10 (More) Reasons You’re Not Rich

Oct 142008

I just read a great article on Yahoo.com and I thought it would be a good idea to share it with you. The article is called ‘10 (More) Reasons You’re Not Rich’ and is written by Jeffrey Strain. Basically the article goes through 10 fairly original reasons as to why you are currently not rich or still in debt as the case may be. I have covered some of the topics in some of my previous articles but some are quite original and ones that I had not thought about before.

I always like reading new and original ideas when it comes to personal finance. It keeps me motivated when it comes to my own finances. There are only so many ways that you can say ‘Spend Less than you earn’ so hearing of new ways of saving and making money is always welcome.

I hope you enjoy the article – I certainly did.

Feeling rich when you pay your bills

Oct 132008

So you mean to tell me that I should feel rich when I am paying my bills and money is leaving my bank account?

Yes that is exactly what I am saying.

For most people the thoughts of paying bills leaves them feeling decidedly poorer. I know it made me feel that way for a long time. When I first got into debt I remember cursing the bank for taking the money out of my account. I would put off paying creditors for as long as legally possible. I had a really tough time motivating myself to pay my bills.

I would dread receiving mail as I almost certainly always knew that there would be a bill or past due notice lurking among all the credit card offers. To log on to my bank account to transfer funds was a huge struggle.

Compare that with the way I react when I get a bill today.

I gather all my bills that I receive in any given week and I tackle them all on a Saturday morning. I log into my bank account and make transfers to pay the bills – the funds won’t arrive until Monday or Tuesday but I don’t mind as Saturday suits me best for doing this. As I pay each bill I mark it in big writing ‘PAID IN FULL’ and I put the date on it. If I have set up an automatic direct debit I make sure that the transaction has been made by my bank and then I mark the bill ‘PAID IN FULL’.

As I pay the bills I try to feel wealthy – not the easiest thing to do when you are neck high in debt but it can be done. I try to imagine that I have vast amounts of money and that I actually enjoy paying my bills. I try to look on paying my bills as part of the flow of money. If I send money out into circulation I know that it will eventually come back to me.

Okay I know that this kind of New Age thinking might not sit well with some of you but if you try it you will be surprised at how your imagination can create positive feelings of wealth. You don’t have to feel like a million dollars but even if you can feel say even just a little wealthier than you currently are then it will make a difference.

What’s the point?

I described this technique to a friend of mine who was in a similar financial situation to me. The response I got was ‘What’s the point Mike? I’m broke and no amount of mumbo jumbo positive thinking is going to make any difference’.

I could understand his frustration. Circumstances had been unkind to him but he wasn’t helping his situation by wallowing in self pity. The fact of the matter is that the more negative he got about his financial situation the more negative financial problems he got as a result.

I used to have a similar problem with negative self talk. It was a slow realization on my part that it was me who was causing a lot of unnecessary suffering by thinking negatively.

What changed?

Once I realized that I was causing a lot of my own suffering by having a negative attitude towards money things started to change. It occurred to me that money is neither good nor bad but rather it is a product of our feelings towards it. In other words money is what we make it in our minds.

If we create a mental image of money as something that is all powerful in our lives then I think we are giving too much of our personal power over to money. On the other hand if we do not treat money with respect then we end up losing it and in debt.

Now before I go on I want to point out that I am still on a journey of discovery here. I do not claim to know all the answers. In fact in relative terms I am only a novice to this whole ‘how much money you have is a product of your attitude’ way of thinking.

In theory it makes sense but I am still experimenting with it. I am still in debt so obviously I have not quite mastered the techniques involved. What I will say is that by paying my bills on time and without a negative attitude I have a lot less stress.

More money

The really interesting thing about paying my bills while trying to feel rich is that I do actually have more money as a result. The difference is only small but it is a positive difference. I don’t know what exactly caused the difference. I think it may have arisen from the fact that I don’t have as much of an interest charge or penalty fee from late payments. Also I think that because I have developed the habit of paying my bills at the same time every week I have become more disciplined in my spending.

Don’t question it – simply try it

Time for some field work, if you want to see if this whole positive attitude towards money works for you then I suggest that you simply try it for yourself. The next time you have a bill to pay try to pay the bill with a positive attitude and do not hold a grudge against your creditor. Simply pay the bill and try to feel rich when you do it. Wish your creditor well.

Give it time. Don’t expect a miracle. It might happen but the chances are slim so continue to indulge in positive thinking when it comes to paying your bills for at least one month. If after the month is up and you don’t notice any difference, try it for another month. Give it time.

Notice the small changes. Change won’t come all at once but rather in a series of smaller more subtle changes. You may notice that you have slightly more money in your bank account at the end of the month or that you aren’t as stressed when you get a bill.

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.

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.

Gambling debts – the last place you want to be

Oct 012008

All debts are not created equal. I have discussed good debt versus bad debt in an article previously and that can be read here – ‘Bad debt versus good debt – value for debt not value for money’.

In my previous article on bad debt I made the point that a debt is good if it adds value to your life. If you can see no long term value from your debt then it is a bad debt and should be avoided if possible.

I gave the example of a holiday and I said that it is a bad debt because it doesn’t add any long term value to your life and to who you are. After two weeks away all you have is an empty wallet and some nice memories.

Now don’t think I’m against going on holidays what I am against is going into debt to go on holidays.

Hierarchy of bad debt

Within the category of bad debt there exists a hierarchy of badness. To me there are differing degrees of badness in bad debt. The different degrees are based on what I call the physical element of the debt.

If you have acquired a bad debt in order to purchase something physical such as a car or a TV then you have something to show for your money. The amount the item is worth may be significantly less than you owe on it but it still retains some of its value. On the other hand if you acquired debts to purchase something that is non-physical such as a holiday or dining out then you have a problem. The problem is that there is no value remaining in that item.

Gambling debts – the worse kind of bad debt

Gambling debts are the worst form of debt. There are a number of reasons why this is the case. The first and most obvious is that there is absolutely nothing to show for the debt. What do you have? An expensive thrill that lasts for about ten minutes? At least if you buy a car you have something physical to show for it that you can sell to recoup some if not all of your expense. With gambling debts you have nothing to sell or show for it.

Gambling promotes a type of behavior that is risk loving and somewhat removed from the financial realities of life. I’m not going to go all moral on you now. I have been to Las Vegas and I had a really good time. I knew my limits and I had a budget for my gambling. Gambling small insignificant amounts is fun but it is so easy for it to spill over into something more sinister and dangerous for your finances.

However bad being in debt is (and I’m not trying to belittle it) to me I would imagine that being in debt due to a gambling addiction would be a whole lot worse. Not only have you a debt problem but you also have an addiction problem.

You may start out gambling money you can afford to lose.  Once in the grip of the gambling buzz the temptation to borrow to gamble is just too strong. Once in debt the logic becomes something like – ‘I’ll need to keep gambling in order to pay off my debts’ – and so the spiral continues. There may be the occasional win but in the long run the game is stacked against there gambler.

Here is a link to an article on the USATODAY website – “Gambling madness can snag court fans”. This article paints a very depressing picture of the damage that gambling can do.

I think that the article says it all.

If you think that you may have a problem with gambling then please try to get help. Trying to get out of debt while still addicted to gambling is a huge challenge and almost certainly destined for failure. The reason why is because the lure of ‘one more shot and I can win’ will always sucker the gambler. Tackling the gambling addiction first is the key to getting out of debt and more importantly staying out of debt.

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.

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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.

Are you lottery class?

Sep 152008

Apparently there is a new way of allocating social class. The new class concept ties into the articles that I wrote about debt and lottery tickets and the windfall mentality that some people in debt have. This new social class breakdown is simply split into two categories. The investor class and the lottery class.

Barbara Dafoe Whitehead has written a very interesting article on the subject entitled ‘A Nation in debt’. In this article Whitehead breaks down the distinction between the classes and how this new social class system came about. Whitehead also writes about the death of thrift. I highly recommend reading the article. It is quite long but well worth the effort.

In the meantime here is a summary of what she says about the two classes.

The Investor class

“The investor class, with ample access to institutions that foster wealth-building discipline, is served by a bevy of insurance agents, tax lawyers, stockbrokers, tax accountants, deferred compensation experts and investment bankers. They are likely to work in organizations with 401(k) plans, profit-sharing, Keogh plans, deferred income compensation and retirement savings programs.”

The lottery class

“The lottery class, on the other hand, works in jobs that offer few pro-thrift benefits. As of 2004, seventy million of America’s 153 million wage earners worked for employers without a retirement plan. Rather than being courted by investment firms, they are targets of modern-day, made-to-look-respectable loan sharks. Tens of millions of working Americans who might join the class of savers and investors under more favorable circumstances are being recruited into a burgeoning population of debtors and bettors.”

To me it smacks of ‘the haves’ and ‘the have nots’. That could be an oversimplification of the situation but at first glance that’s the way it appears. The question you have to ask yourself is what class do you fit into?

Why is it important to know which class you are?

Well I know which class I would prefer to be in and that is the investor class. Am I there yet? Yes and No – I have debt but I also have access to financial advice and retirement plans. I personally don’t think the definition of the two classes is as clear cut as it could be. I think there is room for a third class – the “I’m in debt but hoping to be an Investor one day soon’ class.

Previous articles

In the past I’ve written about the lottery and how it offers a brief glimmer of hope in an otherwise bleak financial landscape. I stand by that article but I want to point out that in a follow on article I spoke about the windfall mentality and the way some people who are in debt cling to the hope that they will have a windfall from the lottery or some other source and that all their problems will be solved. This windfall mentality prevents them from making any real progress on reducing their debt and as a result they become more entrenched in their belief that a windfall will save them. All the while the interest on their debts mount.

Just because you do the lottery does not mean that you are lottery class. I personally think class has everything to do with attitude. Rich people do the lottery – Whitehead’s article points this out – they just spend a lot less in both monetary and relative income terms than people in the lottery class.

So which are you?

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.

Media Diet – follow up

Aug 122008

A couple of months ago I wrote a post about the impact that media has on our spending. The constant bombardment of seductive adverts for the latest gadget would drive anyone to use their plastic. I know I’m not alone when I say that more than once I have been duped into buying something I didn’t need by slick advertising. This in turn has often blown a large hole in my budget.

Anyway in that post – which you can read here – I explained that I was toying with the idea of going on a media diet. The thought of reduced stress and anxiety coupled with more time and mental capacity seriously appealed to me.

If I’m honest the results of my media diet were very mixed.

I think its best if I break down each media channel so I can explain what happened.

Internet.

I use the internet a lot for my job and for this Blog. I find that a lot of the time when I am on browsing the web that I have lots of websites opened. The thing is none of these websites relate to each other. I could have a finance website open while at the same time I could have a sports website. My brain has problems processing the unrelated pieces of information at the same time.

The net effect of having all these websites open was that during the day my thoughts became scattered. To combat this and help me reduce the amount of time I spend on the internet I downloaded a free trial version of a website blocker software. I then loaded the details of my favorite websites into it.

Every time I tried to log on to my favorite websites I got a “page cannot be displayed” message. Initially this was very frustrating but eventually I did lose a lot of interest in those websites and my productivity did improve…for a while at least.

TV.

I mentioned in my last post about a Media Diet that I recorded all my favorite TV shows and watched them all in one go at the weekend. When I was watching them I would simply skip the ad breaks.

This had a big impact. It freed up a lot of time in the evenings as my evening was no longer centred on a TV show.

I did find that when people that I work with were talking about the previous evenings TV shows that I felt a little left out. Small price to pay I reckon.

Newspapers.

I stopped reading the daily newspapers – most of them I read online anyway so I simply blocked their websites. At the weekend I would buy one of the Sunday broadsheets. These usually give a good overview of the weeks events.

All this was shaping up nicely and for a couple of weeks I was seriously reducing my exposure to the media. The thing was that after the initial period my enthusiasm began to wane. By having my favorite websites blocked I felt that I was missing out. Missing out on what I’m not sure but I just felt that I was isolating myself in some way.

One by one I removed the block on the websites so that I could access them ‘just this one time’. I don’t feel isolated anymore and I am up to date with all the current affairs and sports results but at the same time my media exposure is right back where it was when I started this exercise. I have even fallen back into the habit of watching my favorite TV shows in the evenings instead of at the weekends. Not good.

When I am trying to be productive – either at work or trying to write this Blog – I’m back in the habit of jumping from website to website and back to writing. This leads to incredible frustration as I know what I am doing wrong but I am finding it hard to break this habit.

But Mike – what were you trying to achieve anyway?

It was easy to lose sight of the original reason for going on a media diet. My prime motivation was to reduce the negative influence of the media on my bank balance. Simple as that. As a side benefit I was hoping that my productivity would increase as a direct result of my free time.

While now it looks like my media diet was unsuccessful in a way I have achieved what I originally intended to do. Now I find that whenever I am confronted with a purchase I ask myself how much of my purchasing decision was influenced by the media. I probably won’t ever be able to give an accurate answer but at least it gets me thinking about my buying behavior.

No longer do I go blindly about my shopping. Often I find myself asking the question “Is this generic product as good as a branded one?” To me this is what going on a media diet is all about.

For more of my musings on Debt and Personal Finance please subscribe to my RSS Feed.

Online Second Income success stories – not many

Aug 042008

I’m scratching my head as I search on the internet for success stories of people who have made a good second income online. Most of the stories I have come across are very fake and unbelievable. Most of these ‘success stories’ are on websites that are trying to sell something. Usually it is a miraculous new income generating profit system. Geez thanks for getting my hopes up. Again it’s that cheezy sales pitch that keeps putting me off.

So far I have had no success in locating a good and believable story about generating a second income online.

The reason I’m focusing on generating a second online is because it ticks all the boxes in terms of flexibility and start up costs for someone who is currently in a job. In previous articles I’ve discussed the factors that need to be considered before trying a method of generating a second income. You can read that post here: Debt elimination –the next leg. Generating a second income.

In that post I focused on getting a second job as a way of generating a second income. The reason for this was because it was determined that getting a second job was the quickest and most effective way of generating a second income. I wrote about the need for the logistics to make sense. Can you realistically do a second job all the while maintaining your current job?

Now for many people getting a second job simply isn’t an option. People with children may not be able to afford the additional childcare costs. Or there simply may not be any second jobs available in the surrounding area. As a viable alternative to this, generating a second income online offers the flexibility to allow someone to work from home in their spare time all the while meeting their current job and family commitments.

So far so good, working online from home in your spare time seems the ideal solution. Unfortunately the reality of trying to generate a second income is not so easy and straightforward. Given the low barriers to entry the competition on the internet can be intense. That said there are ways of generating a second income if you have the time and patience to do it.

Here is a very useful article from the The Times newspaper. This article is simply called ‘10 ways to make money online’ and offers valuable ideas and information on how to generate a second income online. I recommend that you take the time to have a read through this article as it will serve as food for thought.

In the meantime I will continue to look for believable online success stories. I know they are out there it’s just a case of finding them!

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.

Playing musical chairs with debt

Jul 312008

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

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

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

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

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

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

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

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

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

Juggling debt – seemed smart at first.

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

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

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

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

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

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

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

Walking away from your debt

Jul 302008

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

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

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

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

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

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

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

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

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

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

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

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

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

Can’t break the cycle of debt?

Jul 292008

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

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

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

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

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

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

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

Change one – Change who your friends are

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

Change two – Go on a media diet

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

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

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

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

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

How easy are these changes to make?

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

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

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

Jul 282008

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

I often wonder why we bother.

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

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

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

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

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

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

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

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

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

But you absolutely hate your job, right?

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

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

Ok so you still hate your job?

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

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

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

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

Living Paycheck to Credit card to Paycheck

Jul 242008

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

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

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

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

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

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

How I got out of this vicious circle

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

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

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

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

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

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

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

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

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

The things I learnt.

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

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

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

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

The New York Times series on debt

Jul 232008

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

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

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

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

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

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

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

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

Look after yourself first – your debt second

Jul 212008

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

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

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

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

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

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

You need to be your own best friend.

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

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

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

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

So how to put yourself first and your debt second?

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

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

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

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

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

Affluenza – the credit party is over

Jul 182008

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

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

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

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

Taken from Wikipedia.

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

I couldn’t agree more with the definition above.

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

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

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

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

Affluenza: The All-Consuming Epidemic (Bk Currents)

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

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

Prudence in all matters relating to your debt

Jul 172008

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

The accounting concept that I am talking about is Prudence.

Taken from Businessdictionary.com

Prudence

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

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

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

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

Expect more bills and less income

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

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

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

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

Also remember that its all in your mind.

Time is money

Jul 162008

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

Take from phrases.org.uk

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

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

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

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

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

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

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

Motivation to act on your debt

Jul 152008

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

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

So now it is your turn.

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

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

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

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

Foreclosure, a personal story

Tent city

California town creates parking havens for homeless

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

The fastest way out of debt

Jul 142008

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

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

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

Learn everything you can about personal finance and budgeting

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

Get your family and friends involved

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

Sell absolutely everything that you do not need

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

Consolidate your credit cards to a low introductory offer

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

Shop around

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

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Rent out a room or move to a lower cost area

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

Get a second part time job / work overtime

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

Eliminate all your discretionary spending

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

Cut up your credit cards

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

Focus all of your attention on improving your financial situation

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

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

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

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

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

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

Life plans instead of debt management plans

Jul 112008

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

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

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

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

Why are debt management plans so oppressive?

It primarily depends on who designs them.

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

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

What’s the alternative?

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

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

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

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

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

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

Frugalistas – Frugality goes mainstream

Jul 102008

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

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

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

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

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

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

Penny Pinching Looks Great

Proud to be prudent: Meet the new army of frugalistas

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

Jul 092008

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

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

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

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

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

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

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

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

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

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

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

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

Stoozing – Use your credit cards for profit

Jul 082008

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

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

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

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

How much can you borrow?

How long does the 0% interest rate last?

What are the balance transfer fees?

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

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

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

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

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

Stoozing.com

Moneyeconomics.com


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

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

Jul 072008

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

Fires and foreclosures – not the smartest way out of debt

Jul 072008

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

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

Arson – why would some one do it?

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

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

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

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

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

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

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

What’s the alternative?

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

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

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

Is Inflation a debtors’ best friend?

Jul 042008

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

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

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

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

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

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

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

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

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

However even for debtors inflation is a double edged sword

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

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

Who is trading in your debt?

Jul 032008

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

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

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

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

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

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

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

Do we have a moral obligation to pay our debt?

Jul 022008

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

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

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

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

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

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

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

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

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

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

Selfish acts of charity

Jul 012008

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

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

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

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

The answer of course is yes.

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

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

The simple strategy can be summed up in four words.

Help people in debt.

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

Reach out.

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

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

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

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

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

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