The ability to service your debt

Oct 092008

I remember someone I know telling me about the first time that he received notice from the bank that his mortgage payments were past due. For him it was deeply upsetting. He had a lot of pride and was of the ‘a man’s word is his bond’ attitude. For him to receive something like this from the bank was devastating.

He knew it was coming. He was not ignorant to the ways of the world. In fact the reason he was in debt was because he had taken out a loan to invest in a business. He says it himself that he was trying to be too smart. He was trying to leverage his good credit score and good job to make some money.

Now I don’t know what you think about what he was trying to do. My feeling is that he deserves respect and admiration that he was willing to take a big risk (because we’re not talking small change here) to make money so that he could secure his and his families financial future. Others might argue that he should have left well enough alone as he already had a good job, some savings and a good credit score.

Anyway the fact of the matter is that he got himself into a bind. The business he invested in collapsed and he didn’t get any of his money back. For a period of about six months after the collapse he was okay because he was using his small savings to meet the loan repayments. All his cash ran out and his salary simply couldn’t cover both the loan repayments and the mortgage repayments.

Things started to get tight for him. Eventually it got to the stage where he was borrowing on his credit card to repay his loans. That source of funding eventually ran out as he hit his credit card limit. Somehow he was able to keep all this from his family as he was the one who looked after the finances.

Reality check

He knew the game was up when he received the past due notice from his bank. The sense of failure was overwhelming. Up until that point he had always maintained that once he could service his debt and keep the wolves from the door for one more month then he would be okay.

The problem that he faced was that while he was servicing his debt and living month to month every now and again unexpected expenses would occur. One of his kids might need to go to the doctor one month or his car might need new tyres. It was these unexpected events that pushed his finances over the edge and almost pushed him over the edge too.

His wife had noticed that there was something wrong and thought that he was having an affair. As a result he had to confess to the financial mess that he had gotten himself into. She was relieved that he wasn’t having an affair but upset that he felt he couldn’t talk to her about his problems. The upshot of it was that they decided to work through the financial problems together as a team.

A few adjustments

His wife agreed to go to back to working full time as the kids were now both in school. They figured that she would only need to do it for about eighteen months before their financial situation would be corrected.

Along with this change they made other small but significant changes to their lifestyles that allowed them to gain greater control over their expenses and income. I won’t bore you with the details as I have outlined similar changes in previous articles but suffice to say it involved being more frugal and starting an emergency fund.

They all lived happily ever after. The End.

And moral of the story is what Mike?

Ok the story came to a bit of an abrupt ending. The point wasn’t how it worked out for them in the end. The key point of the story and the thing I want you to think about is how easily he got seduced into thinking that his ability to service his debt was much stronger than it actually was.

His first mistake was that he thought that because he had a good job and a steady income that he could afford to take out a loan to invest in a business. There was simply too much risk involved and as a result when things went wrong his finances started to struggle. He should have used his savings to invest in the business and if he didn’t have the savings then he should have waited until he did have the savings before investing.

His second mistake was not getting help early enough. Pride before a fall. He had a big sense of pride and honour and a misplaced sense that he should be the sole breadwinner. That way of thinking is okay if we lived in the 1950’s but in today’s costly world it is very difficult to get by on one income even if the family is extremely frugal. Had he told his wife earlier on about the problems then thing might not have gotten so bad.

His third and final mistake was that once in debt he came to the conclusion that he could live paycheck to paycheck and somehow survive in the long term. He was living on a financial knife edge and it was only a matter of time before he fell off.

How many mistakes?

Of the three mistakes outlined above I have made them all – over and over again! My biggest mistake has definitely been my misplaced confidence in my ability to service my debts. Too often have I thought that I could earn more or save more or simply just magically pay off my debt each month. As the months would drag on by and I struggled to make the payments I soon would realize that all was not well in my financial story book.

Fool me once shame on you, fool me twice shame on me.

Well it took about eighteen months of trying before I finally began to realize what I was doing wrong. So I’m not sure what you could say about that – fool me eighteen times…shame on???

How confident are you in your ability to service your debts?

This is a question you need to answer as honestly as possible. While you might be able to meet your debt repayments at the moment, project your financial situation forward a year or two. Are you still confident that you will be able to service your debts then? How about it you lost your job? Or if you have lots of unforeseen expenses – would you still be able to service your debts?

If you have even the slightest reservation about your current or future ability to service your debts then now is the time to get real about it. There is no point in hiding from the problem because the longer you hide the more painful the readjustment to both your finances and your lifestyle will be when you do face up to the issue.

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.

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.

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How mood affects spending habits

Oct 032008

I’ve always wondered at what time/on what day I spent the most money. What caused me to reach into my wallet and splash the cash for items I could do without?

As part of my plan to get my finances under control I started to write down and record exactly how much money I spent and on what I spent it on. I didn’t make any attempt to curb my spending as I wanted to get a true understanding of where all my money was disappearing.

So each day I would write down exactly what I spent, where I spent it and who I was with when I spent it.

As I mentioned in a previous article this was an eye opening exercise. I was provided with a wealth of very useful information. To begin with I was spending way too much in local convenience stores close to my home. I then switched to larger discount stores on the edge of town for my shopping. I have saved a small fortune since.

One thing that stood out like a sore thumb to me was that I seemed to spend more on a Friday and a Saturday than on any other day of the week. Also I noticed that I seemed to spend a lot more on the Friday and Saturday after I got paid.

This got me thinking.

Why the heck was I spending more on these days? Ok you might think that I was doing more ‘stuff’ on these days, for example going out on a Friday night. This was true to a certain extent – I was spending more as a result of different activities. However even when I stripped out these different activities I was still spending a lot more than I would on an average day.

Mood enhancers = more shopping

A light bulb went off in my head eventually when I looked at what is different about these two days – Friday and Saturday – from the other days in the week.

As a member of a cubicle farm (i.e. an under appreciated office worker) I put extra significance on these two days. Simply put these are my favorite days of the week. I love Fridays because I am in anticipation of the weekend and the freedom to come and I love Saturdays because I am free and I still have half my weekend left to enjoy.

Since I love these days so much I am much happier on these days and my mood soars.

Now conventional wisdom has it that people tend to spend more when they are down and in a bad mood. The term ‘retail therapy’ is one that I would associate with someone who is in a bad mood and determined to shop their way out of it. But surprizingly I somehow managed to operate in reverse.

The happier I am the more I spend

The changes were only subtle – for example on a Friday I would buy a large coffee instead of a medium. I would be more inclined to eat out for lunch instead of either using the staff canteen or brown bagging my lunch. On Saturdays I would have both the means and motivation to spend more. I might eat breakfast in a nice café and lounge around reading the newspapers drinking a nice expensive coffee.

The thing about mood and spending money for me was that I always felt more confident in my ability to manage my money and earn more when I was in a good mood. I always thought that I was ‘allowed’ to spend more on Fridays and Saturdays since I had put in a week’s work and I deserved a treat.

Oh how we are the masters of our own downfall.

Time for a change

I realized that my logic was flawed and that I needed to correct this behavior if I was ever to get on top of my debt.

Once I made the connection between my good mood and my increased spending I tried to increase my alertness on the days in question. On both Fridays and Saturdays I would try to be extra vigilant for overspending.

If I’m honest I found it tough. The fact that my nice comforting weekend spending routines were stopped did actually dampen my mood.

Was it too extreme?

I personally don’t think it was. Sure I didn’t enjoy my weekends as much since I wasn’t spending anywhere near the amount of money that I had been. But on the flip side the stress of worrying about my finances was in time greatly reduced. I began to feel a little better on a Monday morning and not feel like I was trapped in a job I didn’t like just to pay my debt.

Sure some of you will probably argue that I did deserve a little treat as it was the weekend and I would agree. However I was spending way too much on these ‘treats’. I did continue to treat myself at the weekend but I did in ways that didn’t cost much.

How does your mood affect your spending habits?

I’m interested in getting feedback from readers about how their mood affects their spending habits. Does it have any affect on your spending? Do you spend more when you are in a bad mood or like me when you are in a good mood? How do you manage your moods and in turn control your finances?

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.

Cars – in the end they all do the same thing - get you from A to B

Sep 292008

The car that you drive says something about who you are.

We use material things to project an image of ourselves out into the world. If we want to portray a successful image we might buy a nice big shiny car. These type of cars generally cost us a lot of money but hey what the heck we’re successful aren’t we? We can take the finance offer and pay the car back in nice manageable monthly instalments.

So what does your car say about you?

What image are you trying to portray?

Who are you trying to impress?

Unfortunately sometimes we can get this wrong. My advice?

Tone down your Life

Or more specifically tone down your car.

Before we go on I want to make clear that I’m not trying to beat up on anyone here. I’m not trying to belittle hopes, dreams or aspirations of any readers. What I am trying to do is to help you build a sound financial foundation upon which you can achieve them.

Why burden yourself with stuff that you don’t necessarily need? I mean a car is a car is a car. The ultimate use of any car is to get you from A to B. Ok I understand that there is a whole image thing tied up with the car but are you that self conscious and lacking in self confidence that you feel the need to compensate for it by driving a big pointless car?

To me the coolest person on the block is the person who can jump into a beat up car and have the confidence to drive it around all the while not caring about what people think about them.

rusted-car.jpg

Easy to do?

No way!

I’m as self conscious as the next person and while my car might be six years old I make sure that it is always looking nice and polished. I made the mistake in the past of thinking that a car could somehow improve my social standing.

When I first started working I made the mistake of buying a nice new car. Girls love guys with nice cars right? Well to be honest I couldn’t really afford the car and as a result I never felt 100% comfortable driving it. Since I didn’t feel comfortable driving the car it always seemed that I was driving someone else’s car. Which is true – I was driving someone else’s car. I was driving the finance company’s car. Not a nice feeling.

The problem I had was that I hated not having any money at the end of the month more than I liked the car. Sure it was a really nice car but it was also a car that I couldn’t afford.

I had the car for eighteen months before I decided to get rid of it. I lost money on the transaction but I wasn’t too worried as I simply wanted out of the expensive repayments. I paid off the loan and I bought a much smaller and cheaper car. Not the coolest car by a long shot but cheap to run and it got me from A to B.

Sure I got some jokes in my direction about downsizing but to be honest they didn’t hurt half as much as the monthly repayments were hurting.

Mind over matter

If you don’t mind it don’t matter. So if you are comfortable with the car that you are driving then it shouldn’t matter what other people say. No I know it’s not easy. I struggled with the thought of changing my nice car for a less nice car for a long time. But I got there in the end. I resigned myself to the fact that if I ever wanted to have some sort of financial future that didn’t involved a debt overload then I needed to start cutting. My car was the biggest and most obvious choice to start with.

How about you?

Could you downsize your car? Could you put up with the jokes from so called friends and colleagues? Better still could you get rid of your car completely?

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.

Why die rich? Frugal Fascism

Sep 242008

Bear with me on this one. It’ll make sense in a short while.

I’ve been doing a lot of reading of debt management and personal finance websites over the last couple of days. One of the recurring themes is that of frugality. All of the websites that I read offered great advice on how to cut down your spending and live frugally.

To me living frugally is one of the key components in any debt management plan. If you do not make the effort to live frugally then you will struggle to ever be clear of debt.

When do you stop?

Some of the websites that I read were quite zealous about their promotion of frugal living. I have to say that I admire their passion. The more frugal you can live the quicker you will payoff your debts. That is a simple fact.

But something struck me as not quite right. I began to wonder how do you cope long term?

If the goal is to pay off debts then what happens when you reach that goal and the debts are paid off? How do you live? Do you continue to live the frugal life? Do you allow yourself some small luxuries?

At what point do you stop being frugal?

Never?

I was afraid that you might say that. Living frugally forever seems to defeat the purpose. Ok you may have had a bad experience with debt and you never want to experience it again. I completely understand. At the same time do you want to live the life of a monk for the rest of your life? All the while you squirrel away your money into some savings account never to be touched?

On one of the websites I read the comment

“If you act poor and live poor then you may as well be poor”

I think the point the poster was trying to make is that there is very little difference between acting poor (in this case extreme frugality) and actually being poor. The fact that you may have massive savings means nothing; you are still living a restricted lifestyle.

Frugal Fascism

Don’t misinterpret what I am trying to point out here. I will say it again; in order to get out of debt you need to become more frugal. However there comes a point when extreme frugality borders on neurosis. Take the example of Hetty Green.

Taken from wikipedia

“Henrietta “Hetty” Howland Robinson Green (November 21, 1834 – July 3, 1916) was an American businesswoman, remarkable for her frugality during the Gilded Age, as well as for being the first American woman to make a substantial impact on Wall Street.”

“Green was mainly interested in business, and there are many tales (of various degrees of accuracy) about her stinginess. She never turned on the heat nor used hot water. She wore one old black dress and undergarments that she changed only after they had been worn out. She did not wash her hands and rode an old carriage. She ate mostly pies that cost fifteen cents. One tale claims that she spent a night looking around her home for a lost stamp worth two cents.”

When she died in 1916 ‘an estimate of her net worth was around $100 – $200 million (or $1.9 – $3.8 billion in 2006 dollars),’

I admit that Hetty Green is an extreme example but I am trying to point out that just because you have had a bad experience with debt doesn’t mean that you have to let it ruin the rest of your life. No I’m not saying that you should take more debt on to live a better life. What I am saying is that once you have repaid your debts then you need to co-ordinate your life goals with your financial goals and look for balance.

Balance is the key

If you want to retire with plenty of money then you will need to save hard while you are working but the does not mean that you have to live like a pauper. A balance needs to be struck between what you want to achieve financially – both now and in the future – and the other goals in your life that require money.

Getting out of debt is a huge financial goal and its one that I recommend that everyone pursues with vigour. That said once this goal is achieved it is time to look at your life from both a financially responsible point of view but also from the point of view of someone who is not afraid to go after what they really want in life.

A good dose of frugality in any financial situation is always recommended but what is to be avoided is the situation where the mentality has moved from one of frugality to one of simply being poor.

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.

Doing an intervention for someone who is addicted to debt

Sep 222008

At what point do you intervene when you can see that someone that you care about is heading for serious financial problems?

Do you sit and wait until they come to you?

Do you offer advice and hope that they will heed it?

Do you organize an intervention?

In my mind an intervention was always done for some form of serious addiction – drink or drugs. I now see that I have been too narrow in my thinking. An intervention for someone who is addicted to debt can be just as important as if that person was on drugs.

I’ve never ‘done an intervention’. Sure friends and family have come to me for help in the past and I outlined my experience of one such time in my article ‘The pain of debt’. But I have never actually taken the initiative and gone and intervened where I have seen there was a problem.

Why not?

Well to be honest the saying ‘people in glass houses shouldn’t throw stones’ always comes to mind. It would be very easy for the person that I am trying to help to turn around and say to me that I wasn’t so hot when it came to my own financial situation. But that is the whole point – the fact that I haven’t been so ‘hot’ in the past means that I have lots of painful experience that I could share to help them avoid making the same mistakes.

I suppose it is the fear of rejection that prevents me from doing it. When I blog there is a distance between me and the reader – it is not face to face and as much as I respect my readers the closeness that I have with family and friends would make it all the more difficult to give advice.

Then at what point?

The question I have to ask myself is what would it take for me to intervene to prevent someone from going over the edge financially?

Honestly I don’t know. I could say that if I saw a friend or family member seriously upset about their situation but too proud to ask for help then I would intervene but I would always let them try to solve their problems themselves. If I felt that they were truly struggling then I would intervene.

But I didn’t know.

In a lot of cases people keep their financial problems to themselves and maintain a façade of normality. A lot of people don’t want to be seen as weak or unable to cope so they internalize their problems and hide them away. For example any bills that come in the door go straight into the bin or in more dire circumstances they may take on even more debt to maintain the show.

In these cases it is very hard to know if someone has a problem. In a lot of cases like this it is only when the sheriffs are calling is it acknowledged that there is a problem.

In situations like these there is not much you can do. I suppose the only real thing you can do is be on the look out for warning signs. If you suspect a friend or family member is having financial difficulties then I suggest that you let them know in an indirect way that you are there to help them should they ever need it.

Have you ever ‘done an intervention’?

I would like to know if any of the readers have ever had to confront a friend or family member about their spending. I am curious to know how they tackled it as I am having difficulties trying to imagine how to do it properly. Please leave a comment in the comments box if you have ever had to confront someone about their spending.

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 – 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.

Renting is better than buying and here’s why

Sep 172008

I currently rent. A few years ago I was looking at buying an apartment in the area that I currently live. I didn’t buy a place because I felt that the housing market was overpriced and I didn’t want to be lumped with even more debt. That said at the time I was looking into buying a place I had a lot of debt (I still do) that would have prevented me from getting a mortgage. I was told that I could have fudged a few things and get a mortgage but I knew that I wouldn’t be able to pay so I declined. On top of that the fact that I was being advised to fudge a few things meant that things were really getting out of control.

I’m glad I didn’t buy – obviously – but I don’t want to rub people’s face in it who did buy. I know lots of people who bought at what was the absolute peak of the market in 2006 and are now sitting on a whole pile of negative equity. Not nice and I wouldn’t wish that on anyone.

At the time I was looking into buying a place I kept hearing the statement “Renting is dead money”. People smugly reassured me that I was ‘stupid to be renting’ and I was treated as some sort of social leper when discussing house prices at parties. At the time it was hard to ignore their arguments and the collective property mania. In most cases I had to agree as I watched people I knew make double digit gains on the value of their homes and there I was paying a monthly rent with very little to show for it. In a way my debt saved me.

What changed?

The most obvious thing that changed is the market. House prices plummeted. I don’t have to go through the ins and outs of what happened. I’m pretty sure that most people are familiar with the housing market collapse. My so called friends were no longer crowing about the virtues of buying houses.

As a renter I have being insulated from the fall in house prices. As I don’t own any property I am not directly affected by house price falls. In fact I could go as far to say that I am a net beneficiary of the housing market crash. In the area that I live a lot of apartments were built by property speculators in the hope of turning a fast buck. Most of them did not sell and as a result they are now being rented out. This additional supply has pushed the rent down in the area and my rent hasn’t gone up in two years.

Dead Money

In the last few years I have probably spent about $28,000 on rent. When you look at it in one lump sum it is a scary amount. But the way I think about it is slightly different. The value of the apartments where I live have fallen an average of between $50,000 and $100,000 in value. So in effect I have save anywhere between $22,000 and $72,000 by renting because if I had bought at the time a few years back and not rented I would now have a larger mortgage. I can buy the same apartment for a lot cheaper now.

What else?

Two weeks ago my boiler broke and I had no hot water. I rang the landlord and the next day he came around and fixed it. Apparently there was a big problem with it – it took him most of the day to fix. I reckon that if I was to get a plumber out to fix it that I could have spent anywhere up to $600 on getting it fixed. I got it done for free. The reasoning is obvious. The landlord needs to have the apartment in good working order if he is to rent it out.

If anything goes wrong I simply ring him and he comes around to fix it. I don’t have to worry about organizing a plumber or electrician; I don’t have to take time off work to be at home when they call and best of all I don’t have to pay for it!!!

I’m not at the mercy of the interest rates. Rates can go up and it will not affect the amount of rent that I am paying. On the flip side rates could go down and I would not see the benefit from that either.

Any downsides?

Of course! I don’t own my place so I can’t go and start changing things like the color of the walls or the furniture. I suppose if I really wanted to I could ask the landlord and I’m sure he’d be okay with it but it seems like a lot of hassle. As I’m renting I tend not to want to invest too much time or money into the apartment. I keep it clean and tidy but apart from that I don’t put much else into it. I try to avoid clutter so I don’t buy plants or stuff like that. Some say that it leaves the apartment rather clinical and not homely but I don’t mind as I like it that way.

I’m always on a four week watch. If for some reason my landlord decides he wants to sell his property then he is only legally obliged to give me four weeks notice to pack up and leave. This could be considerably inconvenient depending on the time of year. However this four weeks notice period works both ways. If I want to leave I only have to give four weeks notice.

On balance renting wins for me

For me overall renting is better that buying – especially at the moment. I think in a year or two I will be in a much better position to buy a place and I will do so then but in the meantime it is renting for me. The advantages outweigh the disadvantages and it allows me to save and plan for my future and for when I do decide to buy.

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.

In Debt we trust

Sep 162008

I have just watched the documentary “In debt we Trust”. This documentary was by a guy called Danny Schechter. I highly recommend that you watch it. The documentary covers all aspects of the debt market and how it came about. Some parts of it were a real eye opener for me, I’m sure you will think the same.

The really fascinating thing about this documentary is that it was recorded in 2005. In the documentary they discuss the subprime borrowing that was becoming very popular at the time. Some of the people that were interviewed make the comment that there we were heading for a crash. Very prophetic in their predictions given what has happened with the credit crunch in the last year or so.

Some people will say that the writing was on the wall, they will argue that the level of borrowing and personal debt that people took on could was simply too much and could not go on. To be honest I think that while the writing was on the wall if you cared to look, many people were too caught up in their own financial problems to look at the bigger picture. So there is no value to be had from saying “I told you so”.

Most people operate in their own little bubble, very few actually look beyond their own situation out on to the wider world to see what is happening and how it could effect them. Why should they? If you think about it, if I have enough income to pay my bills then why should I worry about other people’s financial problems? Even if I have a lot of debt I still won’t be worried about other people’s problems as I will be too busy and too focused on trying to solve my own problems.

Big picture

The real reason why it is important to keep an eye on the big picture, which in this case would be the economy, is that the big picture can very quickly become the small picture. Things like oil prices and interest rates have an effect on everyone – no one is immune.

Debt servitude

The other key thing that I got from the documentary was that we are now entering into an era of debt servitude or debt slavery where we are enslaved by our debts. Recent changes to the legislation regarding bankruptcy makes it hard to eliminate debts via bankruptcy. The net effect is that your debts continue to haunt you long after you thought you have go rid of them through bankruptcy.

Slightly depressing

Overall I found the documentary slightly depressing. It was very interesting but there was very little offered in the way of hope or advice. The two things that stuck out for me in terms of the advice offered were to cut advertising out of your life and to join a credit union. Both of which I think are great pieces of advice. I have written about going on a media diet in a previous post which you can read about here. Media diet – useful in slimming down your debt?

We need more documentaries like this to raise people’s awareness about debt. There is no point in suffering alone and in silence. There are things that can be done to help people in debt and the more people that know about what can be done then the better it is for all of us.

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.

Bad debt versus Good debt – value for debt not value for money

Sep 112008

Not all debt is created equal.

I’ve been holding off on writing about this debate for a long time. Part of me wanted to ignore it and lump all debt into the bad category. Another part of me wanted to fight the corner of good debt. Given that debt is such an emotionally charged issue there was always going to be a conflict for me. Some days I can see the argument in favour of good debt clearly other days all debt is bad to me.

So anyway here goes.

Bad debt is a confusing idea. Most of us will have heard the term used in conjunction with a bank or business. Something along the lines of “bad debts are running at 5% of the loan book”, what bad debt means in this context is simply that some of the loans the bank or business has made have gone bad. The people that they have lent the money to are no longer in a position to pay the loan back.

On a personal finance level bad debt can be considered any debt that you personally take on that costs you money. But doesn’t all debt cost me money? Well yes it does but not all debt is the same.

It’s best to give an example.

To me bad debt would be buying something like a holiday on credit. Say I went on a holiday that cost me $1000 and I paid $100 for 12 months to pay it off. To me that debt is bad because I am still paying off the cost of the holiday one year after I have taken it and there is a large interest charge. It creates a big hole in my personal Profit and Loss and Balance sheet. Here I have a big monthly expense that I have to pay for every single month and yet I have absolutely nothing to show for it.

I think you can see where this is going.

Bad debt versus Good Debt – it is all about value

I want to clearly outline the idea here so please bear with me.

You may have read in various financial books that good debt can simply be thought of as a debt that allows you to generate a positive cash flow. The typical example given is a rental property where the monthly cost of repaying the mortgage is less than the rental revenue which is received, thereby creating a positive cash flow for owner of the property. I agree with this definition 100% but I want to expand it.

You see the definition outlined about is too narrowly focused. It is based on a purely financial logic based calculation – but life and debt is never ever that simple. I like to think about debt as relative to the value it adds to you, to your life, your education and yeah sure, to your bottom line.

I never stick to the cold hard logic that debt is either good or bad based simply on cash flow. It makes finance too cut and dry…and boring. The question that you have to ask yourself is whether or not the debt that you are taking on will add value in your life?

Is debt from financing a college education good or bad debt
In my mind it is good debt.

Is signing up for a pay monthly gym membership good or bad debt? If you use the gym often then it is a good debt. If you only use the gym only once then the debt is bad.

Is taking a loan out to buy a car a good or bad debt?
Well that depends – can you get the bus? Can you buy a cheaper model? What do you need the car for? Will the car add value to your life?

One key assumption that underpins my way of thinking about debt is whether or not I can afford the repayments. I am working on the assumption that when I consider a debt that I can afford the repayments. If I can’t afford to make the repayments in the long term then there is no point even thinking about taking on the debt because it is a bad idea – EVEN if it will add value to your life.

My idea of good debt is open to abuse

You see debt is all about personal choice and personal responsibility. Some people might take what I am saying about debt being good if it adds value to your life and distort it. Some people might say something like “well this 60inch plasma screen will certainly add value to my life because I will be able to enjoy a better quality of entertainment” or “This holiday will make me feel better and therefore add value to my life”.

It doesn’t work that way and common sense is called for. You have to be critical in your thinking when it comes to debt. When approaching a decision it is necessary to have all the facts but that is not enough. You need to be honest with yourself. At the end of the day it is you that will have to be carrying the debt so you need to make sure that you are getting good value for it and not wasting it on frivolous items.

Critical thinking

I touched on this briefly above. If you are to adopt the value based idea about debt (I’m not saying that you should only that you be open to new ideas) then I think that you should err on the side of caution. Go into each decision about debt with a slightly negative expectation and add a large drop of cynicism for good measure.

Don’t look for reasons as to why the additional debt will add value to your life. Instead look for reasons why you should avoid that additional debt at all or at least reduce the amount you take on.

If, after running the decision to take on the debt through a number of value add calculations, you still decide to take on the debt then you can be happy in the knowledge that the debt you are taking on should add value to your life in the long run.

Investing in yourself

I suppose what I’ve outlined above can simply be termed as ‘investing in yourself’. Ultimately it is the best investment that you can ever make. Over the long term the return (both financial and otherwise) that you achieve from something like a college education or better fitness will far outweigh the cost of your debt.

Delayed gratification versus Instant gratification - A debtor's choice

Sep 102008

Many financial commentators make the point that one of the root causes of the debt epidemic we are now facing is the concept of ‘Instant gratification’. To me instant gratification is simply the ‘I want it and I want it right now!” attitude that seems so common today. The ‘it’ in the statement could be anything from an ice-cream to a nice new car.

If you think about it, the instant gratification culture which we have become so accustomed to has had an obvious negative impact on our financial health. Personal debt is at an all time high and savings is at an all time low as people seek that instant reassuring buzz of buying something new.

In my parent’s generation of the post war years they were thought to save hard for anything that they wanted. Credit was a dirty word and if they truly had their heart set on something they put their heads down and worked towards it – no matter how long it took. They were well versed in the practice of delayed gratification.

Now compare that to the attitude of my generation whose first exposure to the world of work and commerce was during the dotcom boom. We were bombarded with offers of easy credit and advertising that told us if we had an itch then we should scratch it, all for the low monthly payment of $99.

Sure it took two to tango i.e. me and my bank but in my defence (or should I say our defence) – ‘things were different this time’. There was plenty of employment opportunities, interest rates were at an all time low, banks were practically giving money away. Times had never been so good financially for all of us. The opportunities to make money were manifold – internet stocks, rental properties (gee didn’t they both turn out well). You name it and you could make money from it.

What changed between the generations?

To be honest I don’t know. I suppose there were numerous contributing factors. Perhaps my parents didn’t experience the same amount of media exposure as I did when they were growing up. How could they? I’m not even sure if they both had TVs when they were children. I always got the feeling that there was less pressure to conform from a materialistic point of view. Fitting in was less about the type of trainers you wore and more about the sports team you supported.

I find it hard to reconcile the stories that my parents told me about their childhoods and how they related to money as they grew up with my experience of money as I grew up. For me there was always a social pressure to conform by having the latest brand. I think a lot of my peers felt the same. This article ‘Budget for school gear soars to £600’ from The Daily Mail newspaper sums up the situation perfectly. I left school twelve years ago and I was shocked to read this article about the pressures that school kids face today as they try to conform.

Easy credit – the enabler of instant gratification

Before I allow the older generation to take the high moral ground on the whole instant gratification debate I want to point out that credit has never been easier to obtain – ever! I think one of the main reasons my parent’s generation didn’t suffer from instant gratification as bad as my generation is that even if they wanted to buy something there and then very often there was simply no credit available to do so.

Today we have both the means and the method of instant gratification at our disposal.

No longer are we forced to save for something that we wish to buy. If we really want something and we want it fast then generally speaking it is a relatively straightforward task to arrange the financing of it.

But isn’t instant gratification a personal issue?

Yes and no. Yes it is a decision that everyone makes for themselves. You and you alone can only decide if you will buy something now or you will save for it. No in that there is now such a collective culture of instant gratification that it is hard to resist the temptation to succumb. How easy is it to refuse to go on that expensive holiday when all of your friends are going? ‘I don’t have the money’ just doesn’t seem to cut it as an excuse anymore.

Delayed gratification – a long forgotten concept

If instant gratification can be thought of as a buying something straightaway regardless of whether or not you have the funds to do so, then delayed gratification can be thought of as setting yourself a financial goal and then working and saving hard to achieve that goal. The goal could be something simple like buying a new TV or it could be something bigger like saving for a deposit on a house.

What the goal is doesn’t really matter as much as the fact that you have made the choice to work hard before you consume. I’m sure you could simply whack the cost of the TV on to your credit card but with delayed gratification you are waiting until you feel you deserve it.

Delayed gratification – benefits

There are many benefits of delayed gratification.

No more buyer’s remorse

By delaying your consumption of an item and working hard to save the money to buy it you are forcing yourself to decide whether or not you really want it in the first place. Delayed gratification eliminates the buyer’s remorse that so often accompanies impulse spending.

Guilt free enjoyment

This is related to buyer’s remorse. By saving and working hard to allow yourself to fully enjoy the fruits of your labor you do not need to worry about making the payments on the item in question. If you buy a nice flat screen TV for $600 with cash that you saved then you own the TV outright and you don’t have to worry about any nasty surprizes waiting for you in the mail. You can kick back and enjoy.

No more debt

When you adopt an attitude of delayed gratification you are saying no to more debt. You have decided that is enough is enough and from here on in you want to earn the good things in life. No more taking the easy route of instant gratification via your credit card because you and I both know that that route is actually the hard way.

Builds discipline that can be rolled into financial security

Developing the discipline required for delayed gratification takes time but once acquired the attitude of delayed gratification it will serve you well for the rest of your life. By embracing an attitude of delayed gratification you are setting yourself up for financial success. The reason why is because in order to achieve anything big it takes time.

To save and invest for retirement takes time, to save a deposit for a house takes time, to save for your kid’s college education takes time but it is the time element that adds the value. In order for you to best capitalize on the time element you need an attitude of delayed gratification.

Where to start?

Small – always start small. Delaying gratification can be as simple as waiting a couple of extra days before you buy the latest edition of your favorite magazine. Wait. Be conscious about the reasons why you are waiting. Clean your home, bring your lunch to work for a day or two, do something that you think will justify you spending money on the magazine.

Take it from there. Tackle something bigger like saving for a new stereo system. Work some overtime or sell some of your stuff. Wait until you have the physical cash in your hand before you purchase the stereo system. The feeling of achievement is immense.

Now aim bigger still. Say you want to redecorate your home but it will cost a lot. Start saving. Cut your expenses where possible, save any money that you can, give yourself a timeline. Be honest about your progress. With any goal there will be set backs on the path to achieving that goal. The bigger the goal the bigger the set backs will be.

Keeping moving in the right direction, the idea here is to train yourself to become more disciplined in your financial habits. Easy? No way. Necessary? Absolutely.

The great thing about delayed gratification (the few times I’ve tried it) is that when you achieve the goal that you have been aiming for it tastes a lot sweeter than had you just gone out and bought it on credit. Not only are you getting the things that you have been working and saving for you are also getting a huge sense of achievement and satisfaction as a bonus. Sometimes the sense of satisfaction is nearly worth the effort on its own.

The hard work ethic required to save and earn

Sep 082008

Rome wasn’t built in a day or so I have been told on numerous occasions. I’ve heard that phrase so often that I’ve never really stopped to think about what it meant. However in the years that I have been in debt that saying has rung in my ears more and more.

To get something done and I mean really and truly get something done, it takes time. The bigger the goal the more time it will take. Getting out of debt is no different. The bigger the mountain of debt the longer it will take to climb it. Make no mistake about that last sentence. The bigger the debt the longer the time.

I suppose at this point I could add that if you can’t do the time don’t do the crime i.e. don’t take on so much debt in the first place. But I think at this stage we are beyond those clichéd arguments. We need helpful ideas and not more annoying rhetoric.

So now that we have a debt mountain to climb or if you prefer we have the city of Rome to build, we need to start getting real. Getting real and keeping it real. That’s not some misplaced lingo from my youth but rather a nod to the need to be present in the moment and not off in some dream world where credit card debt doesn’t exist.

Debt repayment takes time. Once again for the people at the back, debt repayment takes time. Unfortunately if you are in debt then time is probably all that you have. But in away time is all you really need – time and the application of a hard work ethic.

Hard work

This phrase has always confused me. Is hard work purely of the physical type for example working in construction? Or can the term ‘hard work’ be applied to an office job? Do you have to end the day physically exhausted for it to qualify as hard work?

I think that the term hard work really applies to productivity. If you are productive and get a lot of things done then I think you would be regarded as a hard worker. So for me hard work equates to the ability to get a lot of things done in a certain period of time.

But being productive isn’t about working in a blind fury and using blunt force to get things done in the shortest possible time. To me being productive incorporates a determined work effort by default but there is also a huge element of working smart involved.

Working Smart

Again this is another one of those management phrases bandied about so much that it has almost lost its currency. To me working smart means the ability to leverage, delegate and also ignore what is unimportant. In other words it means using your brains and knowledge to make sure that the right person is doing the right thing at the right time. That person could be you or it could be your work colleagues.The point is that if someone can do the job better, quicker and more efficiently than you then get them to do the job.

Do not make the mistake of thinking that working smarter simply applies to your working life. Far from it. The most benefit you can get from working smarter is in your personal life. There are dozens if not hundreds of ways that the average person can work smarter in their personal life – everything from streamlining their finances to streamlining how they arrange their sleeping habits.

Back to the debt problem

Working hard and working smart brings with it the obvious benefits of being more in control of your life. The harder and smarter you work the quicker the things you want out of life will come to you. There can be no doubting that. I’m sure that the things you have already achieved in your life have been built on working hard and being smart about how you work.

So far so great – working harder and smarter seems to be the cure all solution to life’s problems. If only it was as easy as that. You see if you are already working hard and working smart the chances are that will not have much of a debt problem if at all. The reason why is that you will have spotted the error of your ways and worked harder and smarter to repay your debts. If this is you then there is no point in reading on as you seem to be winning. Keep up the good work.

What about the rest of us mere mortals? The rest of us mere mortals probably comprises about 97% of the population. We are the ones who have the words “can do better” marked all over our report card.

How to work harder and smarter

There is a thing called work ethic which will make a huge impact on your life and in particular your financial situation. This definition of work ethic is taken from Wikipedia:

Work ethic is a set of values based on the moral virtues of hard work and diligence. It is also a belief in the moral benefit of work and its ability to enhance character.

Workers exhibiting a good work ethic in theory (and ideally in practice) should be selected for better positions, more responsibility and ultimately promotion. Workers who fail to exhibit a good work ethic may be regarded as failing to provide fair value for the wage the employer is paying them and should not be promoted or placed in positions of greater responsibility.

Or more simply put – work harder and smarter to get paid more or get a better paying job which in turn will help you payoff your debt quicker.

Developing a good work ethic is the key to moving out of debt and towards greater financial security. The great think about work ethic is that it is a learned habit. It is not something we inherit or that is part of our physcial or mental make up. IT IS A LEARNED HABIT. Sorry for raising my voice but the point that I am trying to make is crucial. Too many people go through their lives thinking that they can never do better or they simply don’t know how to do better. The beautiful thing about life is that we can always learn ways to improve and do better.

Work ethic is a learned habit which means that you or I or anyone who is willing to learn can develop a strong work ethic.

Again developing a strong work ethic takes time but the benefits are enormous. To develop a strong work ethic simply ‘work all the time you work’. In other words all the time that you are physcially present at your place of work – make sure that you are working. By all means take your lunch and coffee breaks but at all other times make sure that you are working on the tasks that add most values.

I don’t want this article to desend too far into a discussion on better ways to work. There are plenty of excellent resources out there on the web that will allow you to improve how you work. The key thing for you is that you try to develop a strong work ethic.

A natural extension of the work ethic debate is the habit of saving. Saving and work ethic usually go hand in hand. If you have the discipline necessary to develop a strong work ethic then you almost by default will be more inclined to be financially disciplined. The principles that you need for a strong work ethic are the same ones you need to develop the savings habit.

If you think about it logically if you work harder it makes sense that you will want to keep more of what you earn.

So you want out of debt fast?

Here’s how. Develop a strong work ethic by working harder and smarter in your current job (it doesn’t matter what your job is) then after a while you should see the benefits of your hard work – more overtime, pay rise, bonus etc. With this extra earnings you can pay down your debt faster.

No I didn’t say it was going to be easy to do. If it was easy then everyone would be doing it. There is also a large element of delayed gratification that I didn’t cover in this article that makes all the difference. The key thing to take away from this article is that there is a very straightforward way out of debt staring you in the face.

$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.

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.

Rewards for when you pay off a debt – why cost free ones just don’t cut it

Sep 022008

Recently a reader made the comment that when trying to achieve a goal it is important to have a reward in mind so that it will act as a motivating force to help you achieve your goal. This got me thinking.

I couldn’t agree more about having a reward once the goal has been achieved. It will act as a powerful motivating factor.

Now here comes the tricky part. Imagine that I have a short term goal of paying off my credit card bill of say $1000. To motivate myself I use all the usual techniques. I write down the reasons why I should achieve this goal. I write down how I am going to achieve this goal. I visualize myself achieving this goal. I tell myself daily that I am making progress towards this goal.

But how will I reward myself when I achieve this goal?

I could give myself a nice pat on the back and say well done. The nice feelings of warmth and accomplishment should be reward enough. But for many this is not enough. For many there has to be a hard tangible reward at the end of the goal.

And this is where we have a problem.

Hard tangible rewards of value cost money. When trying to achieve a financial goal such as paying off a debt then the last thing you need is to be reward with something that put you in debt in the first place.

If we go back to the $1000 of credit card debt that I mentioned above, now imagine that I accumulated this debt by spending on the latest gadgets. Now imagine if my reward for paying off my debt was to be a small gadget. This gadget wouldn’t necessarily cost that much but it would be a good reward and motivator right?

Or take the case of a woman who has credit card debt caused by excessive clothes shopping who decides to reward herself for paying off her debt with a shopping spree.

The problem here is two fold.

First you are sending mixed signals to your brain. On the one hand you want to pay down your debt which was caused by overspending yet on the other hand to help you do this you are going to reward yourself with more spending. From a long term perspective this behavior is not useful when it comes to changing habits.

This leads to confusion at a subconscious level. Is overspending good or bad? It must be bad as we are trying to eliminate debt related to it or it must be good as we are being rewarded with it when eliminate the debt? Confusing eh?

The second problem is that if you do use a monetary reward to motivate then where do you draw the line? I saved $50 dollars this week so I deserve a reward worth $20? The monetary based rewards that you give yourself will probably be relative to what you achieve (as they should be – you don’t want a $5 reward after paying off your mortgage – more on this later). But how relative they are to the goal is completely arbitrary and at your discretion. What you might think of as an adequate reward someone else might thing of as excessive and takes away from the original goal.

The real problem – Value.

In order for a reward to motivate you it has to have value. Or put more accurately you have to value the reward. This is an important distinction. A one ounce bar of gold has a certain value – it can be easily defined by checking its price on the market. However something like a trip to the local amusement park has both a monetary value and an emotional value. The memories that you create on that trip will last long after the trip has finished.

Emotional value is the key.

The heading of this article states that cost free rewards simply won’t cut it when it comes to motivating. If the reward was free then why wait until the goal is achieved? Why not just take this non-monetary reward and have it now? Why not watch your favorite TV show when it comes on regardless as to whether or not you have achieved your goal? You may feel guilty for a while but who cares right? It didn’t cost you anything.

I know some readers will argue that it should always be cost free rewards. I would argue the same for small goals. However when it comes to monster goals like becoming debt free then I would suggest that the reward be made up of something that you would really really value. What I mean by value is emotionally value.

Would you like to get a family portrait or visit your favorite city for a weekend break as reward? These things cost money but the key thing is that the emotional value to you has to be large. You have to really want the reward and value the reward before it will ever motivate you.

But didn’t you just say that monetary rewards were bad?

The point I’m making here is that if you really really value the reward on an emotional level and not on a monetary level then the reward itself is a good thing even if it cost a few bucks. By valuing the reward on an emotional level you are in effect saying to your subconscious – ok there are costs involved here but I have worked my butt off to get here and I place huge emotional value on this reward. I deserve it.

How much to spend on your reward is entirely arbitrary but to be honest I would never want to spend anything more that 5% of the goal amount on the reward. Otherwise you really are defeating the purpose. For small goals I would try to stick to the cost free rewards but even a nice cup of coffee has a cost so again try to stick to the maximum of 5%.

Think of it another way. If you want something that costs $50 then set that as a reward and have the goal of saving $1000 to justify it as a reward. 5% of $1000 is $50 so  $1000 is your target. It’s just a different way of looking at it.

Will I charge my reward to my credit card?

No, that would defeat the purpose. Before you set out to achieve your goal you need to define exactly what your reward will be and how much it will cost.

This cost then needs to be added to your financial goal. So if your target is to pay off $1000 in debt and your reward is going to cost you $50 then you need to have an actual financial goal of raising $1050 – your original target plus your reward. At least that way you will not go back into debt to reward yourself for getting out of debt.

Laugh in the face of debt

Sep 012008

What’s the point in being miserable all the time?

At any one point in our daily lives there are a multitude of things that we can get worried and stressed about. On a grand scale things like terrorism, climate change and the economy will serve up stress. On a smaller but more important scale are the individual fears and worries that we all can have, things like work, relationships, money and in particular debt.

Combine all these things together on any single day and you have a recipe for major stress. By major stress I mean that sick in the pit of your stomach feeling like you are floating on a stormy sea of stress with no beacon of light or hope to guide you, nothing around you only miles and miles of stress.

Not a pretty image.

That said I don’t want to dwell on the negative for too long. I want to speak about a mental approach that can empower you on stressful days. In my article “The dark depressing days of debt” I spoke about how diet and sleep patterns can have a huge impact on your mood. The aim of that article was to help you to stabilize your mood. Now I want to take it to the next level.

What next level?

In my mind the next level up from stabilizing your mood is the level where you are feeling good enough emotionally and physically to start thinking about your debt and the positive actions you can take to get control over your finances.

This site is full of the positive actions you can take to make your finances better so I won’t go into them in detail here. What I do want to discuss is how to boost your mood when the world seems to coming in on top of you.

Laugh in the face of your debt

You’ve probably heard the phrase “laugh in the face of adversity” well I want to change this to “laugh in the face of debt”. A little corny – ok I’ll give you that but I think if you can put aside your reservations and think a little more about what the spirit of the saying “to laugh in the face of adversity” is all about.

To laugh in the face of adversity basically means to take anything that life throws at you and throw it right back.

The following link contains an article that very clearly demonstrates the link between laughing and stress relief – Laugh in the face of adversity: I’m not kidding. In this article the author makes the point that “Humor provides the unique opening to move forward on a positive note.”

To me this just about sums up everything that is good about laughing at your situation.

When I say laughing at your situation I don’t mean a kind of sarcastic and cynical laugh. I mean a good hearty laugh at what has gone wrong. When you laugh at your situation it has to be from a fun and positive perspective – laugh at the silliness of it all. Laugh at how silly you are to be worrying about things that are beyond your control. Laugh at how crazy money makes people.

If you can do these things and adopt a positive relaxed yet proactive attitude to your debt then I can almost guarantee that you will be laughing all the way to the bank.

The habit of staying debt free

Aug 282008

Getting out of debt is a massive achievement in itself. Staying out of debt for good is a whole different matter.

It’s happened to me and I’ve seen it happen to other people. The situation I’m talking about is where people struggle for a couple of years and eventually manage to pay off their debts. The sense of freedom is overwhelming. Then after a while – it could be a couple of months or a couple of years the sense of release isn’t as strong. The positive afterglow of achieving debt freedom has faded significantly. Not only has the afterglow faded but the fear of debt has diminished. People forget how painful the debt was.

It’s at this point that the person is most vulnerable. It’s at this point that they are likely to be seduced back into the old habits of taking the monthly payment option. Hey its okay they think – just this one time. I can manage this small monthly payment.

From this small opening the floodgates of debt usually bust wide open.

This has happened to me and you keeping kidding yourself that things aren’t that bad and that you can manage. You had a debt problem before but you are different now you are more mature now and you can handle your finances better. Yeah right!

Reality hits home

This fantasy continues on for a while until one day you realize you’ve dug yourself another debt hole – bigger and more impressive than the last one. Does this spur people into a tornado of action to try to solve the problem? Nope – it’s at this point the “why me?” self abuse starts.

Emotions run high and the pressure to do something about this new debt is huge. However this time round it seems to take longer for any action to happen. It’s a case of “How could I have been so stupid?” The fear of judgement by friends and family about getting into debt again means that the debt problem goes hidden for longer.

Since the problem stays hidden for longer the problem gets harder to solve second time round. Added to this is the very human response of “You did it again?” which to me always meant that friends and family are a little bit less enthusiastic about helping you out the second time round.

Staying debt free

Becoming debt free is a massive task in itself. The journey to becoming debt free requires you to look at every aspect of your life. You begin to see how you exist in this world and you begin to better understand your motivations for doing certain things. It can be a real eye opener. At the same time it can be a huge internal struggle. The physical element of becoming debt free is relative easy and straightforward. The emotional element of becoming debt free is huge.

In order to stay out of debt once initial debt freedom has been achieved then the focus must be on the emotional side of the debt free equation.

The habit of staying debt free is not one single habit. The title of this post is a bit misleading but I did that on purpose. It is necessary to understand that the habit of staying debt free is made up of a multitude of individual thoughts, actions and habits.

That said there is one simple rule of thumb that will allow you to maintain the habit of being debt free and that is ‘spend less than you earn’. Dull boring advice – YAWN. Yet had I listen to it second time round my life would have been a whole lot easier.

By spending less that you earn I mean on a cash for cash basis. What this means is that if you earn $2500 net per month then you should be spending less than $2500 per month on all your expenses and outgoings. This includes paying off your credit card completely each month. Ideally when you are coming out of a debt situation using cash only is the best way forward.

A new financial goal is crucial

It’s easy to stay motivated when you have a goal to work towards. A lot of the time when people achieve their goal of debt freedom they rest on their laurels. They relish their new found freedom and rightly so. But some rest for too long and fail to set a new bigger financial goal.

Once debt free another financial goal is required if focus is to be maintained on their financial situation. This is where a bigger more challenging financial goal will make the difference between staying debt free and slipping back into debt. A big financial goal could be something like building up savings of $10,000 in a one year period. Again it will depend on your own personal situation.

Two simple but very effective ideas

In order to stay out of debt once you are debt free spend less than you earn and set yourself a big juicy financial goal. Simple as that…okay okay it’s not as simple as that. If it were then I wouldn’t have so much material to write about on debt. Deep down most of us know that in order to change our situation be it financial or otherwise we need to change our behavior. It is changing our behavior that is ultimately the hardest part of getting and staying out of debt.

The dark depressing days of debt

Aug 272008

Always look on the bright side of life? Sometimes it’s not the easiest thing to do especially if you have the debt monkey on your back. Some days you feel like the whole world is against you and that everything is happening in slow motion. This isn’t a debt specific problem – I’m sure wealthy people have their bad days too.

When you are having a bad day and you have a debt problem then it seems like the world is about to end. Nothing you can do is right and you find it incredibly hard to get motivated. I liken it to walking with a lot of mud on your boots. The heavy legs feeling, the lack of mental clarity and focus, the dread of going out and meeting people.

Yeah we’ve all had them.

Why now and why today?

A couple of years ago when these bad days appeared I used to wonder why the heck it was happening and what caused them? At the time I simply thought they were just random occurrences. You were due a bad day every once in awhile. After some time I began to realize that there is nothing random about these bad days. I now put these down days to cause and effect.

So what are the causes of these bad days?

For me food plays a huge part in my mood. I’m not diabetic but I certainly think I am sugar sensitive. Stimulant drinks like coffee or sugary foods like chocolate or white bread send my mood soaring but the come down can be hard. If I eat a lot sugary foods then I know for sure that I am heading for a sugar crash. This sugar crash in turn will lead me to see the world in slightly less than rose colored glasses.

Do you think that you may have the same problem? You might have but you might not yet realize it. The following article “Does Food affect Mood” goes into the explanation as to how food affects mood in more detail. It is well worth a read.

Directly related to food is something that also has a huge impact on my mood and that is sleep.

For me sleep is sacred. I know that may seem like an over the top statement but if I’m honest I’m like a bear with a toothache if I don’t get enough sleep. If I’m working hard and have had a few late nights in a row then my mood drops off a cliff.

When I’m tired from lack of sleep I tend to drink more coffee and eat more sugary food. These give me a short term boost but then they only add to my woes as their effects begin to wear off and I feel even more tired in the long run.

The link between food and sleep works both ways. Drink too much coffee before you go to bed and you will have a restless sleep at best or stare at the ceiling all night long at worst.

The food sleep relationship can be a vicious circle for me. This process repeats itself until eventually I have a bad day. To me having a bad day is my body’s way of warning me that I am pushing it and that I am not looking after myself. Once I sit out the bad day its like my body resets itself and says “okay we cleared the junk out for now but you really do need to get it together boy”.

I usually heed this warning and try to watch what I’m eating and try to get to bed at a reasonable time. This seems to work and once I take care of myself my mood returns to normal.

The debt effect

In the previous section I outlined how my food and sleep has a big impact on my mood. Feeling bad from poor food choices and lack of sleep is one thing. When you couple them with a debt problem that only seems to rear its ugly head when you having a bad day then that is a completely different thing.

When you are having a bad day every single negative thing in your life seems magnified ten fold. The debt burden that seemed controllable yesterday is overwhelming today. These negative feelings towards your debt can cause even more negative thoughts. It is these negative thoughts that feed on your bad mood and make you feel even worse. That debt problem seems to be growing and growing as the day goes on.

If you don’t stop your thoughts in their tracks then it will make for a very bad day.

I’m sure wealthy people have these negative days. Everyone does. But if you are in debt then these bad days have that extra element of stress associated with them.

Solutions?

I’m all about keeping it simple. Here are a couple of ideas to help you reduce the effects of a bad day.

Watch what you eat.

Simple, clichéd and boring advice but what you eat and dink is incredibly important in regulating your mood. You’ve probably heard this a thousand times “you are what you eat” – that phrase is so over used but it’s so true. I’m not talking about weight gain or loss I’m simply talking about mood regulation. Food is the key.

Get more quality sleep.

No I didn’t say sleep more! I said get more quality sleep. To me quality sleep means uninterrupted stress free sleep. So that means giving yourself time to wind down and de-stress before you go to bed. Make your bedroom an oasis of calm. Like the porridge in the Goldilocks and the three bears story, your bedroom should be not too hot and not too cool – just right.

The “I will deal with it tomorrow” card

I have a personal rule that I never make big decisions on an empty stomach, when I’m tired or when I’m in a bad mood. The reason why is that my decision making skills are seriously impaired if I am not feeling 100%. When I am having a bad day I put off making decisions – especially financial decisions – until the next day. If I’m still feeling less than 100% the following day then I simply put off the decision until I am feeling better even if it is a week later.

I go as far as saying to myself that there is no point even thinking about financial problems until I am in a better mood. I call this my “I’ll deal with it tomorrow” card. This is where I feel I can legitimately say to myself that I am excused from taking any action or even thinking about stuff.

For the rest of the day my focus is then on simply getting through the day and doing what I need to do just to function. In work I’m operating on automatic. I’m not doing my most creative work but then again I know the reason why so I don’t beat myself up about it.

Simple fact – bad days happen

The best and quickest way I find to deal with a bad day is to acknowledge that I am having one. Face up to the fact that it’s going to be raining all day and try to salvage what I can from the day. Focus on the simple easy to do tasks and put my head down get stuck in and tune out all my other thoughts as best as possible.

One point I will make is that while everyone has bad days if they persist and everyday seems to be a bad day even after you have changed what you eat and fixed your sleeping habits then it might be time to consider getting professional help.

Free Debt management ebook – Understanding and getting out of debt

Aug 252008

I’m always looking for ways to add value to the user experience on this site. That may sound very grand but to me it simply means making this site better in any way possible.

A while back I decided I should create a free debt management ebook so that readers of this site could download and keep it. I know sometimes when you are browsing the posts you may be short of time and would like to read more. This ebook will allow you to do this at your own leisure.

Another goal of mine was to create a debt management plan and to outline it in the ebook. I know that some of my posts tend to be more theory than practical – I write about what I think is important. However I was conscious of this when I started to write the ebook. In the ebook I focus a lot more on the practical element of debt management while still covering some theory.

Here is the table of contents of my ebook – “Understanding and getting out of debt”.

Introduction

Global Debt epidemic

The debt spiral

Debt management – it’s all about responsibilities

Financial education should be your priority

Defining your debt problem exactly - to the cent

Money management – it’s all in you head

How to pay back your debts and still have a life

Budgets – the basics

Pay down your little debts first

Getting money quickly

The price of all that ‘Stuff’

Second income – is it realistic

Savings

Automate everything

Media Diet

Debt and relationships

101 ways to save money

Conclusion

Resources

Did I mention that this ebook is FREE? Yep that is correct you can enjoy the fruits of my labor without having to part with a single penny.

To get my free debt management ebook simply sign up for my email newsletter.

When you do you will receive a confirmation email that will contain a link to your free copy of my debt management ebook. You can use the newsletter sign up box in the top left hand corner of this page to sign up.

I hope you enjoy this free ebook and that you get some ideas out of it. Feel free to leave a comment and let me know what you think.

Debt and health

Aug 182008

‘Your health is your wealth’

In my experience health is never really given much consideration until something goes wrong. People tend to take their health for granted. However as soon as they get sick or need to visit the doctor their attention focuses firmly on their medical insurance.

If you are in debt then your focus should be on where you can cut your expenses. However cutting things that have an impact on your health can be disastrous in the long term. Health insurance, diet and leisure pursuits usually take a direct hit when someone is designing their budgets and debt management plans.

Getting out of debt requires cutbacks and savings. These cutbacks and savings should not be at the cost of your own or your family’s health. You can’t put a value on health and by trying to cut your health expenditure that is what you are doing – trying to put a value on your health.

The three main areas that come under scrutiny in any household budget but also have a direct impact on health are 1. Health Insurance 2. Diet and 3. Leisure pursuits.

Health insurance.

With money problems one of the first things to go is health insurance. Many people look on health insurance as a nice to have rather than a need to have. If their employer does not provide health insurance then for many it is the obvious choice to start budgeting with. However I cannot stress strongly enough how important health insurance is. By all means shop around for the best provider or see if you can bundle your home and car insurance to get a better deal but do not get rid of your health insurance.

The thing about adequate health insurance is that you hope that you will never have to use it. If you have health insurance then you can be confident that there is health insurance there if you need it but ultimately you never want to use it. Some may argue that you are in good shape and don’t get sick often so why bother? I say great! But you don’t want to be caught short if you have the misfortune of getting sick or need to visit the hospital.

Diet.

As it stands the average diet in the western world is pretty bad. Millions of us exist (or should that be subsist) on a diet of processed refined nutrient deficient foods. Sure they might taste good but they don’t contribute much to our health and in some cases they take away from it and in turn take away from our pockets.

The question you have to ask is whether or not it is more or less expensive to eat well. I have made the argument before about buying generic food products as opposed to the more expensive branded products. This makes sense as they are generally cheaper versions of the same thing. My argument here is that we should consider whether or not in the long run it costs more to eat well.

Eating well is a whole other topic – the field is enormous and the opinions vastly different. Everyone has their own opinion as to what exactly eating well means. The point I am trying to make is that eating something that is obviously bad for you just because it is cheaper than the more healthy alternative does not make sense and in the long run it will cost you even more in terms of doctors and dentist visits. Just because your local fast food joint is doing a two for one special doesn’t mean you have to eat there. To me that is a false economy.

Leisure pursuits.

What I originally called the title of this section was Gym membership but I realize that not everyone holds a gym membership. The nice thing about talking about gym membership is that it allows me to perfectly illustrate the impact that debt can have on a person’s health.

In my post about passive expenses I made the point that things like gym membership can be an unnecessary drain on your finances especially if you are paying a monthly subscription. However I want to point out that I was referring to unused gym memberships. If you are not using your gym membership then by all means try to cut that expense out. If you are using your gym membership then look on it as a legitimate budget expense and don’t beat yourself up over it – even if it is expensive. The long term benefits of going to the gym on a regular basis will serve you well in the years to come.

The same logic should apply to any of the other leisure pursuits that people enjoy. If it is done on a regular basis and is seen as being a positive then work it into your budget if at all possible.

Becoming fit and healthy is more important than getting out of debt. In reality if you are not fit and healthy you will find getting out of debt a lot more difficult. The reason why is because getting out of debt requires a lot of energy and focus. Debt is stressful and no matter what way you cut it getting out of debt takes time and energy.

Second Income? Of course I’m bitter it didn’t work out.

Aug 012008

You know what really annoys me? Those cheezy websites that offer you a once in a lifetime opportunity to earn hundreds of thousands of dollars. Supposedly you can do this in your spare time at home. You will earn fantastic sums of money if only you would just buy their automated system and follow their instructions. It’s really simple just plug and play their system and you will be on the road to riches.

What makes me even madder is the images these so called second income ‘Gurus’ use on their websites. Images of bundles of cash, fast cars and beaches make me want to vomit. How naïve do these ‘Gurus’ think we are? Do they think that those pictures and some slick sales letter will dupe us into buying their automated system?

There’s one born every day.

You can probably guess by my tone that I have been seduced by these websites more than once. I’ll admit the reason those cheezy websites annoy me so much is because I was foolish enough to part with my money in the past. It embarrasses me now when I think about it but I have spent a lot of money pursuing these so called ‘Internet businesses’. What sickens me even more is that I’m sure these internet businesses did make a lot of money…for the person selling them!

If you’re in debt then spending your money on business concepts that do not work or depend on unsustainable methods can knock the wind out of you. The last thing you need is to incur more debt in the pursuit of opportunities that simply don’t exist.

The question I should have asked was ‘If the system was so good then why were they selling it and creating potential competitors instead of just keeping all the money for themselves?’

Learn from experience.

To truly learn it is said that we need to experience things first hand and make mistakes. You don’t learn how to drive or swim by reading a book about it. You get stuck in and start making mistakes – the more the better. This is how we learn.

The same can be said for generating a second income.

I have to admit that I am far from an expert but I am willing to learn. Up to this point I have spent a lot of money learning about what does not work. Often I have wondered if the problem lies more with me and not these so called ‘automated cash machines’. I don’t think so. I could be wrong but in the past I have invested a lot of time, money and energy into these business ventures with very little to show for them.

Could I be getting it wrong every time?

Maybe but I would like to further explore the idea that a sustainable second income can be generated online. Is it really possible to take advantage of all the internet has to offer in terms of leverage and access to a 24 hour a day market?

Over the next articles posts I am going to research and write about online business opportunities to see if it can be done.

I’m toying with the idea of subscribing to one of the more respectable internet business opportunities and really making a go of it to see if it can be done and if it is possible to generate a reasonable second income.

Walking away from your debt

Jul 302008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jul 282008

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

I often wonder why we bother.

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

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

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

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

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

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

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

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

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

But you absolutely hate your job, right?

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

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

Ok so you still hate your job?

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

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

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

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

How long could you survive if you lost your job?

Jul 252008

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

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

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

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

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

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

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

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

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

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

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

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

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

The net effect?

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

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

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

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

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

Look after yourself first – your debt second

Jul 212008

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

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

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

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

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

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

You need to be your own best friend.

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

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

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

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

So how to put yourself first and your debt second?

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

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

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

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

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

Affluenza – the credit party is over

Jul 182008

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

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

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

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

Taken from Wikipedia.

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

I couldn’t agree more with the definition above.

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

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

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

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

Affluenza: The All-Consuming Epidemic (Bk Currents)

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

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

Prudence in all matters relating to your debt

Jul 172008

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

The accounting concept that I am talking about is Prudence.

Taken from Businessdictionary.com

Prudence

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

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

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

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

Expect more bills and less income

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

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

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

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

Also remember that its all in your mind.

The fastest way out of debt

Jul 142008

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

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

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

Learn everything you can about personal finance and budgeting

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

Get your family and friends involved

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

Sell absolutely everything that you do not need

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

Consolidate your credit cards to a low introductory offer

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

Shop around

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

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Rent out a room or move to a lower cost area

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

Get a second part time job / work overtime

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

Eliminate all your discretionary spending

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

Cut up your credit cards

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

Focus all of your attention on improving your financial situation

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

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

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

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

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

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

Life plans instead of debt management plans

Jul 112008

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

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

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

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

Why are debt management plans so oppressive?

It primarily depends on who designs them.

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

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

What’s the alternative?

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

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

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

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

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

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

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

Jul 092008

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

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

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

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

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

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

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

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

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

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

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

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

Stoozing – Use your credit cards for profit

Jul 082008

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

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

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

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

How much can you borrow?

How long does the 0% interest rate last?

What are the balance transfer fees?

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

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

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

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

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

Stoozing.com

Moneyeconomics.com


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

Is Inflation a debtors’ best friend?

Jul 042008

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

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

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

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

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

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

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

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

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

However even for debtors inflation is a double edged sword

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

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

Who is trading in your debt?

Jul 032008

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

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

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

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

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

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

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

Do we have a moral obligation to pay our debt?

Jul 022008

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

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

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

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

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

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

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

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

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

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

The windfall mentality won’t get you out of debt

Jun 302008

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

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

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

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

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

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

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

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

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

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

Jun 272008

Nine hours a day.

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

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

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

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

Then a strange thing happened.

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

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

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

Going on a media diet will serve two purposes

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

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

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

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

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

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

Jun 262008

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

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

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

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

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

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

Slow and steady

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

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

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

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

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

Remember slow and steady.

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

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

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

Saving while in debt – does it make sense?

Jun 252008

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

I disagree.

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

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

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

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

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

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

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

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

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

Bad things happen to good people

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

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

Freeganism – Is this the ultimate solution to debt problems?

Jun 202008

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

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

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

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

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

Again taken from Freegan.info website.

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

Extreme debt requires extreme measures.

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

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

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

Freeganism – is it sustainable?

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

Would I turn Freegan?

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

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

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.

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.

Passive income? Look at your passive expenses first

Jun 092008

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

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

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

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

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

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

Passive expenses – the mirror image of passive income

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

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

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

Phone bill

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

Electricity bill

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

Magazine subscriptions

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

Gym memberships

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

Insurance

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

Website memberships

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

Cable TV

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

Rent/mortgage

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

Banking fees/credit card fees

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

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

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

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

Possessions – the weight of the world on your shoulders

Jun 062008

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

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

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

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

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

What’s the point?

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

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

Don’t define yourself by your possessions

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

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

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

Impulse spending – it’ll be the debt of me

Jun 052008

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

Women only?

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

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

What can you do?

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

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

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

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

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

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

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

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

Debt Management – Analysis Paralysis

Jun 032008

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

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

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

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

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

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

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

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

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

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

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

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

May 302008

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

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

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

What are you trying to achieve with your paperwork?

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

Cardboard box clarity

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

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

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

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

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

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

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

X marks the spot

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

Don’t be afraid to ask questions

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

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

Destroy the evidence

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

How long should you keep paperwork?

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

Storing your paperwork

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

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

In Summary

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

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

Do you have the energy to fight debt? Part 2

May 292008

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

Is your home clean and clutter free?

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

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

Sorting through the paperwork

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

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

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

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

Virtuous circle

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

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.

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

May 232008

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

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

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

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

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

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

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

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

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

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

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