Money – Easy come Easy go?

Oct 152008

I was talking with my brother last night about how some members of our family are spendthrifts and how we fritter away money like it is going out of fashion.

I made the comment that the family attitude towards money seemed to be ‘Easy Come Easy Go’. My brother agreed however while I was focusing on the ‘Easy Go’ part of the statement he was focusing on the ‘Easy Come’ part. He made the excellent point that while most members of the family are spendthrifts none of them are in really serious financial difficulty.

This got me thinking.

I was focusing on the ‘Easy Go’ part of the statement and thinking about all the money I have spent over the years and all the expenses and debt repayments I now have. He was focused on the ‘Easy come’ part of the statement and when I asked him to explain and he told me that he was thinking about how money seems to easily come to the members of the family who spend a lot. He used a couple of examples where money seemed to appear out of nowhere like someone getting a big unexpected bonus at work.

He was right and the more I thought about it the more I began to realize that in general the people I know who have had difficulties with money are the very people who are uptight about money. They may read about the credit crisis and get stressed, they have effectively shut down their spending and become stressed about the flow of money into their lives.

On the other hand the people I know that aren’t having difficulties with money but yet still seem to be spending are those people who have a very relaxed attitude towards money.

I’m thinking out loud here but I reckon the reason why this seems to be the case is that people who have relaxed attitude towards money seem to take more risks and follow more potentially profitable opportunities. While people who are stressed about money seem to take fewer risks and try to maintain their financial status quo.

Take the example of a new job opportunity that pays well. The person who is relaxed about money would more than likely be prepared to take the risk and go for the job. The person who is uptight about money might not even consider applying for the new role for fear that it might upset their current employer should they ever find out.

This is a very simple example but I think it illustrates the difference between those who are stressed about money and those who are relaxed about money nicely.

The difference

The key difference seems to be the attitude to risk. The person who is relaxed about money knows that there are always plenty of money making opportunities and jobs out there for the person who is willing to work hard and take a risk. The person who is stressed about money is too focused on losing what they have and the current financial problems that they face that they do not even see the opportunities. As a result they stay stuck in a kind of financial limbo that only moves at the rate of inflation.

But I’ve got bills to pay

Me too and while I kind of figured that this was the way that money seem to work it wasn’t until I sat down and thought about it that I realized that attitude has a huge part to play in any financial situation.

Say you’re in debt like me and you’ve had a bad day at work and you arrive home to find a stack of bills. The misery just keeps piling on and no matter how sunny your disposition is there is a good chance that this will get to you. Fair enough. But you have a choice as to how you can respond to the situation. You can kick and scream at the unfairness of it all or you can simple say ‘I don’t feel up to dealing with this right now so I’m taking a time out and will deal with when I feel better’.

The truth is that when you are in debt the world tends to beat on you a lot more than if you weren’t in debt. The same problems that seemed easily dealt with before can seem insurmountable when you are in debt. That is the nature of the beast unfortunately and at the risk of sounding like a broken record the only true think that you have control over is your attitude.

What can I do?

Changing your attitude towards money takes time, patience and a lot of effort. I can only relay what I have read about it because in theory if my attitude towards money was brilliant then I would not be having problems with debt. So perhaps I’m not the best person to be asking. That said I can tell you from experience of what constitutes a bad attitude towards money if that will help?

So the idea here is to notice if you have similar thoughts. If you do then it might be the case that you need to look at your attitude towards money.

Ok so here goes.

You see someone with a fancy flash car and you think – they must be criminals.

You work hard yet get passed over for promotion and a colleague gets it instead. You think – they must be sleeping with the boss.

You receive a pile of bills but you ‘forget’ to pay them thinking that you can get away with it for another month.

You get angry at the credit card companies for charging you extortionate rates yet you knew exactly what the rates were when you signed up.

You ‘forget’ family and friends birthdays.

You live for today and adopt the ‘I could be dead tomorrow’ attitude. But wake up in two days time alive and well.

You don’t know how to get your bank balance.

You don’t know how much you owe on your credit cards and loans.

You expect some ‘manna from heaven’ i.e. some good fortune to come along and solve all your money problems in one go.

You try to match your neighbor in the lawnmower stakes. Mine is bigger than yours.

You try get rich quick schemes in the hope of making money but in the end you lose all your money.

This list is by no means complete. The point I am trying to make is that each of the thoughts and actions outlined above point to a case of bad financial attitude. If you have had some of these thoughts in the past don’t worry. Attitude is something that can be changed. So why not change yours?

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.

$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.

Online Second Income success stories – not many

Aug 042008

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

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

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

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

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

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

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

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

Walking away from your debt

Jul 302008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jul 282008

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

I often wonder why we bother.

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

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

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

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

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

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

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

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

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

But you absolutely hate your job, right?

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

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

Ok so you still hate your job?

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

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

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

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

The New York Times series on debt

Jul 232008

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

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

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

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

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

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

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

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

Prudence in all matters relating to your debt

Jul 172008

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

The accounting concept that I am talking about is Prudence.

Taken from Businessdictionary.com

Prudence

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

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

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

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

Expect more bills and less income

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

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

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

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

Also remember that its all in your mind.

Time is money

Jul 162008

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

Take from phrases.org.uk

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

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

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

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

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

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

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

Motivation to act on your debt

Jul 152008

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

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

So now it is your turn.

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

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

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

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

Foreclosure, a personal story

Tent city

California town creates parking havens for homeless

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

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

Jul 072008

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

Who is trading in your debt?

Jul 032008

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

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

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

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

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

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

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

Do we have a moral obligation to pay our debt?

Jul 022008

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

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

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

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

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

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

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

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

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

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

The silent scream of generation debt

Jun 232008

‘The mass of men lead lives of quiet desperation’

Henry David Thoreau

Are we now faced with losing a generation of people to debt? A generation of people who lived the high life for about five years but end up paying for it for the rest of their lives?

As the economy teeters on the brink and people start to try to cope with their debts – are we faced with a generation of people whose hopes and dreams and now lay shattered? Homeownership and material wealth that seemed so close and real are now slipping fast from the hands of many. Untold emotional suffering is now happening in the homes across the land. They say that no one ever knows what goes on behind closed doors but you can be sure that for many the financial burdens are playing havoc with their home life.

If you listen closely you can almost hear the collective scream of a generation lost in a sea of debt. Look at the faces of the people you meet. Can you see it in their eyes? Can you feel the frustration and anger at their situation – your situation? I can’t quite put my finger on it but there is something there – it’s almost like a screaming despair – a want for the good times just gone and a dread of what lies ahead.

Who is to blame?

You tell me? Who do you think is to blame? The bankers and financial institutions that made it too hard to refuse? Or does the uncomfortable truth lie a little closer to home? For me the truth probably lies somewhere in the middle, a collective euphoria existed where almost everyone (myself included) joined the party and got drunk on cheap wine provided by those nice guys down at the bank. What we are now facing is a collective hangover and no amount of coaxing can beat the booze blues. We just have to sit and wait it out.

The sitting and waiting

It is the sitting and waiting it out that is the hardest part. The memories of easy credit and good living are still fresh and yet the pain of debt is starting to hurt. Frugal living may not be a new concept but it is one that will take a bit of getting use to all the same. For how long will the pain last? Well it depends on how much debt you have and how determined you are.

You see most people haven’t woken up to the fact that the party is over and that they now have a problem with debt. Those who have woken up to the problem are in a state of denial. The next stage is anger – anger at themselves – ‘how could I have been so stupid?’ A lot of people don’t move beyond the anger phase. They sit there and stew with anger and despair. ‘How could this of happened to me?’ and yet fail to realize that the one person who can help them is so caught up in the negative emotions of the situation to do anything about it.

It is those people that are in the anger and despair phase that you hear moan about how the world is a crooked place. How everyone has a hand in your pocket.

Where are you? Are you in the denial phase? Not quite ready to leave the party and still living on your few last lines of credit? Or perhaps you have moved beyond denial and are in a state of shock. That’s good, keep on moving. Anger comes next but from that anger can come positive action. Any action is better than no action. It will only be a matter of time before you find out what works and what doesn’t work. Keep moving.

While the mass of men (and of course women) may lead lives of quiet desperation that doesn’t mean that you have to. You may have bought into the whole easy credit thing but that doesn’t mean that you have to sit there and silently scream as you long for the good life again. You can get the good life again – a lot quicker than you thought possible if you are only willing to focus your efforts and apply yourself to your finances. Rome wasn’t built in a day but give yourself a few short years and the good times for you could be back, this time for good. So I say let the good times roll.

Debt Management – Analysis Paralysis

Jun 032008

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

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

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

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

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

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

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

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

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

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

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

Cash flow calendar – a lifebuoy in a sea of debt

Jun 022008

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

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

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

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

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

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

Cash flow calendar

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

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

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

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

Building a cash flow calendar

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

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

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

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

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

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

May 302008

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

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

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

What are you trying to achieve with your paperwork?

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

Cardboard box clarity

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

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

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

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

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

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

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

X marks the spot

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

Don’t be afraid to ask questions

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

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

Destroy the evidence

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

How long should you keep paperwork?

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

Storing your paperwork

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

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

In Summary

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

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

Do you have the energy to fight debt? Part 1

May 282008

When I read personal finance books I generally feel like the life is being sucked out of me. I am hit by a wave of tiredness. Part of the reason why has to do with the fact that most Personal Finance books are dull. They are full of facts and figures and they can be well written but they make what is already an unappealing subject even more unappealing. The thing is I actually like personal finance and I enjoy reading about new ideas in relation to personal finance. But if I am honest most of these books put me to sleep.

If these books put me to sleep I can only imagine what they are doing to people with no interest in personal finance. People in debt may have been recommended to buy a certain book as a quick solution to their debt problems. However it is likely that some of them will become even more frustrated and depressed if they are faced with a book that is boring.

It’s not just the personal finance books that cause people to go into a trance. The whole field of personal finance is almost like a dirty word to most people. There seems to be an inbuilt resistance to tackling financial problems – particularly debt problems. Most people just don’t want to know, sure they’d like to have all their financial problems solved but when push comes to shove they are not really bothered.

You come home after a long hard day at work, you’re tired and hungry. The last thing you want to do is sit down and go through the process of creating a budget or sorting your bills. I know I’ve been there. In fact it can get even worse because when you know that you should be doing work on your personal finances you start to feel guilty. But no matter how guilty you feel you still can’t overcome the inertia that has you sitting in front of the TV all night.

The weekends aren’t much better. You wake up on Saturday morning full of confidence. You assure yourself that this weekend you will tackle your finances. By noon on Saturday you still haven’t done anything but you are still confident – there’s plenty of weekend left. By six on Saturday you decide to enjoy your evening and you will sort your finances tomorrow. Sunday is not much better. It passes by so fast that you don’t even have time to think. Its eight o’clock before you realize that you forgot to look at your finances. Ok you say to yourself I’ll do it one night during the week. Unfortunately that one night during the week never happens. Your finances remain the same.

Now the scenario above is a bit general but it outlines nicely the way most of us manage to push looking at our finances as far away as possible. I’ve always had a problem with looking at my finances. Ironic I know but true. I often wondered why this was. The reason I came up with is that I was tired and the thoughts of looking at my finances made me even more tired. For me looking at my finances was too much like work.

Do you feel the same? Do you feel that looking at your finances is too much like hard work? Well you’re right it is like work and it’s certainly not easy. So how do you overcome that inertia?

Clear the mental clutter

Before you can tackle your finances you need to tackle the mental clutter. The feelings of tiredness and dread come primarily from the one hundred and one thoughts going through your mind at any one time.

The simplest way to tackle this mental clutter is to write a list. On this list write down all your thoughts – however random. In fact the more random the better. You will feel immense relief once you get these thoughts down on paper. You are in effect verbalizing your problems, hopes, fears, dreams and worries. This allows you to then think about your thoughts in a more structured and logically fashion. Do this for a week – everyday after you get home from work. You will be surprised at difference it will make. After the week is up you will probably notice a pattern to your thoughts. This pattern should then be used as the basis for an action list.

I know the dreaded ‘A’ word – action. But trust me you’ll enjoy this. Ok so you have your list of thoughts and you have highlighted the recurring thoughts. Now what I want you to do is to write down three fun and enjoyable actions that you can take that will help you solve your problems or resolve a particular situation that you are thinking about. For example if you are stressed at work – you could invite a close friend at work for a coffee or a beer and you could have a good rant about the situation. You could take your companies logo and put it on a dart board and fire darts at it for an hour or so. The list is endless but the emphasis has to be on fun fun fun. You have to take actions that will allow you to let off steam and enjoy yourself.

So what has this go to do with my debt and personal finance? Well the aim is to tackle the problem of your inaction in a roundabout way. For most people the thoughts of diving head first into their financial problems can be too much. It was financial neglect that caused the problem in the first place and this is not going to be solved overnight. The goal here is to clear your mental clutter and get the cogs of action turning in your brain. You’re more likely to take action if it seems appealing so the key here is to make it appealing.

I mentioned it in previous articles but one technique that I find really useful is NLP or Neuro Linguistic Programming. A bit like brain surgery without the actually surgery. Here is a link to an ebook that comes highly recommended. Success with NLP

In Part 2 of this article I discuss the impact of environment and how it can slow you down mentally and impeded your progress.

Debt and Lottery tickets – Is this the answer?

May 262008

It’s funny the way the mind works. We can convince ourselves that we are justified in buying $10 worth of lottery tickets each week when we are up to our eyeballs in debt. We say to ourselves that if we win big that all our debts will be wiped out in an instant. This type of logic is fundamentally flawed. Yet why do we persist?

I’ve often heard the lottery referred to as a tax on the poor. I couldn’t agree more. Why is it a tax on the poor? I think it has to do with the fact that it is poor people who have the most to gain if they win the lottery. If they win they can go from a place of zero wealth to a place of massive wealth overnight. The dream is that all their problems can be magically solved overnight. It is poor people who have the most to gain materially from a lottery win. It is this dream that spurs us all on to buy lottery tickets every week. Ironically it is the people who can least afford to play the lottery that plays it most often.

The lottery by its very nature plays on the hopes and dreams of people. It is very effective at this – without even trying. People just see all those millions and start dreaming about what they would do with all the money. I’ve done it. On numerous occasions, especially for the really large rollovers, I have found myself planning out my future with millions in the bank and to be honest I really enjoyed the feeling that yes it could be me that wins this time. Unfortunately it never is me. I won’t say that I have given up on winning the lottery but week after week it did feel like I was banging my head against a wall so I don’t play that often anymore.

From a debt management point of view it would be very easy of me to say that this money spent on lottery tickets would be better spent paying down your debts. The simple fact of the matter is that you know it is true. If you spent $10 a week on lottery tickets then that is $520 a year that could be spent on something more useful. Tell me – how much have you won on the lottery in the last year? Was it over $520? No? Really? You know deep down that the lottery is a waste of time and money. The choice is yours as always but I would ask you to consider cutting it out or certainly cutting it down and diverting those funds to paying off your debts. In the long run the returns will be much better from paying off your debts.

Now before we go on I want to make it clear that my first instinct for someone in debt is to cut out all the luxuries and in my opinion playing the lottery is a luxury. What I’m trying to point out is that playing the lottery is something that brings a little hope and although you know deep down that you are not going to win there is a strong emotional attachment to the ritual of checking the numbers. This ritual can make it hard for people to break the habit. You have to accept the responsibility for your actions and if you decide to continue playing the lottery then you need to live with the consequences.

Ok lecture over.

Now here is the interesting part. If you are determined to continue playing the lottery then you need to do something to increase your chances of winning. Currently the odds against you winning the lottery are astronomical. In reality there is no point in even playing. But yes I agree with the logic of “You gotta be in it to win it” and it gives you a glimmer of hope in what can be an otherwise bleak situation if you are in debt.

The goal here is not to spend more money on the lottery but to use the money you currently spend on the lottery in a more efficient manner. So what I suggest is that you either form a syndicate or join one. For those who don’t know what a syndicate is it is essentially a group of people who come together and pool their funds so that they increase their chances of winning.

If you compare the your chances of winning with your weekly $10 against a syndicate of 20 people each with $10 for a combined $200 in lottery tickets, you can see that the syndicate will have a better chance of winning. You might argue that if you win with your $10 on your own that wouldn’t have to share your win with anyone and you would be correct. In a syndicate the winnings are split among the members. My thinking on this is that there is a trade off to be had. You will win a smaller amount with a syndicate but you have a much better chance of winning (the odds against winning are still huge). For example 5% of $20m is better than 100% of nothing.

I’ve been part of a few lottery syndicates mostly at work and to be honest they are quite a lot of fun. Ok we never won big but we all had this common thing to talk and joke about. It certainly helped to liven up the atmosphere especially when there was a big rollover.

Syndicates are not without their problems. To start one up requires a bit of organizing. There needs to be rules in place that cover things like how much is played each week, who looks after collecting the cash, who is in charge of buying the tickets. You need to make it absolutely clear from the beginning what the rules of the syndicate are and if you are joining a syndicate make sure you know the rules. How often have you heard horror stories about people who didn’t pay up in time only for the syndicate to win big and they subsequently missed out? Don’t let it happen to you.

I know most of you were probably expecting me to mouth off about cutting your lottery out and reducing your debt. I suppose I had initially set out to write about that but then I realized that we are all adults and that we can make our own decisions and that you don’t need to be spoon fed. For me the lottery is a bit of fun. I don’t do it that often anymore and I’m no longer part of any syndicates. When I think back over the times that I have played it then I certainly had most fun when I was part of a syndicate. What I will say is that if you do decide to continue to play is keep it small and keep it real and if you want to increase your chances of winning then use the power of numbers and let other people share in the fun.

What type of Second Income person are you?

May 162008

The headline screams at you “Make $5000 a month in your spare time”. Curious to find out how this is possible you read on. It appears that it is a Multi Level Marketing (MLM) scheme. You read a little further and then you lose interest thinking to yourself that it is a scam. How on earth can someone make $5000 per month in their spare time? I tend to agree with your first reaction – initially at least. It does seem like a bold claim.

Dig a little further into something like MLM and you are confronted with even bolder claims of wild earnings. The same sort of thing applies to “Internet Marketing”. Stories abound of people who claim to have made lots of money in their spare time. The thing is you only ever hear about the success stories. I doubt that you will ever see a headline like “I lost $2,000 trying to make it in MLM”. The truth is thousands of people try and fail at MLM and Internet Marketing – myself included. In the quest for that elusive second income people spend thousands and make very little in return.

It always made me curious as to what separates the winners from the losers in the game of trying to generate a second income. Now my focus isn’t just on MLM or Internet marketing. You can take any part time endeavour such as a second job or trading on eBay and you will see that long term success is limited to a select few. The turnover of staff in part time jobs tends to be large. The long term success of your average eBayer is not guaranteed.

What makes the difference? Well to be honest I struggled with this myself for a long time. If you want to generate a second income you have a number of factors to consider. The key one is how badly you need the money. If you need it bad enough you will do anything. However this attitude will only work in the short term. To really generate a significant second income you need to be thinking long term.

Your focus needs to switch from short term activities to something that you can maintain in the long term. Ok this is best explained with an example. Say you are in debt and you need money fast. You have a day job but you get a part time job as a security guard to make extra money. You personally find the work boring but you need the money so you stick with it. You took the job to improve your situation and clear your debt but in the long run if you don’t like it then it will become a burden. My advice is to do it as long as it takes to make the money you need to pay your debts. Then look for something more suitable for you for the long term.

 What suits you long term? 

When you are considering the best method for you to generate a second income you need to examine your personality very closely. How well do you know yourself? Just because a MLM advert promises riches does this mean that the work involved is suited to everyone? Could it be that the people who really make it in MLM are pushy extroverted people who are extremely driven? How comfortable would you be hard selling products to your friends and family? I know I wouldn’t be comfortable with it but I know people who would have no problem with doing it.

The way I see it is if you want to successfully generate a second income in the long term you need to play to your strengths.  You need to do something that matches your personality. This seems pretty obvious but I don’t know how many people I have heard about or met that go into something just because there seems to be a lot of people making a lot of money at it. I think it is easier to pick an income generating activity that matches your personality rather than trying to force your personality to match the requirements of an income generating activity.

So if you know yourself, your strengths and weaknesses then you can begin by drawing up a list of activities that you think would suit you. The secret is if you are well suited to an income generating activity and you genuinely enjoy it and put the effort in you will make money at it. It’s as simple as that. It may not happen overnight and you may not make a million but it will give you the satisfaction of knowing you are controlling your financial destiny.

Debt elimination – the next leg. Generating a second income.

May 142008

The benefits of generating a second income are obvious; if you are in debt then the entire second income could be used to pay down your debt. Your debt would disappear fast. For every salaried employee out there who is doing the 9 to 5 generating a second income is the holy grail of personal finance.How easy is it to do? Well that depends on who you are talking to. Put something like “make money online” into a search engine and you’ll get a zillion pages. Each one of them trying to tell you how easy it is to generate a second income – from the comfort of your home, in your spare time, while your watching TV, ok you get the picture.

On the other hand you might talk to someone who has tried a couple of different ways and has had bad experiences. They may have lost money. They may be cynical and negative on even trying anymore. They would probably advise you to work hard and stay focused on your 9 – 5 job.

 

I think the truth lies somewhere in the middle of these two extremes. I don’t believe it is easy to make millions in my spare time yet I do believe that with a lot of hard work and motivation it is possible to make a nice second income. You may not be able to retire or quit your day job but it could be the key factor that allows you to be rid of your debt burden. After all that is the focus here – eliminating debt. Once the debt is gone we can worry about where we will put all our money after that.

Before you decide to pursue a second income you will need to put a lot of thought how you are going to do it. More importantly you need to consider what method is best for you given your preferences and needs.

How badly do you need the money? 

There are two aspects to this – if you need cash badly enough you will do almost anything to get it and I discuss this further in the next section. The second aspect and the one I want to discuss here is the time lag. If you are badly in need of cash then there is little point in trying to build a website or buying a rental property. The reason why is because of the time lag between when you start your website or buy a property and when you begin to generate income. By the time you receive your first bit of income you could be further in debt.

If you are in need of money you need to look at the time lag and how soon you will get paid. For example if you were to take a part time job waiting tables you can be pretty certain that you will either get paid at the end of the night or end of the week or in the worst case the end of the month. With a website/rental property it could be months before you generate any income.

If you need money urgently then you must pursue the method that will allow you to generate income fastest. You may have to swallow some of your pride. No it won’t be easy and yes it will be a lot of hard work but what you have to always do is think of the prize. The prize in this case is eliminating all your debt.

What are you prepared to do for the money?  

Nothing illegal I hope!

What you are prepared to do is directly related to how badly you need the cash. As I mentioned above if you are desperate you will do almost anything. But let’s imagine that you are not desperate but you do need additional income. In order for you to successfully generate a second income you need to think strongly about what exactly you are prepared to do for the money. If you are an accountant by day would you wait tables at night? If you were a waiter by night would you work in construction during the day? I’m not saying there is anything wrong with these jobs – nothing whatsoever. What I am trying to point out that in order to generate a second income you may have to do things that you would not normally be prepared to do.

Aside from getting your hands dirty so to speak what else are you prepared to do? Are you prepared to give up TV? Spending time with your friends? Going to the Gym? The reason I ask is because when you make a determined effort to generate a second income a lot of what you currently do in your spare time will have to take a back seat. If you go to the gym three times a week you may find that you simply don’t have the time to go anymore. For someone trying to keep in shape this can be tough. Remember this doesn’t have to be a permanent lifestyle change. It only has to be until you get your debt situation sorted out.

Do the logistics make sense? 

Imagine that you were working your normal 9 to 5 but you have taken a second job working for 4 hours each night in a call center. You finish your day job at 5 and the call center job starts at 7. Now let’s say that it takes an hour to drive from your place of work to the call center but that most days you don’t actually finish work until 5:30 and that the traffic is really bad and sometimes it can take up to two hours to drive to the call center. So you end up arriving at 7:30. This isn’t sustainable.

 

The logistics have to make sense. The method you use to generate a second income has to fit well with your current environment. By environment I mean the physical buildings, roads and transport. You need to get from A to B fast. But by environment I also mean the emotional environment. Does the fact that you will be very tired from working late on a second job fit well with the people around you? Will your partner support you if you arrive home late and cranky demanding to be fed?

Do the numbers add up?

This is a crucial thing to consider. You may think that by working twenty hours a week in a job that pays $15 an hour makes sense for you but you need to consider the numbers. How much do you make after tax? How much does it cost to get you there and back? How much do you spend on food? Do you have to pay a baby sitter? Before you decide to try to generate a second income you need to look very closely at how much of the income you generate do you actually get to keep?

A lot of the focus in this article has been on generating a second income by getting a part time job. There is a reason for this. For many people in debt there is a pressing need to generate income quickly. Apart from selling your possessions getting a second job is the quickest way to get money fast.

Learning how to trade shares online or learning how to build a property portfolio are great ways to generate income. The problem is that there is a lot involved in both and it takes years of learning and experience to be able to do it effectively. That is why I pointed out that time lag is crucial. If you have a long term perspective then by all means go and learn about shares and property but if your focus is on the short term removal of debt then you should focus on those activities that will generate money fast.

The key thing to remember with generating a second income is that it only has to be for a short time. What would be the point in spending all your day working and all your night working too? You would eventually burn out. The goal you should have is to only continue with generating a second income if it makes sense for you – physically, financially and emotionally. Only do it as long as it takes to repay your debts. Once you have achieved that goal then reassess your situation. Take some time out and think about your next financial goal.

Where is my money? Clarity is the key

May 122008

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

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

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

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

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

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

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

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

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

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

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

In debt? Where do you start cutting?

May 092008

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

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

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

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

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

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

Prioritizing is the key

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

In debt? Your banks don’t care about you

Apr 212008

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

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

Passing on the pain

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

What this means for you

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

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

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

1. Your credit score

2. Your income

3. Your total credit card debt

4. The number of years until you plan to retire

5. Your overdraft

6. The amount and number of outstanding loans

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

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

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

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 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.

How to stop debt before debt stops you

Mar 272008

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

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

If you’re in a hole stop digging.

The simplest way to stop debt is to stop everything.

Stop eating out

Stop buying luxury goods

Stop living beyond your means

Stop whatever it is that is causing your debt

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

Here’s an example of what I mean.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

Inability to pay credit card debt

Mar 092008

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

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

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

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

How to solve the problem.

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

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

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

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

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

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

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

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

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

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

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.

© 2011 Till Debt Do Us Part - Pay off debt fast Suffusion theme by Sayontan Sinha