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.

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.

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.

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.

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.

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.

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

Apr 212008

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

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

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

The reality of working in a call center for a bank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Up to your eyeballs in debt – so what?

Apr 172008

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

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

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

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

How a stress free debt laden lifestyle would work

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

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

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

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

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

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

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

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

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

The things you need to do to maintain this lifestyle

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

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

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

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

A word of warning

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

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

Debt help program – do it yourself and save money

Apr 152008

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

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

But I don’t know anything about debt management.

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

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

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

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

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

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

Debt help program that suits you

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

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

The problem with self made debt programs

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

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

In Summary

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

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

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

Debt Free – Starting from where you are

Apr 072008

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

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

Commitment

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

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

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

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

The cause and effect principle

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

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

Debt by Stealth – this is the cause of your Debt

Mar 292008

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

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

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

Student Loans:

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

Mortgage Debt:

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

Consumer Debt:

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

The debt bite

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

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

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

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

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

Keeping up with the Jones

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

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

Wake up

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

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

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

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

Debt Management – Anyone for some elephant?

Mar 182008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Sum Total of your Debts

Mar 042008

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

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

Don’t know where to start?

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

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

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

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

Here’s an example:

Student loan                                           5000

Credit card                                            11000

Car loan                                                 6400

Phone                                                     200

Electricity                                                300

Cable TV                                                 100

My brother Tim                                       4500

My Mum                                                  320

Back tax                                                1300

Parking fines                                            250

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

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

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

The ugly truth about your debt.

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

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

Debt and Clutter – one solution for both

Feb 092008

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

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

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

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

Clutter on a grand scale

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Two problems solved in one go:

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

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

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

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

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

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

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

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

Debt Management Budgets – A waste of time?

Feb 032008

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

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

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

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

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

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

So how do you do it?

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

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

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

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

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

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

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

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

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

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

The Pain of Debt

Feb 022008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Probably not.

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