Mortgage Debt | Till Debt Do Us Part

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.

Doing an intervention for someone who is addicted to debt

Sep 222008

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

Do you sit and wait until they come to you?

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

Do you organize an intervention?

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

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

Why not?

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

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

Then at what point?

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

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

But I didn’t know.

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

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

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

Have you ever ‘done an intervention’?

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

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

In Debt we trust

Sep 162008

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

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

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

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

Big picture

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

Debt servitude

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

Slightly depressing

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

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

Back to basics for me

Sep 122008

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

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

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

Back to basics

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

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

Debt from a thousand cuts

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

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

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

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

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

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

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

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

Look after the pennies

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

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

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

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

Sep 112008

Not all debt is created equal.

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

So anyway here goes.

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

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

It’s best to give an example.

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

I think you can see where this is going.

Bad debt versus Good Debt – it is all about value

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

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

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

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

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

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

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

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

My idea of good debt is open to abuse

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

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

Critical thinking

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

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

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

Investing in yourself

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

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.

Debt Management – Anyone for some elephant?

Mar 182008

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Inability to pay credit card debt

Mar 092008

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

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

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

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

How to solve the problem.

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

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

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

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

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

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

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

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

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

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

The Sum Total of your Debts

Mar 042008

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

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

Don’t know where to start?

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

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

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

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

Here’s an example:

Student loan 5000

Credit card 11000

Car loan 6400

Phone 200

Electricity 300

Cable TV 100

My brother Tim 4500

My Mum 320

Back tax 1300

Parking fines 250

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

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

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

The ugly truth about your debt.

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

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

Debt and Clutter – one solution for both

Feb 092008

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

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

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

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

Clutter on a grand scale

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Two problems solved in one go:

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

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

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

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

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

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

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

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

Debt Management Budgets – A waste of time?

Feb 032008

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

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

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

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

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

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

So how do you do it?

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

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

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

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

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

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

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

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

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

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

Till Debt Do Us Part – Pay off debt fast