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?

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10 (More) Reasons You’re Not Rich

Oct 142008

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

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

I hope you enjoy the article – I certainly did.

Feeling rich when you pay your bills

Oct 132008

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

Yes that is exactly what I am saying.

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

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

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

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

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

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

What’s the point?

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

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

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

What changed?

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

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

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

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

More money

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

Don’t question it – simply try it

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

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

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

For more of my musings on Debt management and Personal Finance please subscribe to my RSS feed. Alternatively if you would like a free copy of my Debt management ebook “Understanding and getting out of debt” please sign up for my free newsletter.

The ability to service your debt

Oct 092008

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

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

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

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

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

Reality check

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

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

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

A few adjustments

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

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

They all lived happily ever after. The End.

And moral of the story is what Mike?

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

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

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

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

How many mistakes?

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

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

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

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

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

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

For more of my musings on Debt management and Personal Finance please subscribe to my RSS feed. Alternatively if you would like a free copy of my Debt management ebook “Understanding and getting out of debt” please sign up for my free newsletter.

If your bank goes bankrupt your debts won’t disappear

Oct 072008

With all the madness that has been going on over the last few weeks in relation to the stockmarket and the economy it is easy to get caught up in it all. There is nothing but doom and gloom pouring out from every TV channel and news website.

The simple fact of the matter is that you have nothing more to worry about than usual and here’s why.

If you are in debt and owe the bank money and that bank goes bankrupt then you STILL owe the bank that money. You do NOT have your loans written off – in fact your loan is seen as an asset of the bank because it generates income for them. As a result your loan stays in place.

Unless you have thousands of dollars invested in the stockmarket, then your main concern should still be to repay your debts. On the other hand if you do have thousands of dollars invested in the stockmarket I would ask you, retirement funds aside, why haven’t you used these funds to pay down your debt?

No matter which way you cut it, your number one focus should still be on debt repayment.

Job losses

This is a legitimate concern but given the unstable nature of working life these days it was probably a concern you had long before now. It is true that if things continue the way that they are going then there will be a lot of people losing their jobs and not just on Wall Street. Even as it stands there are thousands of people who are losing their jobs each month.

To those of you who still have a job and are concerned about losing it I would say get your house in order. There is a reason why the motto of the Boy Scouts is ‘Be prepared’.  I wrote a previous article called ‘How long could you survive if you lost your job?’ that will help you understand what you need to do in order to weather the approaching storm.

Stick half of your head in the sand

This is the best advice I could give to someone who is worried about what is going on in the world today. I give this advice on the understanding that you have your financial affairs in order and that you are focusing on paying down your debts and building an emergency fund. I wrote an article called ‘Stop talking about recession, I don’t want to know’.

In this article I outline how I actually made some money during a recession by ignoring the negative financial self talk and hiding away from the bad news. It was a case of ‘ignorance is bliss’.

Nothing changes much

If you are on a debt freedom journey then do not allow a recession or talk of recession throw you off course. It is now more important than ever to be seeking debt freedom. At least that way if you are debt free (or at least on course to being debt free) and things get really bad you can be safe in the knowledge that you are in a much better position than a lot of people are. Ultimately whatever happens it is how well prepared you are that will determine what shape you will be in when you come out the other side.

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Gambling debts – the last place you want to be

Oct 012008

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

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

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

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

Hierarchy of bad debt

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

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

Gambling debts – the worse kind of bad debt

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

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

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

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

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

I think that the article says it all.

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

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Debt – balancing the big picture with the little picture

Sep 182008

I touched on this topic yesterday in my article ‘Renting is better than buying and here’s why’. In the article I made the point that the vast majority of people have their minds so focused on their own financial problems and worries that they don’t have time to consider what is going on around them in the economy and the wider world.

I called the economy ‘big picture’ and the personal and financial problems that people have ‘Little picture’. Just to note that I am not having a go by calling people’s problems ‘little’ – far from it. I am simple making the comparison between the ‘big’ problems that affect all of us (in this case the economy) and the different problems that people have that are unique to their situation.

Balancing Act

If you have a debt problem it should have 100% of your focus. You should focus on it until the debt is no longer a problem. That said there is a problem with focusing 100% on your debt and that problem is what is happening in the wider economy at any given time.

Is the economy on the up? Is the economy on the way down? Where are interest rates heading. How much does gas cost? What is the unemployment rate? What is the rate of inflation?

All these things are very important when it comes to repaying your debt. For example, if you decide to go for a better paying job. If the economy is on the way down there may not be any better jobs out there for you to go for. Another example of looking at factors in the wider economy would be something like the price of gas and the impact it has on the type of car that you buy.

The danger is that people in debt develop financial coping strategies without taking into consideration the various economic factors that could have a direct impact on them. In a lot of cases people determine their budgets based on their current status quo and do not factor in something like getting laid off. This is where an emergency fund is crucial and it is one great way to counter the effects of a declining economy.

On the flip side of this argument is that you can become too wrapped up in the state of the economy. You might never seek out a better paying job just because the economy is not in great shape. Some people are doom merchants and any hiccup in the economy sends them running for cover. This is no way to live either.

Start learning

To maintain a healthy balance between the focus you put on repaying your debts and the focus you put on the state economy you need to learn how events and factors in the economy affects you. No you don’t need to do a PHD in finance. By simply researching online and reading blogs about the economy you will pick up the necessary information about how events will affect you.

A lot of people don’t pay much attention to the price of a barrel of oil and yet they wonder why the price of gas has become so expensive. Had they known about events in the economy and the wider world they may have been in a position to develop a strategy along the lines of car pooling or taking public transport or even buying a more fuel efficient car.

I find learning about the economy and world events to be fascinating. Things that happen thousands of miles away can have a direct impact on your pocket. It pays to know about these things. If you do you research about economic events it is possible to put yourself in a position where you are largely insulated from them.

For more of my musings on Debt management and Personal Finance please subscribe to my RSS feed. Alternatively if you would like a free copy of my Debt management ebook “Understanding and getting out of debt” please sign up for my free newsletter.

Renting is better than buying and here’s why

Sep 172008

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

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

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

What changed?

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

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

Dead Money

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

What else?

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

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

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

Any downsides?

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

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

On balance renting wins for me

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

For more of my musings on Debt management and Personal Finance please subscribe to my RSS feed. Alternatively if you would like a free copy of my Debt management ebook “Understanding and getting out of debt” please sign up for my free newsletter.

Are you lottery class?

Sep 152008

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

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

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

The Investor class

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

The lottery class

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

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

Why is it important to know which class you are?

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

Previous articles

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

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

So which are you?

Back to basics for me

Sep 122008

Reading this you could be forgiven for thinking that I am some sort of holier than thou debt management wannabe guru. I apologize if I come across that way. I am passionate about Personal Finance and helping people to get out of debt. It’s just the way I am. It’s my dirty little secret.

The thing is that I am far from perfect when it comes to my own financial state of affairs. My financial health and net worth would resemble more the trajectory of a rollercoaster ride than a NASA rocket. Instead of my financial situation improving in a straight upward line, it goes up and down and down and down then maybe up.

I don’t think I’m alone in this experience. I have had so many financial highs and lows that I’ve really lost count. I think it is this experience that puts me in a better position to help others with what they might be going through. I still have a lot to learn though and I’m not afraid to admit it.

Back to basics

Recently I’ve become a little lazy with my own financial affairs. I just kept putting things off until there were problems that urgently needed to be solved. I did feel like a bit of a hypocrite writing about debt management when at the same time my own affairs were sliding, but I am now admitting responsibility for my mistakes and I am looking to fix them fast.

The problems that I have been having recently are simply caused by nothing more sinister than overblown day to day expenditure. Ok I did get hit with an expensive car repair bill but apart from that it has been the small daily things that have been hitting me hard.

Debt from a thousand cuts

I’ve been on the go a lot lately and as a result I have tended to eat out quite a bit, nowhere expensive just regular places. I might eat out for lunch and then maybe dinner depending on where I am. As a result these expenses are really starting to bite. I have been living like this for about 2/3 months and have been quite busy.

The net result is that my budget is shot to pieces.

The obvious problem is that my lifestyle hasn’t helped. The fact that I was on the go a lot and not getting home until late meant that I was too tired to cook. In the evenings I would simply buy ready made meals or get takeout.

Not good for my health or my wallet and I knew that. The point I am trying to make is that it is so easy to slip into a bad routine and then wake up one day with a gaping hole in your finances. This is what happened to me.

For me now it is a case of going back to basics.

What this means is a complete scaling back of my daily expenditure. For a while I was really good at keeping track of my daily expenditure. I would keep all the receipts and record how much I spent at the end of the day. Then after a couple of weeks of doing this I would analyze where I was spending the most and where I could cut down.

I found this to be an excellent way to manage my expenses. The only thing was that there was a lot of effort involved. It was hard work keeping up to date on all the small daily expenses. Make no mistake it is tedious hard work keeping track of all your daily expenses. I have tried to do this numerous times and failed at it numerous times.

I now realize that the fundamental key to long term debt freedom is managing your daily discretionary expenditure i.e. the money you spend on food, newspapers, magazines, coffees etc everyday. If you can contain these expenses then you will eventually break the back of your debt problem.

Look after the pennies

The saying “look after your pennies and the pounds will look after themselves” holds a lot of truth. By building up the discipline to manage the small and relative insignificant daily expenditure you are laying the foundation for greater financial discipline when it comes to the big expenses. There will be less of a financial bottleneck when you come to pay your bigger expenses.

However, there is a danger of being “Penny wise but Pound foolish”. This is where you are so focused on minding the small expenses that you neglect to look at the bigger picture and your bigger expenses.

There is a call for balance and my hope is that over the coming months – because it will take me months to rectify – that I can find that balance between looking after my small daily expenses while at the same time keeping an eye on the bigger picture.

The hard work ethic required to save and earn

Sep 082008

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

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

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

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

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

Hard work

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

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

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

Working Smart

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

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

Back to the debt problem

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

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

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

How to work harder and smarter

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

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

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

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

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

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

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

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

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

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

So you want out of debt fast?

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

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

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

Sep 082008

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

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

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

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

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

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

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

Why more debt?

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

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

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

The difference between the two types of spending

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

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

The difference an additional $1000 will make to your debt

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

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

Can I afford the additional repayments in the long term?

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

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

Payment shock – and how to avoid it

Sep 032008

Taken from Investopedia.com

Payment shock

The risk that a loan’s scheduled future periodic payments may increase substantially. Payment shock can be the result of several things, including the expiration of an initial or temporary start interest rate (sometimes known as a teaser rate), the end of a fixed-interest rate period, the end of an interest-only payment period, an increase in an adjustable-rate mortgage’s fully indexed interest rate or the recasting of a payment option ARM.

My payment shock came in the form of an introductory low interest rate offer on a credit card. I had transferred the balance off a couple of my credit cards onto a single credit card that had a really low introductory offer. The offer was 0% for six months on balance transfers. I jumped at the chance.

Six months later I was so use to getting my monthly statement with the same balance on the account that I didn’t even bother opening the statements. I wasn’t using the credit card to buy anything so the balance wasn’t moving. I got lazy. I sailed through the six month period without even realizing that it had ended.

About three months after the introductory offer period ended I went to check my credit card statement. I got what I now know as a ‘payment shock’. My credit balance had shot up in the three months since the end of the introductory offer period. I was now paying interest on interest. I was very alarmed and annoyed that I let it happen.

I learnt a hard lesson and I learnt all about what it means to suffer from “Payment shock”.

That said I think I was lucky. I am currently renting but about two years ago I was looking to get a mortgage. There was some scary stuff out there. Interest only options with teaser rates. From my experience with the credit card payment shock I was in no rush to be seduced by these low monthly mortgage payments. From what I could see most of these low rates only last about 2 years. Then they reset and you have 28 years of trying to pay the much higher rates. I held off and I’m glad I did.

I suppose that was what the whole subprime meltdown was all about. People who could not necessarily afford the standard mortgage payments were seduced by these low low teaser rates and some slick salesmanship.

The offer was simple and I imagine it went something like this

“You can have the home of your dreams and it will only cost you $600 per month, then when the rate resets in a couple of years you can refinance or sell as your home will have gone up in value.”

How could you not be seduced by this? I mean here was your dream handed to you on a plate for a very reasonable and manageable monthly payment.

When you take it at face value it looks like an amazing offer. You get what you want for a very little monthly outlay. Many people bought into this and I can completely understand why.

Unfortunately the danger lay a year or two down the track. Like what happened to me I imagine that a lot of people got comfortable and use to making the monthly payment and not even thinking about the rate reset. Like me they were in for a very nasty payment shock.

I’ve read stories online about how people were seduced by the low interest only rates only to find that they simply couldn’t afford the repayments once the rates reset. Here is a link to one such story from the New York Times – Mortgage Crisis Spreads past subprime loans.

How to avoid payment shock

Hindsight is 20:20. When you look back on an event that has occurred it is so easy to say ‘I should have done this or I should have done that’ but in reality the event is gone forever and there is no point beating yourself up about something that you cannot change.

That said there is still value to be had by analyzing past mistakes. The value is to learn from your mistakes and the mistakes of others so that you are less likely to repeat them.

I learnt a couple of lessons from my payment shock.

The first lesson I learnt is to always go into these things with your eyes open. I knew what I was getting into with the low introductory credit card rate but what I wasn’t 100% clear about was when exactly the period ended and what, if any, obligations I had once the period ended. To be honest I wasn’t even sure about what rate I would be paying once the period ended.

So my advice is to do your homework completely before you enter into any sort of introductory or low interest offer. There is no such thing as a free lunch and the more you know and understand about the offer the better you will be able to evaluate it and decide if it is suitable for you. Use the power of the internet to connect with other people who may have already signed up for the offer and find out what their experiences have been.

One key piece of information that is crucial in your decision is whether or not you can afford the repayments when the rate resets. So you need to find out exactly how much the new rate will be in a worse case scenario. If you have a mortgage then this means calculating how much you will have to repay when the rates reset but also assuming a worse case scenario that the interest rates in the economy will rise as well. Then ask yourself if you can sustain that level of repayment indefinitely or will it be a strain on your finances?

The second lesson I learnt is to use the time of the introductory offer to good effect. In the six month interest free period I sat back and did absolutely nothing to tackle my credit card debt. I should have looked on this as a window of opportunity to make serious inroads into my debt so that when the interest free period ended there was no debt for the credit card company to charge interest on.

If you have a low interest period on a loan, credit card or mortgage then use it to good effect because you can be certain that when the interest free period is over you will face higher repayments.

I can understand why someone buying a house would like to avail of the interest only option. When moving house there are lots of new things that may need to be bought and unforeseen expenses that can occur. That said I think that it would be prudent to start working backwards from when the introductory period ends.

As mention above you should find out what the new repayments will be after the introductory offer period ends. With this new worse case scenario repayment figure in mind you should start budgeting your finances accordingly.

For example if you currently repay $600 on your mortgage but you know that in 18 months that it will reset to $750 then you should start to budget your current finances on the basis of the new figure of $750 even if it is 18 months before the new rate kicks in. Start paying the new rate of $750 now. Don’t wait for the rates to reset in 18 months.

The logic is simple, by the time the new rate kicks in you will have adjusted your finances accordingly and the payment shock will be neutralized. In effect you are bringing the payment shock forward and allowing yourself to deal with it on your own terms.

In the example above there is a difference of $150 between the current payment of $600 and the project rate reset figure of $750. When you start to budget your finances using the new figure even though it is 18 months before you actually need to start paying $750 you should save the difference of $150 and place it in an account only to be used to help you smooth out the transition to the new higher rate.

Payment shock – the real key to avoiding it.

In my article called ‘Prudence in all matters relating to your debt’ I made the point that to be prudent with your finances you should expect more bills and expect less income. To avoid payment shock you should apply the prudence principle. If you estimate that your repayments after the rate reset will be $750 then you should budget for $800. By doing this you are allowing for any hidden or unexpected charges.

The only real way to avoid payment shock is to go for the fixed rate option where you repay principal plus interest each month. You know exactly what your repayments will be for the entire period of the loan. It may cost you more initially but in the long run you avoid any payment shock that could throw you financial plans into disarray.

Finally if you are caught on the wrong side of a payment shock like I was don’t just sit there looking at it. Get the calculator out and start doing your sums. Contact the lender and ask for help. Research your options on the internet. Take action. Get moving on it and keep moving on it. Come at the problem from different angles. More often than not a few choice cuts in your budget can help soften the blow.

Just remember that the faster you move the less of a shock it will be.

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

Sep 022008

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

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

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

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

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

And this is where we have a problem.

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

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

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

The problem here is two fold.

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

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

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

The real problem – Value.

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

Emotional value is the key.

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

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

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

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

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

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

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

Will I charge my reward to my credit card?

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

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

Laugh in the face of debt

Sep 012008

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

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

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

Not a pretty image.

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

What next level?

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

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

Laugh in the face of your debt

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

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

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

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

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

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

The habit of staying debt free

Aug 282008

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

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

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

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

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

Reality hits home

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

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

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

Staying debt free

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

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

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

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

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

A new financial goal is crucial

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

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

Two simple but very effective ideas

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

Free Debt management ebook – Understanding and getting out of debt

Aug 252008

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

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

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

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

Introduction

Global Debt epidemic

The debt spiral

Debt management – it’s all about responsibilities

Financial education should be your priority

Defining your debt problem exactly - to the cent

Money management – it’s all in you head

How to pay back your debts and still have a life

Budgets – the basics

Pay down your little debts first

Getting money quickly

The price of all that ‘Stuff’

Second income – is it realistic

Savings

Automate everything

Media Diet

Debt and relationships

101 ways to save money

Conclusion

Resources

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

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

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

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

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

Aug 012008

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

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

There’s one born every day.

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

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

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

Learn from experience.

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

The same can be said for generating a second income.

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

Could I be getting it wrong every time?

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

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

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

Playing musical chairs with debt

Jul 312008

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

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

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

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

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

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

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

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

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

Juggling debt – seemed smart at first.

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

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

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

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

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

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

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

Walking away from your debt

Jul 302008

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

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

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

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

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

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

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

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

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

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

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

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

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

Can’t break the cycle of debt?

Jul 292008

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

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

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

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

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

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

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

Change one – Change who your friends are

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

Change two – Go on a media diet

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

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

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

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

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

How easy are these changes to make?

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

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

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

Jul 282008

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

I often wonder why we bother.

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

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

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

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

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

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

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

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

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

But you absolutely hate your job, right?

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

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

Ok so you still hate your job?

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

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

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

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

Living Paycheck to Credit card to Paycheck

Jul 242008

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

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

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

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

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

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

How I got out of this vicious circle

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

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

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

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

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

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

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

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

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

The things I learnt.

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

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

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

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

The New York Times series on debt

Jul 232008

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

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

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

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

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

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

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

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

Look after yourself first – your debt second

Jul 212008

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

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

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

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

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

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

You need to be your own best friend.

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

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

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

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

So how to put yourself first and your debt second?

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

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

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

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

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

Affluenza – the credit party is over

Jul 182008

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

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

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

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

Taken from Wikipedia.

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

I couldn’t agree more with the definition above.

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

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

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

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

Affluenza: The All-Consuming Epidemic (Bk Currents)

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

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

Prudence in all matters relating to your debt

Jul 172008

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

The accounting concept that I am talking about is Prudence.

Taken from Businessdictionary.com

Prudence

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

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

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

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

Expect more bills and less income

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

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

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

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

Also remember that its all in your mind.

The fastest way out of debt

Jul 142008

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

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

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

Learn everything you can about personal finance and budgeting

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

Get your family and friends involved

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

Sell absolutely everything that you do not need

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

Consolidate your credit cards to a low introductory offer

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

Shop around

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

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Rent out a room or move to a lower cost area

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

Get a second part time job / work overtime

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

Eliminate all your discretionary spending

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

Cut up your credit cards

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

Focus all of your attention on improving your financial situation

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

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

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

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

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

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

Life plans instead of debt management plans

Jul 112008

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

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

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

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

Why are debt management plans so oppressive?

It primarily depends on who designs them.

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

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

What’s the alternative?

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

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

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

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

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

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

Frugalistas – Frugality goes mainstream

Jul 102008

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

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

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

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

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

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

Penny Pinching Looks Great

Proud to be prudent: Meet the new army of frugalistas

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

Jul 092008

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

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

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

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

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

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

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

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

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

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

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

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

Stoozing – Use your credit cards for profit

Jul 082008

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

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

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

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

How much can you borrow?

How long does the 0% interest rate last?

What are the balance transfer fees?

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

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

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

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

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

Stoozing.com

Moneyeconomics.com


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

Is Inflation a debtors’ best friend?

Jul 042008

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

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

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

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

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

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

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

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

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

However even for debtors inflation is a double edged sword

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

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

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

Jun 272008

Nine hours a day.

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

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

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

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

Then a strange thing happened.

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

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

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

Going on a media diet will serve two purposes

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

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

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

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

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

Saving while in debt – does it make sense?

Jun 252008

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

I disagree.

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

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

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

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

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

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

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

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

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

Bad things happen to good people

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

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

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.

Freeganism – Is this the ultimate solution to debt problems?

Jun 202008

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

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

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

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

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

Again taken from Freegan.info website.

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

Extreme debt requires extreme measures.

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

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

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

Freeganism – is it sustainable?

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

Would I turn Freegan?

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

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

Foreclosure of a dream

Jun 192008

I recently heard the sad story of a single mom who had her home foreclosed. This is a story that has become depressingly familiar and has been repeated thousands of times over and will be repeated thousands of times in the next few years. No two cases are exactly the same but they all seem to have a common thread running through them. However this story is worth repeating if for no other reason than to show how you can be seduced by easy credit only for the dream to turn sour. For those of you facing a similar situation take strength from the knowledge that you are not alone and that the mistakes you have made were not necessarily all your fault. For those of you in debt take a warning from this story as to how bad things can get if you do not face up to your problems now.

To protect her identity we will call her Michelle. Now Michelle came from a disadvantaged background to begin with. Her Dad left home when she was young and her Mom struggled to raise her and her two brothers the best she could. Michelle grew up with strong principles of right and wrong and despite her background she did well for herself.

Michelle was a hard working single mom. She had a job in a local company doing administrative work. She enjoyed her job. In spring 2005 she spotted an advert for mortgages. What caught her attention was the fact that the mortgages on offer were ‘no money down’ – she didn’t need a deposit or any assets to get the mortgage. Too good to be true.

Initially she was worried about being able to meet the mortgage payments and the fact that she had a spotty credit history due to some late payments on an auto loan. However when she called the mortgage broker she was assured that she would be able to afford the monthly repayments and that her credit history wouldn’t be a problem. In fact she was quite pleasantly surprised at the low monthly payments. This of course was to be her undoing. The mortgage broker either didn’t mention the rate reset on the mortgage or mentioned it in terms so obscure and alien to Michelle that she didn’t understand them. Either way a couple of years later Michelle was in for a nasty shock.

With tears of joy Michelle took the keys from the real estate agent and opened the door of her new house. For two happy years Michelle enjoyed her home. It was no longer just a house to Michelle it was her home. She made a great emotional investment in it. She spent every spare moment she had working on the house. It was her pride and joy and it was a safe place to bring up her young son.

In June 2007 Michelle received a letter informing her that her mortgage rate was to be reset to a much higher rate. Her monthly payments went up by $300. Like so many other people she was stunned. She was not expecting such a large increase in payments but due to her poor credit history she was charged a higher rate.

To make matters worse she was already behind on another loan and was getting letters from the bank about it. She did have a small amount of savings but this was simply eaten up by trying to meet the new higher mortgage repayments. It wasn’t long before Michelle fell behind in her mortgage payments. Her situation got so bad that in November last year her home was foreclosed. Michelle was devastated.

Michelle’s story is similar to so many other stories of foreclosure. All that Michelle wanted was a home that she could raise her son in and enjoy life. She had a dream and that dream was home ownership. In reality what she got was a nightmare.

What are the lessons to be learnt? Hindsight is always 20/20 and people can always tell you what you should have done after the event has happened. However there is value to be had from learning about other people’s mistakes. There were a couple of obvious mistakes that Michelle made that could have been avoided.

The biggest mistake Michelle made and probably the single most important thing she could have done was to learn more about her mortgage and about personal finance in general. It doesn’t matter what state your finances are currently in, the more you learn about personal finances the quicker you will solve your financial problems. Financial education is the single most important thing that you can obtain. If you have any spare cash invest it in yourself and in your financial education. You need to know as much about personal finance as possible so that you won’t be taken for a ride.

In Michelle’s situation it was not properly explained to her about the rate reset but whose fault was that? Was it the mortgage brokers? Or was it Michelle’s for not knowing enough about mortgages to ask the question?

In reality Michelle should never have been approved for the loan. The lenders were too easy with the credit and in a lot of ways the banks and financial institutions have no one to blame for their current problems only themselves. But that’s not the point. The point is Michelle was given a loan she clearly should not have qualified for. This was unfair on her. She was given the dream only for it to be snatched from her two years later.

The housing market for people like Michelle was one giant Ponzi scheme. Michelle just happened to be a willing victim. I know some of you reading this will say ‘good enough for her’ but I think you are missing the point. Michelle wanted the dream of a nice home in a nice area and a secure future. Don’t we all want something like that? Who is to say that we might not be next?

In Debt? – get your emotions out, get over them and get on with it

Jun 162008

One of my pet hates is to see newspaper articles about people in debt. The reason why is because the people in the articles are nearly always cast as helpless fools. The picture that comes with the article is nearly always one where the people stare into the distance with a tear in their eye. I think it is highly disrespectful to the people involved. The people in debt are nearly always at their wits end and can see no future. The last thing they need is to be lampooned in public.

I always get the feeling from these articles that for the people involved view it is a last resort. A public cry for help. I imagine that if their debts were under control that they wouldn’t feel the need to tell the world about it. I could be wrong but it seems that they may have left things too late to do anything and they are throwing themselves on the mercy of the public. I feel terrible that for them it has come to this. It does serve as a salutary warning but at the same time it doesn’t really offer any insight as to how you can pay off your debts faster. If anything the articles only tend to reinforce the view that there is no way out of debt.

In my opinion people in debt spend too long caught up in the emotion of debt and not enough time tackling the debt. They sit and stare as the debt grows bigger and bigger yet they remain frozen by their emotions. Like a deer caught in headlights they cannot move. When they do eventually come around and try to start doing something about their debt then they find it extremely difficult as they are emotionally and physically drained from worry.

When people realize the magnitude of their debt for the first time they sometimes adopt a ‘close your eyes and it might go away’ attitude. Eventually the debt becomes such a huge problem that they have no choice but to do something about it. For many at that stage it can be too late. The damage is done. While it is not impossible to fight their way back, their lack of initial action has makes it a lot harder. What makes it even harder is that their emotional energy is at an all time low. It’s no coincidence that debt problems coincide with relationship problems. The two almost go hand in hand.

I’ve often asked myself why there is a time lag between when the realization occurs that debts are a huge problem and the time when the people start to do something about it. I nearly always come back to the same answer. The emotional stigma and drain involved can be a huge factor. Being in debt is often seen as a failing and as a result people do not want to admit that they made a mistake. The problem is that by delaying the admission of the mistake the problem only grows and valuable time is lost.

Open the emotional floodgates

If you feel that you have a debt problem but you are stuck in that frozen stage of self denial then talk to someone. Talk to someone you can trust in confidence – a friend, a counsellor or someone you know you can be honest with. Tell them that you think you may have a debt problem and that you are worried and you don’t know what to do. Let the emotional floodgates open, cry, get angry, get scared. Go through the full range of emotions. Clear out your emotional system.

By opening the emotional floodgates you have a release. You release all those emotions that have been pent up in you. There’s no point in hiding from these emotions. Hiding from them serves no purpose whatsoever. The problems will still be there when you come out of hiding except probably much bigger. Acknowledging that you have a problem and dealing with the emotions that come with that problem is key to getting out of debt.

By tackling the negative emotions that surround a debt problem you are laying the foundation for an effective solution. If you try to tackle your debt while still carrying all the emotional baggage associated with you will find the going a lot harder than it need be. It is easier and more effective trying to tackle your debt if you are coming from a place of strength rather than a place of weakness.

Dealing with those emotions of fear and dread are the first step in any debt management program. Clear out the mental clutter of negative emotions. If you continue to carry these emotions with you as you try to tackle your debt you will be handicapping yourself needlessly. The problem of debt needs to be reduced to the simple formula of money in less money out. If you can take care of the emotions then it leaves you more energy to focus on using this formula.

Is it easy letting go of the emotions? No – it’s very difficult. Fear, worry and denial are never far behind when dealing with debt. The point I’m trying to make is that while negative emotions will continue to haunt you as you tackle your debt you can make your journey a lot easier by acknowledging those negative emotions and doing something to counteract them. Talking to someone and having a good moan about your situation is tremendously helpful but don’t make the mistake of getting caught in the ‘woe me’ trap. Where all you do is moan about your debt and how your life is crap. Get your emotions out of your system, get over them or at least accept them for what they are and get on with dealing with your debt. Remember no one else will do it for you.

Reject Society and you’ll pay off your debts a lot faster.

Jun 132008

I’m not here to push some socialist agenda on you. As I said in previous articles I’m one of the most pro-capitalist guys you can meet. Seriously. Now what I am about to say is at odds with my economic philosophy but there is a method in my madness. I’m here trying to make a difference in your life by encouraging you to take new approaches to getting out of debt. If you want to pay off your debt in the quickest time possible then the easiest way to do it is to reject society or more accurately reject the consumerist aspects of society.

This isn’t a new idea and I have to admit that I got the seeds of this idea from the ‘Buy Nothing Day’ movement. The idea behind the ‘Buy Nothing Day’ is to raise consumer awareness and get people to focus on consuming less and producing less waste. If you are in debt then by rejecting consumerism (for a while at least) you are achieving two things. The first is that you will, by default, have a lot more cash. The second is you will be doing your bit to help the environment as you will be consuming less and therefore less packaging is needed.

Reject Society? How exactly do I do that?

Its not as hard as you think and it doesn’t involve walking round waving a placard with ‘The end is near’ written on it. The easiest way to reject consumerism is to do nothing or do very little. More specifically continue to do your job, continue to meet your friends, continue on as normal except only shop for the necessities in life. Quit visiting the mall for the sake of it. Stop using your credit cards, stop taking out loans, Start shopping in discount stores, start buying own brand products, stop being a label junky, bring your lunch into work, buy in bulk, if you want something save hard for it. Make credit your enemy.

There doesn’t have to be much change in your day to day activities. In fact no one has to know that you have decided to take a break from consumerist society for a while. Your friends won’t know, your neighbors won’t know or care, your workmates won’t know. Take a little time out to recharge your batteries and recharge your finances. Reject materialism. Invest time in yourself, in developing your relationships with your friends and family. These things don’t cost money and in the long run you will get a much better return that you will on a hundred pairs of shoes or the latest SUV. By investing time in yourself and your relationships you are making a stand for who you really are when all the trappings of consumerism are stripped away. I’m sure you’re a lot different type of person than the person that the marketers have you typecast as.

Why am I advocating such an extreme lifestyle change?

Simple really – it has been extreme spending that has caused people’s debt problems and in most cases it will take extreme action to rectify their financial situations. Remember you don’t have to live this lifestyle forever, you just have to do it until you are back on track. Long enough for you to see that there is an alternative to the constant merry go round of work – spend – debt – work. You can break the cycle and by not buying into the marketers crap you will see the world around you in a totally different light. One where the true value to be had is in the relationships we build not in the things we buy.

Be selfish about your motive for rejecting consumerism. Remember no one is going to help you out of debt only YOU. By adopting a self-centered approach you will achieve debt freedom a lot quicker. Ironic I know but debt freedom is all about you and your financial situation not about that of your neighbors or friends. Look to the future and to the time and place where the stress of debt no longer exists for you. This is the place you want to go and by rejecting consumerism and material things you are going to get there a lot quicker than you thought possible. Of course once you reach that point you can spend spend spend – but that’s a whole different article.

It’s not how much you earn - It’s how you spend it.

Jun 112008

Each month you face the same problem. You get paid and your salary only just about covers your overdraft. Within a few short days you will be back using your overdraft facility and supplementing your spending with your credit card. It feels like you are just threading water. Each month the same little routine plays out. Each month you kid yourself that next month will be better.

It’s a depressingly similar situation for your average salaried employee. We somehow managed to get ourselves into this ‘running to standstill’ situation whereby all our energy and focus is on being a good employee and trying not to rock the boat. We may not like our jobs, in fact we may even hate our jobs, but we need our jobs. By painting ourselves into a corner from a cash flow point of view we have no choice but to stay in our current job. No dreaming of a better future for you.

I know you don’t want to hear this and be reminded of what has happened or is currently still happening but I’m afraid its time for a few home truths. The reality of the situation is that if you are currently struggling financially then you need to look long and hard at how you spend your money. Somewhere I read that you spend in proportion to your salary. Now what this means is that if you get a salary increase then your spending should logically increase. But what seems to have happened is that the easy credit has allowed people to bypass this rule of thumb and now even someone on a modest salary can live like they are earning maybe three or four times what they really earn.

It’s not simply a case of living beyond your means. It’s a case of not even know what your means are. To me my means is simply my net take-home pay each month. To others ‘means’ is mistaken for ‘available credit’. Now in previous articles I have mentioned how it is this access to credit can help you ride out the tough times. However to help you avoid those tough times you need to look at your means as your net take-home pay.

Net take-home pay provides the parameters within which we must limit ourselves if we are ever to stop this cycle of living from paycheck to paycheck. The idea is simple. If you have a take-home pay of $3000 per month, then your target is to fit all your monthly expenses within that $3000. This way you can be sure that you are not incurring any excess debt.

Now most people will be starting from a point where their monthly expenses are way above their monthly net pay. This is where the problem lies. The treadmill just starts to speed up and go faster and faster and you can’t get off. At this point it’s where the necessities come into play.

Necessities?

There are some basic things in life that you just can’t do without. Ironically two people’s necessities are not the same and this is where the trouble starts. Between men and women there will be differences. So you need to be honest and determine what the necessities are. When I look around my life I could probably list the necessities on one hand – accommodation, transport, food, debt repayments and phone. I said these were the necessities not my current reality. I know that if I need to reduce my spending habits and free up some cash that I would simply reduce my life back to zero i.e. I would simply cut out the excess spending in my life. I call this living on life support.

Living on life support – financial life support

Not a particularly pleasant thought because it makes you think about death but I think it nicely defines how someone in debt should view their financial life. To recover from a bad case of debt you need to put your financial life on life support. By life support I mean reducing your spending down to the basics that you need to function. That way you can slowly but sure gain your financial strength again.

If your net pay is $3000 per month and your necessities only cost $2400 per month then straightaway that is $600 that you can use towards eliminating your debt. The maths is simple. After six months on life support you have freed up cash of $3600.

This $3600 can make the difference between you coming off financial life support or someone else making the decision to turn off your life support machine.

It will take a serious amount of discipline and focus to cut your life back to the bare minimum. It won’t be easy. There will be sacrifices that will need to be made, maybe for six months – maybe even longer. As always the choice is yours. If you do decide to take this route and cut your life down to the bare necessities then you can be assured that you will make a huge difference in your financial situation. It’s as simple as that. The hard part is knowing the difference between a ‘need to have’ item and a ‘nice to have’ item. Only you can decide that.

I have to admit that this article was a little darker than the usual. I don’t know why but sometimes I guess you have to be cruel to be kind. I’m all for tough love if the person it is directed at can understand that there is well meaning behind it. So don’t take offence and realize that the actions you required to change your situation aren’t that hard to take. I just hope that I can provide the spark to get you going.

Possessions – the weight of the world on your shoulders

Jun 062008

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

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

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

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

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

What’s the point?

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

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

Don’t define yourself by your possessions

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

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

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

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.

Do you have the energy to fight debt? Part 2

May 292008

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

Is your home clean and clutter free?

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

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

Sorting through the paperwork

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

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

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

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

Virtuous circle

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

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.

Debt Magic – Clear your mind first

May 192008

Everywhere you look its coming at you. Like a plague from biblical times the debt tsunami is washing over the land and not sparing anyone. Switch on the TV you get talk of the credit crunch and job losses. Read the newspapers and you get scary statistics of foreclosures. Turn on the radio and all you hear are talk shows with someone telling their tale of debt woes. At work it seems that it is all anyone ever talks about “How am I going to afford this month’s mortgage payment”.

There almost seems to be a collective acceptance that we are all doomed and that somehow if just join hands together that the debt Tsunami will wash over us and we will all be spared. Yes there is strength in numbers but at the same time do you want to be dragged under by the weight of everyone else?

As they say a problem shared is a problem halved and I agree up to a point. When people start trying to halve that problem over and over again it just becomes toxic. You see it doesn’t take much to create a panic. When you have a few friends where all they talk about is their financial situation then it is going to have an adverse impact on the way you think about your financial situation. Misery loves company so to speak.

So where is this all leading I hear you ask? Simply put if you really want to solve your financial problems then you need to detoxify your mind of all the negative self talk and negative financial propaganda. You need to realize that the media are screaming negative headlines only to sell papers. They are not worried if they ruin your day. They just want you to buy their paper and if that means using scare tactics to do it then so be it.

Freeing up mental capacity

Think about the mental capacity that you will free up if you can clear the negative financial news from your mind. Ok you have your own debt situation to be worried about but why are you bothered to be worried about the financial situation of people you don’t even know. It’s terrible when someone loses their house without a doubt but why are you worrying about it? You could be next? Well you will be if you don’t stop focusing on everyone else’s debt worries and start focusing on your own.

Stop listening to the media and to everyone else. Deep down you know what you have to do to get out of debt. You may not know the exact steps but what you do know is that you need to change. You are only hindering your progress by listening to reports of financial chaos in the media. Trying to reduce your debt while listening to and reading about financial trouble is like a person on a diet trying to lose weight while working in a bakery. You may laugh but you are making life so much more difficult for yourself. You are cluttering your mind and making yourself stressed.

To free your mind of the excess financial stimulation you simply need to turn off your TV, Radio and close that newspaper. Why not include the internet in that list? Well the great thing about the internet is that you chose what you want to see and read. If you don’t want to read horror stories about debt then you just don’t look them up. You have a choice. With TV, radio and newspapers you are not given much of a choice. Either sit there and listen to the news or turn if off. The choice is yours.

When someone at work tries to corner you and moan about their debt situation don’t listen. Be polite but make your excuses and don’t listen. Don’t talk about your situation to anyone only your closest friends and family and be careful that you are not overloading them with your problems. Yes the mental release is nice but you have to be wary of doing too much talking and not taking enough action. I urge you to cut the negative stimulation about debt and financial problems out of your life.

Do it for one week and see how you feel about your debt.

You will be surprised at the difference it makes. You will gain so much mental clarity about your own financial situation that it is well worth the effort. No longer will you have other people’s debt stories floating around your head and causing you stress. You will be able to tackle your own debt problems with greater efficiency.

I’m not saying to bury your head in the sand. This is the worst thing you can do when it comes to your debt problems. What I am saying is that you aren’t doing yourself any favors by reading about other people’s debt woes. You get more of what you focus on and if you are focus on debt and debt related misery then I’m sorry but that is what you are going to get more of. You need to stop focusing on the negative feelings that surround debt you need to stop wallowing in your martyr status. When the music stops and you are the only one left standing you won’t feel too clever and your martyr status won’t account for much. Harsh but true.

Where to now? Try cutting negative debt influences out of your life for one week – seven days. That’s not too much to ask is it? You won’t be sorry and the feelings of relief will make you want it to continue it. Then once you have done this you will be able to revaluate the steps you need to take to get out of debt in a different light. You will be approaching your debt problems from a place of power and not from a place of fear. Those negative lingering voices will have been significantly reduced and this will allow you to take empowering action on your debt situation.

Second Income – One man’s journey of learning to do it right

May 152008

It’s strange the way the world works. Lately I’ve been thinking a lot about how to generate a second income. I’ve even written a few posts on it. Everywhere around me I see people working double jobs or running some small side business to generate a bit of extra income. Anyway I got an email from a friend that I hadn’t heard from in a couple of years. He had a very interesting story to tell and one I’m sure that you will find very useful if you are thinking about how to generate a second income.

Ok to protect the innocent I’m just going to call my friend Jon. This is not his real name. A bit of background is important here. Jon has been working in the IT department of a large corporation for the last seven years. Jon hates it – absolutely hates it. He admits now that he made a couple of wrong choices after he left college and ended up in a place that he didn’t want to be. After college he was in debt and was determined to pay off his debt and to him this meant staying in his job.

As the years went by Jon became more comfortable in his situation. He still hated his job but he knew it inside and out and was happy to remain in it. Jon always had a bit of an entrepreneurial flair in him and was always looking at business ideas. The thing was he only ever looked at them and very rarely did he actually go out and do something about them. That is until he got caught up in the property boom.

A few years back Jon began to notice a lot of people making a lot of money in the property market. At the start he didn’t know a thing about property – how to flip, how to manage rental properties, where to buy etc. This would eventually lead to his undoing.

Jon was concerned that if he did not act fast he would miss the boat. Off he went to his nearest real estate agent and began looking at property. He didn’t have any strategy he just wanted in. He didn’t care how he did it he wanted his piece of the pie. These are his words not mine. He’ll admit that he was too eager and innocent and was taken for a ride. Anyway he bought an apartment off the plans. He was assured by the people in the know that this was the quickest way to make money from the property market. He could ‘flip’ the property and make a quick buck. And you know what? It worked! First time out on the field and he hits a home run. He made $12,000 on the deal. The man now had the fever.

Every week Jon went to look at different properties. With credit so freely available he was able to buy three properties in quick succession. His goal was to flip one and keep the other two as rental properties. This worked out. He made another $15,000 on the second property he flipped and then he managed to rent out the two properties. All the time Jon still had his job. Life was rosy. Jon reckoned that at the rate he was going he’d be a millionaire by the time he was 35.

We all know how this story ends.

At his peak of property dealing Jon had three rental properties and was looking at buying a fourth. He had managed to flip four properties and had rolled all his profits into doing more property deals. Two of his three rental properties had tenants and one of them was vacant. He was still doing ok. His cash flow was positive.

As Jon puts it – the signs were there. It wouldn’t have come as a big surprise to the seasoned property investors. The season property investors would have known how to read the signs and back away from the market. For the likes of Jon it was like blindly walking over a cliff. Jon had got carried away and bought into the hype that property only ever goes up.

What happened next has been written about and written about everyday for the last year. The whole credit crunch and decline in property prices hit Jon very hard. He was able to maintain his cash flow for a while but then one of his property deals went wrong and he was forced to take a $50,000 drop in his selling price. This pretty much ate up all the profit he had made. Then it got worse.

One of Jon’s tenants got laid off. Jon is an understanding type of guy and let his tenant have a grace period of a month. Unfortunately his tenant had taken this kind gesture as a sign of weakness and began refusing to pay their rent. It got a little ugly but eventually it got sorted out. This left a bad impression on Jon and it added further to his stress. He now had three rental properties with tenants in only one of them.

Jon was able to survive financially for a while but he was dipping into his savings a lot. He knew it was unsustainable in the long run so he did everything he could to rent out his vacant properties. He had mixed results. He was able to rent one of the two vacant properties out. He now had to sell the other vacant property.

After months of trying Jon managed to sell his vacant property. Jon reckons he was lucky as he only lost $35,000 on the deal. Man that is tough!

At the end of Jon’s property journey he had a net loss of about $25,000 – this was costing him $400 a month in repayments as he had taken out a short term loan. He was also losing $450 a month on the rental properties.

Jon’s new plan

Jon realised that he’d made a mistake and instead of giving him a chance to leave his job his property escapades meant that he would have to stay in his job even longer. Jon’s a positive guy and after a couple of months feeling very sorry for himself he picked himself up again. He was soon back looking for ways to generate a second income. This time he was going to take a different approach.He looked around his current life situation and skill set and he thought long and hard about how he could generate cash. The only thing he could think of as something he could monetize was his computer skills. He had seven years experience working in IT for a large corporation.

He started small and placed an advert in his local free sheet advertising a computer repair service. Things were slow at the start. From his existing customers he noticed that there was a demand for education courses on how to use computers. Particularly from his older customers. He decided to advertise a class on the basics of computer use. He rented a room in a local college. All he need was ten students to breakeven. He got seventeen.

Jon never looked back. He continues to work in his day job but three nights a week and at the weekend he is either giving computing classes or he is repairing computers. He told me that his average income after tax is about $1000 per month. This is on top of his salary. He is able to meet his commitments on his loans and also he can save a small amount towards replenishing his savings.

All round it appears to be a positive outcome. Don’t make the mistake of thinking that Jon’s journey was easy. It wasn’t. His initial attempt to generate a second income failed and ended up pushing Jon further into debt. It was then a case of ‘necessity is the mother of all invention’. He ship was sinking under the weight of his financial obligations and he need to start pumping fast. Knowing Jon I don’t know if he would have bothered teaching the computer course had it not been the case that he was desperate for cash. I’m not sure if his pride would have let him. This is something he will admit himself. He said that at one stage he was prepared to work in a fast food joint. His situation had become that bad.

Where does that leave you? Well if you are in debt and need to generate a second income take heart from Jon’s story. When he got desperate he looked around his life to see what skills he had and how he could use these skills to add value and generate income. He did it and so can you. It may take time to get things up and running but keep telling yourself that you are building a better future because you know what? You are building a better future.

Fast ways to eliminate credit card debt

May 082008

So it has suddenly dawn on you that you have a lot of credit card debt and you are looking for a fast way to eliminate it? Well the good news is that you can eliminate your credit card debt a lot quicker than you think but the bad news is that it involves a lot of hard work.

I have put together a list of ways that should help you eliminate your credit card debt fast. The thing you need to be aware of is that in order for this to happen for you, you will need to be committed. The great thing is that because these ideas will help you pay off your credit card debt fast then you won’t have to be committed for long.

The list is made up of simple yet highly effective ideas to help you. How you work it is entirely up to you. You can choose one idea and focus on it or you can use a combination of ideas. The key thing is that whatever one you choose you must take action on it and see it through. There is no point paying lip service to this. YOU need to take action otherwise you are wasting your time.

Remember the focus here is on speedy debt elimination. How fast you eliminate your credit card debt is a direct result of how much action you take. At the same time you do not want to take on any excessive tasks that make you end up feeling miserable. Focus on having fun and the end result.

1. Buy time for yourself by transferring your credit card balances to cards with lower introductory rates. There are a multitude of balance transfer deals out there. Find one that suits you. Do your homework and make sure to check the terms and conditions for any penalties. This will involve some paper work but it will help slow the rate at which your credit card debt is increasing while at the same time allowing you to concentrate on eliminating that debt.

2. Extreme budgeting for one month (or as long as you can stand it). This is taking budgeting to the next level. What this involves is for you to stop buying absolutely everything apart from the bare necessities – food and transport. So this means no lattes in the mornings, no lottery tickets, no cable TV, no new clothes, no dinners out, no movies, bring your lunch to work, shop at discount food stores etc. I think you get the idea. At the end of the month you need to calculate how much you saved and then transfer this amount off your credit card. Now I’m not advocating this lifestyle long term but you would be surprised at the progress that you would make in a month or two of it. You could simply become a monk for a month? I did say it was extreme.

3. Downsize your car. If it is possible for you to get a smaller and more economical car then do it. Any money that you save on lease payments and fuel can be put towards eliminating your debt. I did say fast not easy.

4. If you have a mortgage look around for a better mortgage deal. In some cases you can significantly reduce your monthly repayment. It depends on each case. Again do you homework and check the small print. The amount of deals on offer is probably smaller since the credit crunch started.

5. Get a second job. Okay if you are considering this then you need to think about logistics and how you will manage your time. If you resolved to put all of the income from your second job towards your credit card debt then it won’t be long before you eliminate it.

6. Do you have any existing savings? If you do then it probably makes sense to use these savings to help pay off your credit card debt. The reasoning is simple. If you are paying a rate of 16% on your credit card debt and only receiving 3% (if you are lucky) on your savings then it makes financial sense to pay off your debt because your are incurring interest on your debt at a much faster rate than you are incurring interest on your savings.

Imagine the scenario where you have transferred your credit card balances to a lower introductory rate, downsized your car, took on a second job all the while following an extreme budget. How long do you think it would be before you had your credit card debt paid off? What could you do with an additional $500 per month? $1000 per month?

When you look at it from the point of view of the additional income you can make/save then it becomes obvious that it is path worth following. Now as I said before you don’t have to use all of the ideas on the list, even if you implement just one of these ideas correctly then you will be well on your way to eliminating your credit card debt.

It requires discipline and dedication to eliminate your credit card debt. It’s not easy but with the right amount of focus it can be done.

Is your mortgage a debt? Mmmm that’s a tough one!

May 072008

If you own your home or want to buy one at some stage then it is important that you consider a number of factors. Now unless you have won the lottery or have a rich aunt who just left you a bucket of cash then you’re going to have to get a mortgage. The trouble with a mortgage is that when you sit down and look at your monthly expenses it stands out like a sore thumb – taunting you.

In recent conversations that I have had with friends the discussion turned to mortgages and whether or not they are true debt. Ok I know you going to be scratching your head but bear with me on this one.

The general argument goes that a mortgage is a debt. The word mortgage itself comes from the Latin word “mort” and mortgage essentially means “until death”. Basically back in the old days when you took out a mortgage you had it until you died. Nowadays you usually have a mortgage for 30 years which is a lifetime but you expect to still be standing at the end of it. When you look at it from a historical perspective you were in debt until you died. It’s as simple as that.

Today it seems to be the case that everyone has a mortgage or is in the process of getting a mortgage – credit crunch aside. Most of my friends seem to think that a mortgage is a debt and ask any accountant and he will define your home as a liability given that it is costing you money ever month. I have a problem with this. Ok I agree with the accounting definition and agree with the historical perspective but I want you think about it in another way.

Let’s lay it on the table. In the last few years there has been a mania about buying houses. I’m not going to start discussing who is to blame – not here anyway that will come in another article. No what I want to point out is that there has been a madness of the crowd that had been driving property prices through the roof. If you didn’t flip properties in your spare time you were a nobody. It got to be ridiculous. There was a complete change in the way people thought about their homes.

You see people not longer talked about homes – they talked about houses and apartments and flipping and rental yield. I can’t emphasise enough how out of hand it got. The thing that got lost in the haze for many of us is that we were thinking about our homes in the wrong way. We began to think about our homes as assets and as cash machines. If they went up in value then great! But what we failed to see is the simple truth that they were our homes.

These are the places where we bring up our families, where we create all those memories. Ok this may sound sentimental and a bit naïve but you have to see your mortgage from the point of view of a necessary evil. I would never put mortgage debt in the same category as credit card debt for the simple reason that we will always need a roof over our heads. We will always need a place to keep our family safe. We don’t always need that new 32inch plasma screen TV.

Some may argue that renting is cheaper and there is some truth to that. The thing is with a mortgage is that you are acquiring ownership of the property. You know that some day you will own that property outright. When you rent you are on a never ending treadmill of monthly payments that lead nowhere.

What you have to ask yourself is this. What is my attitude towards my mortgage? Do I look on it as a monthly burden that it depresses me to even think about? Or do I look on it as an enabler – something that allows me to enjoy the comfort and security of my own home safe in the knowledge that one day I will own it outright?

You see a mortgage is a debt in the technical sense but in reality it is one of those facts of life like death and taxes that we need to embrace and accept. We need to get over our obsession with buy to let property or property flipping and we need to focus on building a home on the foundation of our mortgage. If you want to be happy with your mortgage then you need to change your attitude towards it. See it as a means to an end rather than something that is holding you back financially. Otherwise you are in for a lot of pain and mental anguish as your mortgage continues to come out of your bank account for the next 30 years. My advice? Get over it.

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.

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