comfortable with your debt and you need to scare yourself into action about your debt.

Debt is debt and only in the more positive or extreme circumstances can it ever be justified. The two simple questions you should as yourself when considering taking on more debt are:

Can I afford the additional repayments in the long term?

Does the thing that I am using the debt for add value to my life?

If you can answer yes to both of these questions then you may be able to justify taking on more debt. If you have any doubts about your answer to either of these questions then you need to seriously reconsider taking on the debt.

Life plans instead of debt management plans

Jul 112008

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

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

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

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

Why are debt management plans so oppressive?

It primarily depends on who designs them.

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

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

What’s the alternative?

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

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

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

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

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

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

Cash flow calendar – a lifebuoy in a sea of debt

Jun 022008

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

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

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

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

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

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

Cash flow calendar

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

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

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

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

Building a cash flow calendar

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

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

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

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

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

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

May 222008

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

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

Beware of the false economy

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

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

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

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

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

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

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

May 202008

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

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

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

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

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

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

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

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

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

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

Debt consolidation – Where is the catch?

May 062008

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

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

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

Creatures of habit

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

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

Does debt consolidation make sense?

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

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

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

Advantages of debt consolidation

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

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

Disadvantages of debt consolidation

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

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

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

Debt management plans – can someone please explain?

Apr 232008

I’ve been hearing a lot of about debt management plans lately and how they are touted as a cure for the ills of people in debt. Taken at face value the debt management services on offer sound great – take all your loans, credit cards, overdrafts and store cards and turn them into one easy to afford single monthly payment. Wow this sounds great – that is until you dig a little deeper.

How it works

You as a potential customer contact a debt management company. The debt management company will ask you for information in relation to your debt, your monthly income and your day to day expenses. The debt management company will devise a plan for you based on your monthly income and on the amount of unsecured debt that you have. Please note that the debt management company can only devise a debt management plan for you in relation to your unsecured debt, this includes credit cards, overdrafts, store cards and personal loans. Mortgages and car loans will not be covered by the debt management plan.

Straightaway this is what I would regard as a negative since you will still have the monthly car loan and mortgage payments on top of the debt management plan payment.

Ok so the debt management company has the necessary information about your debts and your income. The debt management company calculates and agrees a realistic monthly payment that you can make to pay off your debts while at the same time allowing you enough money to pay for your day to day expenses.

Once you have agreed the monthly amount the debt management company will approach your creditors looking for more favourable terms for you. They may in some cases be able to negotiate a lower interest rate and/or reduced monthly payment amounts.

When the debt management plans starts the debt management company takes the monthly payment that you give them and distributes it to your creditors as agreed with them under the new repayment terms.

That’s it in a nutshell.

What’s in it for the debt management company?

Funny you should ask that. Why a nice juicy fee of course. Depending on the organization the fee will vary from being a one off admin fee to a recurring percentage based fee.

What’s in it for the creditors?

For the creditors it is a case of something is better than nothing. If you default on all your debts then the creditor will eventually have to write off your debts as a bad debt and they will not get any more money out of you. If the creditor agrees to your debt management plan they know that you will be in a better position to repay your debts and the creditor will get some if not all their money back.

Advantages and disadvantages of a debt management plan

Advantages:

1. Only one monthly payment.

2. The debt management company may be able to negotiate lower interest payments and lower monthly repayments for you.

3. You no longer have to communicate with your creditors as your debt management company deals with them on your behalf.

4. You can avoid getting a loan to consolidate your debts as a debt management plan does not involve consolidating your debts.

Disadvantages:

1. Creditors may not necessarily agree to participate in your debt management plan.

2. Your credit history may be affected. It’s not so much the debt management plan that will affect your credit history rather it’s the fact that you were unable to keep the original payment schedule as agreed in the original contract.

3. If you have less than $10,000 in unsecured debt you may not qualify.

4. It will take longer for you to repay debts as the debt management company will most likely try to negotiate lower monthly repayment amounts.

It is up to you to decide if the advantages outweigh the disadvantages. It will depend entirely on your personal situation.

Do it yourself debt management program

The one point I will make is that if you are thinking about using the services of a debt management company why not try to create your own debt management plan first? There is nothing from stopping you dealing directly with your creditors and trying to renegotiate your debts with them yourself. Use the information on this website and on the internet to empower you to take control of your debt.

One of the fundamental problems with the services offered by a debt management company is that they do not offer services that cover secured debt. This means that you will have to deal with your car loan and mortgage yourself anyway so why not simply apply what you learn to all your debts? In the long run it will serve you better to create your own debt management plan and deal with your creditors yourself. You will gain incredibly useful skills and knowledge that will serve you a lifetime. Not only that but it is you who is in full control of the situation. You will be empowered.

However if the thought of creating and running your own debt management plan intimidates you and you are more interested in using the services of a debt management company then please do your research carefully. Do not sign up to any debt management service until you have read the following information about debt management services from the government contained in this link. Debt Management Plans

Debt by Stealth – this is the cause of your Debt

Mar 292008

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

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

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

Student Loans:

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

Mortgage Debt:

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

Consumer Debt:

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

The debt bite

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

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

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

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

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

Keeping up with the Jones

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

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

Wake up

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

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

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

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

Debt Management – Anyone for some elephant?

Mar 182008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Sum Total of your Debts

Mar 042008

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

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

Don’t know where to start?

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

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

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

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

Here’s an example:

Student loan 5000

Credit card 11000

Car loan 6400

Phone 200

Electricity 300

Cable TV 100

My brother Tim 4500

My Mum 320

Back tax 1300

Parking fines 250

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

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

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

The ugly truth about your debt.

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

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

Debt and Clutter – one solution for both

Feb 092008

If debt has taken hold of your life and you just can’t seem to see a way out then it might be time for drastic action.

Do you feel stressed when you get home and are confronted by clutter? Do feel like the walls are coming in on you? The thing is you probably have too much stuff. Things like too much clothes, too many shoes, too many magazines and too many gadgets.

I have often found myself wanting to scream from the top of my voice, “Why do we need all this stuff?” I don’t know where the line between buying something we actually need and just buying something for the sake of it began to blur. It’s almost like we sleep walk into buying stuff that is completely unnecessary. Help!!!! I’m actually getting a little stressed even thinking about it. How often have you gone to the ATM, taken out $50 gone to buy some essentials and then realising that you have about $7 when you get home? When you try to piece together where the money went you realise that you spent most of it on unnecessary items such as magazines or lottery tickets.

The feeling of regret this brings when you realise that the enjoyment and value that these items bring are very short lived. Sometimes they actually bring negative value for example soda will eventually rot your teeth so in the long run you will pay a lot more in dental costs than the initial cost of the can of soda.

Clutter on a grand scale

An old friend from college recently got in touch with me. It was great to hear from him. The one thing I remember most about him was that he was a pack rat and a very messy individual. I would dread going around to his apartment because I would have to fight with the half eaten pizzas and beer bottles for a place on his sofa. He also had lots of stuff – things like lava lamps and dozens of magazines scattered about randomly. I passed it off as the typical student lifestyle – one from which my own was not too far removed.

Anyway a lot had happened to him in the last couple of years. One major event was that there was a fire in his house about two years ago. He lost almost everything he owned.

My heart went out to him as he explained what had happened. Anything that did survive the fire was too badly smoked damaged to keep. While he had insurance the amount he received for the lost items was nowhere near what he paid from them. He would find it very difficult to replace all the lost stuff. But then he said something that stunned me and when I think about it makes perfect sense.

He said that there was one huge positive from all of this.

All the stuff that he lost was just that – stuff! old magazines, books, DVDs, computer games etc. He had been meaning to throw out all the stuff for years and in one fell swoop had it done for him. He said that he felt an immense sense of freedom. Yes initially he said he was devastated from having lost so much of his stuff and indeed there were personal items of sentimental value that he lost but when he stepped back on got perspective on the situation he found that.

I’m lucky to be alive and able to create new photos with my friends and family.

I’m free of all the clutter in my home life that was like an oppressive weight around my neck.

Is that attitude too much like Pollyanna’s? I don’t think so. Ok it’s true that the fire was a traumatic experience and thankfully no one was injured but every cloud has a silver lining. My friend had been set free from all his clutter.

You see the problem was that the clutter was not only messing up his home it also came with a lot of emotional baggage. My friend told me that he would look around his house and he would get very stressed as he did not have the motivation or focus to clear out the clutter. The clutter was effectively crowding him out of his home!

Two years later and he is a changed man. He vowed not to let clutter take over his life again and he is winning the battle. His clean minimalist house almost puts me to shame. He explained to me that he now feels about 100 times freer than he did when he had all that clutter.

So how does all this help you with your debt situation?

Now I’m not for one minute suggesting that you go all Backdraft on your stuff and burn your house down. The 10 years in prison would make the whole process very expensive and lord knows we are in enough debt already without having to pay our debt to society with jail time. Ok so arson is ruled out. What next? Simple really…eBay!

My advice is that you sell everything in your life that is not an absolute necessity. Everything. You need to be ruthless.

The biggest problem is not the physical act of taking photos and putting them on eBay then sending the item to the buyer. No the biggest problem that you are going to have is to overcome the emotional attachment that you have to this stuff. It will take time but once you commit to it you have to see it through because now you are presented with a great opportunity to solve two problems at once.

Two problems solved in one go:

Problem one: The mayhem that you call home.By decluttering and selling all the excess clutter that you do not need you are creating a clean and clear living space for you and your family. No longer will you have to worry about what you friends will think when you invite them over for coffee.

Have you ever seen those house makeover shows that show the before and after pictures of someone’s house? From what I see the biggest problem in most of these houses is the clutter. Sure the décor could do with updating but the majority of them seem to be so cluttered. The solution is obvious really – get rid of the clutter.

Problem two: That debt burden that is weighing you down.

So having read about clutter you may be asking what on earth has this got to do with my debt and how will it help me solve it? Well the benefit of clearing out the clutter is that you will get a much needed cash injection from the sale of your items on eBay. Ok this will take time but its going to take you time to pay off your debts anyway and this is a piece of very simple action that you can take to help you tackle your debts.

When you sell an item on eBay the chances are that you are not going to get what you paid for it. Do not let this logic stop you from selling your clutter. The way you have to think about it is ‘How much is it costing me to keep this item?’ The costs of keeping an item come in a number of varied ways but the primary one is emotional. Each day when you return home from work you are constantly reminded what you have spent your money on and that you are in debt. So I say clear it all out.

Why eBay? It doesn’t have to be eBay. It can be any marketplace where you feel that you will get a fair price for your clutter. I use eBay as an example because it is one of the biggest marketplaces in the world.

Strip your home life down to the bare essentials, cut away the excess. Sure it’s going to be tough emotionally because like your debts this clutter has taken time to build up. Above all else and even if you take no action after reading this article I want you to see the causal relationship between the clutter in your house and the debts that you owe. The chances are you incurred a significant part of your debt by buying things that at the time you thought you needed but in retrospect they were not needed at all.

Like paying off your debts, clearing out the clutter will take time. Give it time. Give it as long as it takes. You want to build a better brighter future for you and your family? Then act now.

Debt Management Budgets – A waste of time?

Feb 032008

How often have you heard that the first thing you need to do in Debt management is to make a budget? I don’t necessarily agree. In fact in a lot of cases creating a debt management budget can be a complete waste of time.

So you want to tackle your debts. Great – this is a fantastic step forward in that you acknowledge that there is a problem.

For someone who is offering their services as a financial advisor one of the easiest things in the world for them to do is to give you a budget. They have a template budget that they fill in your numbers into. You have ‘X’ income and ‘Y’ Expenses. You have a free cash flow of (X-Y) that you can put towards paying off your debts. Then they go on to give you a money saving tip sheet, The tip sheet includes things like – shop around for the best offer, rent out a room; file your taxes on time etc. This is all very commendable stuff and indeed some of it may prove to be useful but there is one fundamental problem with this whole process. That problem is YOU!

The core of the problem is that you are not a robot. If you were then that budget and tip sheet would work amazingly well if you had a computer program for a brain. All the budget rules and money saving tips could be programme into your brain. If this were the case your debt problem would solve itself in a matter of time. Your debt problem would have been caused by the result of faulty programming.

The thing is you are human. Your logic is ruled by your emotion and it is not possible to change your debt situation without changing your emotions. You see if it were simply a case of dishing out Budgets and Tip sheets to everyone then there would be no debt problems. The emotions people attach to money can be crazy – and I’m not excluding myself here, money is the root of all evil, to go after money is to be greedy, greed is good etc.

With such crazy and widely different views on money is it any wonder that people have confusing and conflicting emotions when it comes to money? Now apply this to you debt situation. How are you supposed to move in the direction of your goal of financial freedom when all this time you have been accumulating debt? There is no simple switch that can change your course overnight. When it comes to debt it doesn’t work that way and no amount of fancy budgets are going to change that.

So how do you do it?

To make the budget effective you need to change how you relate to money. Up to this point you may have had a ‘live for the moment’ attitude but have now realised that this is not sustainable from a long-term perspective. The banks usually catch up with you.

To change your attitude towards money you need to change the way you think about it. The big danger is that if you let your debts take over every thought that you have you will turn what is essentially an inanimate object – money – into something that has a life of its own and is about to take control of your life. Okay the fact that you are reading this article indicates that debt has become such a significant part of your life that you felt compelled to search for information about it on the internet. This is a good and bad thing, bad in that your debt is at such a stage but good because it shows that you are willing to take action – however small – to rectify the problem.

You have got to remember you are not going to change the spending habits of a lifetime over night. Before your budget will ever become effective you need to change. How do you change? One of the simplest and most effective ways to change how you relate to money is to use NLP.

NLP is short for Neuro-linguistic programming. It consists of a number of different psychological techniques that allow you to shape your attitudes and beliefs about anything. It is this flexibility that will allow you to use it to change your attitude towards money. NLP is just one of a number of techniques you can use. The time you spend researching how to change your attitudes and beliefs about money will pay serious dividends in the years to come.

The alternative to not changing your attitude towards money goes something like this.

You have debts that you need to repay. You have ignored them until now but the pressure from your creditors has become so intense that you can not afford to ignore them any longer. Faced with some tough decisions – either go bankrupt or somehow raise the funds to pay off your debt. You manage to raise the funds to repay your debts you either consolidate your debts or borrow from a family member or sell your car.

Problem solved or so you think. The real problem began with the spending habits that you have developed over the years and these spending habits are going to be hard to control once you think the debt danger has passed.

The only long-term viable solution is to get at the root of your debt problem which is to tackle your attitude towards money and your spending habits. If you combine a determination on your part to tackle your attitude towards money with a good workable budget then is no reason why you will not succeed in clearing your debts for good.

So when you decide to make a change and tackle your debts the best approach is going to be a two pronged attack. The first prong is that you are going to research as much as possible about NLP and techniques that change your beliefs on the internet. The second prong is going to be that you research how to create the best budget possible for your situation and also you compile a list of money saving tips that will apply to your situation.

So in answer to the question ‘Are Debt management budgets a waste of time?’ the answer is No. However, for them to be really effective they need to be backed up with a change in attitude of the person who is using them.

The Pain of Debt

Feb 022008

Not long ago a friend of mine came to me with a problem. He had just recently broken up with his girlfriend and was having financial difficulties. He was not looking for money, well not exactly. He and his ex-girlfriend had taken out a 100% mortgage to buy their house. Since they were no longer together it had been agreed that he would take over the house and the repayments that went with it. The problem was the mortgage was in both their names and based on both their incomes.

My friend went to get the mortgage changed into his name but he ran into a brick wall. The bank was not prepared to change the mortgage into his name because it was not prepared to take the risk on my friend. You see my friend also has a significant amount of personal debt, credit card debt, overdraft and some outstanding student loans.

So if it wasn’t bad enough that my friend’s relationship broken up it also looked like he would lose his house. Now what did he want from me? Did he come looking for advice on how to repay his debts and stabilise his financial situation? Was he looking for motivation in his struggle with his debts? No, nothing of the sort. My friend was running short on options. He was looking for someone to go guarantor on the mortgage. This would mean that the person who signed as a guarantor on the mortgage would be liable for the mortgage repayments in the event that my friend could not make the mortgage repayments.

To be honest I struggled for a long time with this situation. What was I to do? I was caught between wanting to help a friend in need and not wanting to put myself in a position that could damage my future. Imagine the scenario – I go guarantor on the mortgage for my friend, now my friend manages to make the mortgage payments for six months. Okay, so far so good – it seems to be working out ok and my position as a good friend is assured. Now imagine that my friend gets laid off or his debts continue to grow and are too much for him to handle? What then? The problem then is that if my friend can’t make the mortgage repayments then it falls to me to make them for him. I have debt burden myself so I sincerely doubt that I could take on someone else’s mortgage repayments on top of the loan repayments I have to make each month myself.

As you can see it was a tough position to be in. I was angry at my friend for putting me in this position and trying to leverage our friendship so that I could solve his problems. I wasn’t happy about it at all. I wasn’t happy about the way it was making me feel and the way it had infected our friendship. You see that’s the thing about debt in all its ugly forms. If you are in debt and are struggling to cope with your debts then every single aspect of your life is view through the glasses of debt. Every decision you make is clouded by debt. You are no longer prepared to take risks like finding and starting a new and better job.

It was situations like this that made me mad enough to start this website. I get really angry when I see people beaten down by debt. They sleep walk right into a mountain of debt and wake up one day wishing it was all a bad dream. Some get depressed and end up on anti-depressants. Couples with debt problems begin to argue over money. The debt has made them afraid of losing what material things they have. Little realising that if they continue they way they are they will end up in a vicious cycle of spending to maintain a certain lifestyle and using debt to fund it. I’ve heard stories of couples staying together (even though they hated each other) simply because they could not afford to take the negative equity hit on their house. You see debt like this is oppressive – its slavery.

Getting back to the situation I had with my friend. He was getting desperate as the bank was looking for a guarantor and his ex-girlfriend wanted her name off the mortgage fast. So I took the middle ground – I really wanted to help this guy, after all he’s a friend and what use would I be as a friend if I couldn’t help him in his hour of need. On the other hand I didn’t want to be pulled down by his mistake – if things got a little worse for him then I would be dragged into his black hole of debt. Not a place I wanted to go. So here is what I proposed to him and how I proposed it to him.

“I will go as guarantor on your mortgage for the period of six months if you satisfy the following criteria.

1. Get a reality check – I want you calculate exactly how much you owe and to whom you owe it. Then I want you to calculate exactly how much you are repaying in loans each month.

2. Calculate the absolute minimum that you can realistically live on each month – so cover the basics only, mortgage, food, transport and health insurance.

3. Take a look around your house and life and sell everything that you do not need – everything. Use this extra cash to pay down your credit card debt.

4. Once the first three steps are completed I want you to set aside an additional 5% of your net income each month and add this amount to the monthly repayments you make on your smallest loan. Once you have paid down this loan take the amount you were repaying on the loan along with the additional 5% and add it to the next smallest loan. Continue in this fashion.

5. Cut up all your credit cards and operate only with debit cards or cash.

6. Create a daily/weekly/monthly budget.”

I said to my friend that I would go guarantor for six months to give him breathing space but I wanted him to change his spending habits. After the six months were up I would extend it for another year if he met the criteria I outlined above.

To the casual observer the terms outlined above may seem a bit extreme – some may argue that I should have simply gone ahead and signed for the mortgage and to hell with the consequences. He’s a friend goddamn it! My argument is this – it was this kind of attitude that got us into debt in the first place and I’ll be damned if I’m going back there. I’ve had too many sleepless nights for me to go back to drowning in debt.

So this is how it turned out. My friend said I was being unreasonable. I explained in detail the reasons why I wanted him to meet the criteria. It was for his own good and I had his best interests at heart. He didn’t take too kindly to my offer of help on condition. He got very offended. He said I was treating him like a child and in certain respects he was right. I was trying to control his spending behaviour but only because I could see exactly where he was going to run into financial trouble.

I tried to remain calm and kept repeating my reasons but as I said before when people are in a lot of financial trouble and the bank is calling it is hard for them to be logical. It did become a bit ridiculous and my friend became very upset. He couldn’t see why I was being so stubborn. I pointed out that I felt it was unfair for him to use emotional blackmail on me just so I could click my fingers and his problems would be solved. Well at least solved until the next debt threat!

The conversation went on in this manner for a while before my friend just got up and left in anger. We didn’t speak for weeks. I sent him an email to see how he was getting on and he called me. We spoke for a while and he apologised for storming off. I asked about the mortgage and he told me that his brother in law had gone guarantor.

We pretty much left it at that. We have met up and spoken since but our friendship is damaged probably beyond repair.

Part of me wonders whether the right thing to do was nothing – to make up some wishy washy excuse as to why I couldn’t go guarantor and leave him to his own devices. I don’t know what would have happened but to be honest I think the best thing that could have happened to him was to lose his house – or come close enough to losing it that he changed his ways. Now before you start typing that email of bile to me let me explain. I wanted my friend to realise how dangerous debt can be if used without thinking. I could see from his “I want it all and I want it now” lifestyle that he was using getting in deeper and deeper in debt. I wanted to help him realise this but he did not want to listen and certainly not to me. Who was I to tell him he had a problem? If the sheriff had come calling to take his stuff away would that have been enough?

Probably not.

Till Debt Do Us Part – Pay off debt fast