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.

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

Gambling debts – the last place you want to be

Oct 012008

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

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

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

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

Hierarchy of bad debt

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

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

Gambling debts – the worse kind of bad debt

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

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

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

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

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

I think that the article says it all.

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

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

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.

$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.

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.

Debt and health

Aug 182008

‘Your health is your wealth’

In my experience health is never really given much consideration until something goes wrong. People tend to take their health for granted. However as soon as they get sick or need to visit the doctor their attention focuses firmly on their medical insurance.

If you are in debt then your focus should be on where you can cut your expenses. However cutting things that have an impact on your health can be disastrous in the long term. Health insurance, diet and leisure pursuits usually take a direct hit when someone is designing their budgets and debt management plans.

Getting out of debt requires cutbacks and savings. These cutbacks and savings should not be at the cost of your own or your family’s health. You can’t put a value on health and by trying to cut your health expenditure that is what you are doing – trying to put a value on your health.

The three main areas that come under scrutiny in any household budget but also have a direct impact on health are 1. Health Insurance 2. Diet and 3. Leisure pursuits.

Health insurance.

With money problems one of the first things to go is health insurance. Many people look on health insurance as a nice to have rather than a need to have. If their employer does not provide health insurance then for many it is the obvious choice to start budgeting with. However I cannot stress strongly enough how important health insurance is. By all means shop around for the best provider or see if you can bundle your home and car insurance to get a better deal but do not get rid of your health insurance.

The thing about adequate health insurance is that you hope that you will never have to use it. If you have health insurance then you can be confident that there is health insurance there if you need it but ultimately you never want to use it. Some may argue that you are in good shape and don’t get sick often so why bother? I say great! But you don’t want to be caught short if you have the misfortune of getting sick or need to visit the hospital.

Diet.

As it stands the average diet in the western world is pretty bad. Millions of us exist (or should that be subsist) on a diet of processed refined nutrient deficient foods. Sure they might taste good but they don’t contribute much to our health and in some cases they take away from it and in turn take away from our pockets.

The question you have to ask is whether or not it is more or less expensive to eat well. I have made the argument before about buying generic food products as opposed to the more expensive branded products. This makes sense as they are generally cheaper versions of the same thing. My argument here is that we should consider whether or not in the long run it costs more to eat well.

Eating well is a whole other topic – the field is enormous and the opinions vastly different. Everyone has their own opinion as to what exactly eating well means. The point I am trying to make is that eating something that is obviously bad for you just because it is cheaper than the more healthy alternative does not make sense and in the long run it will cost you even more in terms of doctors and dentist visits. Just because your local fast food joint is doing a two for one special doesn’t mean you have to eat there. To me that is a false economy.

Leisure pursuits.

What I originally called the title of this section was Gym membership but I realize that not everyone holds a gym membership. The nice thing about talking about gym membership is that it allows me to perfectly illustrate the impact that debt can have on a person’s health.

In my post about passive expenses I made the point that things like gym membership can be an unnecessary drain on your finances especially if you are paying a monthly subscription. However I want to point out that I was referring to unused gym memberships. If you are not using your gym membership then by all means try to cut that expense out. If you are using your gym membership then look on it as a legitimate budget expense and don’t beat yourself up over it – even if it is expensive. The long term benefits of going to the gym on a regular basis will serve you well in the years to come.

The same logic should apply to any of the other leisure pursuits that people enjoy. If it is done on a regular basis and is seen as being a positive then work it into your budget if at all possible.

Becoming fit and healthy is more important than getting out of debt. In reality if you are not fit and healthy you will find getting out of debt a lot more difficult. The reason why is because getting out of debt requires a lot of energy and focus. Debt is stressful and no matter what way you cut it getting out of debt takes time and energy.

Online Second Income success stories – not many

Aug 042008

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

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

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

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

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

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

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

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

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

Aug 012008

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

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

There’s one born every day.

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

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

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

Learn from experience.

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

The same can be said for generating a second income.

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

Could I be getting it wrong every time?

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

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

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

Playing musical chairs with debt

Jul 312008

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

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

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

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

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

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

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

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

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

Juggling debt – seemed smart at first.

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

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

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

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

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

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

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

Walking away from your debt

Jul 302008

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

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

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

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

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

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

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

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

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

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

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

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

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

Can’t break the cycle of debt?

Jul 292008

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

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

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

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

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

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

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

Change one – Change who your friends are

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

Change two – Go on a media diet

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

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

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

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

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

How easy are these changes to make?

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

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

How long could you survive if you lost your job?

Jul 252008

I’m not trying to be all doom and gloom but I want you to start thinking about how long you could survive financially if you were to lose your job. How long could you continue to pay the bills? Six months? Six weeks? Six days? I know its not nice thinking about these things but deep down I reckon most people realize that planning for redundancy is very important in today’s weak economic climate.

Have you put much thought into it? If you are like most people then the answer is probably no. That’s ok because I never really put too much thought into it either. That was until there was a series of head count reductions in the company I worked for.

It was around May 2004 and the company that I worked for at the time was going through some serious difficulties. As a cure for these problems management decided that it would be a good idea to reduce headcount by 15%. For some strange reason the department that I worked in was particularly badly hit. I estimate we lost about 40% of the people who worked there.

What really got to me was what happened to the people who lost their jobs after they left the company. I remember thinking at the time that the redundancy packages were fair and that they should allow the people who were laid off enough time to find a job. Part of me was even envious at their enforced break. The thing that I hadn’t taken into consideration was how much the jobs market had changed.

After about three months most of the people were still struggling to find work and by this stage they had spent their redundancy packages on day to day living expenses. I remember hearing that a few of them were getting into serious financial trouble because they had been sailing pretty close to the wind financially even before they lost their jobs. The loss of their jobs tipped them over the edge financially.

Stories like this got me worried. At the time my financial focus was on paying down my debts but a part of me realized that I should be paying more attention to creating a big emergency fund. But not only should I have been increasing my emergency fund I should have been doing other things to cushion the blow of any potential redundancy.

To ease my worries I set about doing three key tasks.

I gave myself a period of 4 – 6 months in which to complete these tasks. I figured that because management had just completed a round of redundancies that it would be at least another six months before they would go at it again.

The first thing I did was to calculate how much money I needed to survive and pay my bills for six months. I calculated this figure by taking my monthly expenditure on essential items and multiplying by six. I then estimated any big bills that could potentially come up in any six month period – things like car maintenance, insurance, tax etc. I added the two figures together and I came up with a figure of $7800.

I resolved within myself to save like a crazy man until I had hit that target. It was highly ambitious given that I was still repaying debts but I felt that it was the right time to be focusing on building a big emergency fund.

The second thing I did was that I tried to do as many of the internal training programs that were run by my company as I could. Everything from building rapport to client management, I did as many as I could. The training was free as it was run internally. The budget for training had been cut deeply but if you put your name down far in advance you could pretty much get on any course you wanted.

By doing a lot of the internal training it achieved two very useful aims. The first was that management saw that I was eager to learn and that I was motivated. The second was that I was developing very saleable skills that I could put on my CV and bring to any potential future employer.

Finally the third thing that I did was to begin researching the jobs market. I became familiar with the companies that were recruiting. I would scour the jobs websites maybe once or twice a week to get a feel for what was out in the market. At the same time I was fine tuning my CV. I updated it and I began to tailor it to suit the roles that I was interested in pursuing should I have been made redundant.

The net effect?

The six month period that I set myself to achieve these tasks passed without incident. Work went on as normal once the office had calmed down after the upheaval of the redundancies.

I managed to save a total of $5400 – it was short of the target but it was still some going all the same. I was proud of my achievement.

I continued to do the training courses and research the jobs market.

These tasks combined to leave me in a much stronger position than my colleagues if there was to be further redundancies. I wanted to be playing from a position of strength if I got that redundancy letter. As soon as I started to work on these tasks I took the power back into my own hands. I have to admit that it gave me an immense sense of relief to know that if worst came to worst that it wouldn’t be so bad after all.

Now it’s your turn to examine your contingency plans for redundancy. Do you have a contingency plan? Can you see the merit in having one? A lot of people get caught short when they are made redundant. They don’t have any emergency funds and as a result tend to rely heavily on credit cards and bank overdrafts – this is a recipe for disaster. Don’t let that be you. Start as soon as you can to build contingency plans for your job should it go pear shaped. You just never know what is around the next corner.

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.

Motivation to act on your debt

Jul 152008

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

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

So now it is your turn.

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

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

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

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

Foreclosure, a personal story

Tent city

California town creates parking havens for homeless

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

The fastest way out of debt

Jul 142008

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

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

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

Learn everything you can about personal finance and budgeting

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

Get your family and friends involved

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

Sell absolutely everything that you do not need

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

Consolidate your credit cards to a low introductory offer

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

Shop around

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

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Rent out a room or move to a lower cost area

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

Get a second part time job / work overtime

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

Eliminate all your discretionary spending

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

Cut up your credit cards

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

Focus all of your attention on improving your financial situation

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

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

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

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

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

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

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.

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

Jul 072008

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

Fires and foreclosures – not the smartest way out of debt

Jul 072008

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

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

Arson – why would some one do it?

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

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

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

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

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

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

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

What’s the alternative?

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

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

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

Is Inflation a debtors’ best friend?

Jul 042008

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

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

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

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

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

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

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

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

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

However even for debtors inflation is a double edged sword

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

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

Do we have a moral obligation to pay our debt?

Jul 022008

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

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

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

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

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

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

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

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

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

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

Selfish acts of charity

Jul 012008

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

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

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

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

The answer of course is yes.

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

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

The simple strategy can be summed up in four words.

Help people in debt.

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

Reach out.

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

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

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

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

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

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.

In Debt? Don’t try to cut everything all at once.

Jun 262008

When faced with a person with a debt problem one of the first standard pieces of advice thrown out there is “Cut back on your spending completely”. Sound advice I might add but not always the most appropriate advice. I find that it’s a very easy piece of advice to give “Cut way back on your expenses and everything will be ok” but you already know that this isn’t the case. If it was that easy to do you wouldn’t be reading this article because you would have had no problem cutting back in the first place.

I accept that if someone is in debt then radical action is needed. However telling someone to cut back on expenses is a bit too general. It’s not so much what to cut back on – a simple tally of your monthly bills will tell you that – rather the key thing that I feel is missing is the ‘how’ to cut back element.

From your experience, what happens if you try to cut back everything at once? You go into a state of cold turkey. Your mind gets overwhelmed by this new behavior. Spending danger lurks around every corner and you get exhausted from trying to keep your mind focused on not spending. But no matter how hard you try and no matter how much you focus on ‘not spending’ your money just seems to run away from you – sometimes at an even faster rate than before.

What causes this? Well there are a couple of things at play in this. The first is that you are focusing on ‘not spending’. When confronted with a spending opportunity the natural response is to say to yourself is something like ‘I must not spend, I must not spend, I must not spend’. However all your brain will process is the doing part of the sentence which is the verb – spend. So all your brain will hear is “Spend, Spend, Spend”.

Ironic I know but studies have shown that how you phrase something is key to changing your behavior. So what you need to do is to rephrase what you say in relation to your spending. Don’t talk in terms of spending and buying or expenses, talk more using terms like saving, investing, reducing. For example instead of saying “I must not spend” you could rephrase it to something like “I must save more”. The difference is small in terms of the words used but in the long term the difference it makes to you mentally will be very significant.

The second and most important aspect of changing your spending behaviour is the speed at which you do it. This is a tough nut to crack as there are a number of variables at play. How much debt you have will be a factor in intensity of your desire to get a move on and start making cuts. What your current level of spending is now is likely to also have a huge bearing on your ability to make cuts. The more spending you are currently engaged in on a day to day basis the harder it will be for you to make drastic changes.

Slow and steady

The average time needed to change a habit is estimated to be anywhere between 21 and 30 days of repeat behavior. What this means is that if you want to change a habit you need to spend at least 21 days repeating the new more positive habit – consistently – day after day.

A lot of the time people assume that the habit they need to change is their ‘spending’ habit. This way of thinking is not 100% accurate. A much better way to think about it is that your spending is just the umbrella for a whole host of different habits. If you want to make real progress in your spending then break your spending down into its component habits.

Your spending pattern is probably made up of dozens of habits, each habit feeding into the next while all the time your money is disappearing.

So if your spending is made up of dozens of spending habits then you need to identify them. To help you do this it is simplest to think of your average week and how you incur your spending. For example do you buy a paper with your morning coffee? Do you buy that coffee on the way to work as you stop off for gas? When grocery shopping, do you shop when you are hungry? At the weekends do you simple amble into the local shopping mall just to kill time but have no clear plan about what you need to buy?

Each bad spending habit that you can identify needs to be put down on a list. You then should write down what a positive spending habit would be that would counter the bad spending habits. This will take time and some imagination but it is well worth it. Finally you need to identify the one habit that is doing the most damage to your finances.

Remember slow and steady.

Having identified the one habit that is doing the most damage to your finances you need to resolve to change that habit and that habit alone. Do not try to change more than one habit at a time!!! Focus all your energy on changing that habit. Stick with it for at least 21 consecutive days. Once you are happy that you have changed that habit then move on to the next most expensive habit.

You may have the urge to change a lot of habits at once. This is understandable, once you have made a firm decision to tackle your debt you will want to get moving as fast as possible. Don’t – take your time. The problem with trying to make a raft of changes in one go is that you cannot allocate enough energy to each of them to make them permanent. There is a saying that goes ‘the more hurry the less speed’. I believe this is true for debt management also. If you rush into making a lot of changes you are likely to lose motivation as you don’t see the changes you would have hoped for.

By tackling your biggest spending habit and focusing on it for at least 21 days you will make a lot more progress than if you simply tried to tackle five smaller spending habits at the one time. Don’t try to cut everything all at once. Doing so is simply a recipe for frustration. Don’t be tempted. Focus on one spending habit at a time.

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.

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.

Pets and debts – Isn’t it time Frodo start pulling his weight?

Jun 102008

So you love Frodo or Bobo or whatever you called your pet dog/cat/snake. You’re pretty sure they love you. Great! Good for you but now lets get down to serious business. If you are in debt then that great big ball of fur could be keeping you there. The costs associated with keeping a pet can be huge depending on your level of attention to detail and how much you want to keep up with the Joneses.

Pets are often treated as another member of the family – a very expensive member of the family. Even the smallest pet is not cheap. When they look up at you with their big loving eyes little do you realize that they are eating away at your budget.

Now before we go on I want to point out that I am not some cold hearted monster that is going to recommend that you leave Frodo at the side of the road. Far from it. I love animals. I’m more of a dog person but I have to admit that I admire the way cats can fend for themselves and give a collective two fingers to the world. I also have a soft spot for turtles but who hasn’t? Spiders and snakes are not really my buzz but I can see the appeal of an ant farm. Oh and fish, I really like tropical fish.

Now the thing is this website is about debt and your relationship with debt. The unfortunate thing is that most pets are expensive. As a pet is almost always seen as member of the family it is generally the case that you want the best for them. The clever marketing people know this and charge you accordingly. Pet expenses can be unpredictable and costly and this makes them hard to budget for.

So what’s the alternative?

Well there are a couple of simple things you can do to allow you to properly budget for your pet expenses.

The first is to buy pet Insurance. I know this is an extra cost each month but the way I look at it is it will help smooth out the annual cost of your pet. Each month you know that you have to pay a set small fee and as a result you can incorporate this into your budget. If you have to take your pet to see the vet then the insurance should cover most if not all of it.

The second step is to buy your pet food in bulk and online. If your pet is like 9 out of 10 cats and prefers a particular brand of pet food then shop around for the cheapest offer on it. The good thing about pet food is that it is usually long dated and it is a long time before it goes stale. This will allow you to buy in bulk and buy cheaply. Amazon is a good place to start but I highly recommend that you shop around.

Budgeting for a pet?

Yeah I know it does take a certain amount of the fun out of having a pet and it does add to the list of tasks that we need to do when we have a pet. I would put budgeting for a pet in the same category as cleaning up dog pooh. Not a nice task but something that needs to be done. The fact is that if you don’t budget for your pet and it gets more expensive to keep them then you will begin to resent them.

Another way to think about your pet is look at them from the point of view of cost of keeping them versus the benefits that they bring. Homes with pets in them seem to be filled with more joy. There seems to be a lot more going on if there is a dog or a cat running around. Studies have shown that the mood of people who are depressed improves when they have a pet. The pet takes the persons focus away from themselves and their problems.

The simplest way to increase the benefits of having a pet is to reduce the costs of having them. This way you get the same benefit but for a lower cost. Pets are great. They can be a little hard work and if you want to reduce the cost of having them they may require a little more hard work but the benefits far outweigh the costs involved.

Passive income? Look at your passive expenses first

Jun 092008

Do a search for the term ‘second income online’ and you will be hit with a hundred and one articles and stories about how someone makes $1000 a day in their spare time. More interestingly you will notice that the buzzword that is thrown around a lot is ‘Passive income’. Passive income has become the holy grail of the second income prophets. They talk about it in hushed tones. It almost has a reverential quality. Create a passive income and become financially free is their tagline.

If only it was as simple as some of these articles make out. Many times the authors of these articles are trying to sell you something. Some piece of software that will automate your selling or investing. Either way they are trying to make their ‘Passive Income’ by selling the idea of ‘Passive Income’ to you. In the end it resembles something like a pyramid. Person one at the top sells the idea of passive income to two people those two people sell the idea of passive income to another four people. This continues until eventually you have a couple of thousand of people all trying to create passive income by selling passive income tools.

I know about this because I’ve tried to create passive income in the past but with limited success. Generally I end up working very hard for the so called ‘passive income’ that I do generate. Passive income in itself is supposed to be self perpetuating by its very nature. Once you set up a passive income system it is suppose to carry on by itself using its own momentum.

So where does that leave you? You’re in debt or maybe not but either way you want a piece of this ‘Passive Income’. Well to begin with if you are truly going to go after passive income you are going to need a lot of time. Time is the one of the key elements.

Lets be honest most of us don’t have the time or energy to create a second income. I know I hadn’t. I was so busy doing nothing (well nothing important) that I made excuses and couldn’t get anything done. The few times I did get start passive income projects they invariably died a quiet death never to be mentioned again.

So what’s the alternative? It’s a lot closer to home than you think.

Passive expenses – the mirror image of passive income

No one ever really talks about passive expenses. Or certainly no one talks about them in the context of your personal finances. To illustrate what I mean about passive expenses take the example of gym membership. Say you have membership of the local gym that costs you $80 a month and is paid by direct debt. This $80 will be taken from your account every single month regardless of whether you are in the gym every day or whether you haven’t seen the inside of the gym since January 2nd.The point is that the expense is passive you don’t have to physically go out and buy anything for it to occur. You signed up once and now you pay via direct debt every month.

Now as an alternative to generating a passive income a simple solution would be to eliminate as much of you passive expenses as possible. The net result is the same. If you manage to eliminate $100 worth of passive expenses each month then that is still $100 staying in your account and not going anywhere. It means that you don’t have to invest time and energy into generating a passive income of $100.

Here is a list of some of the typical passive expenses.

Phone bill

Have a look around for a cheaper provider. There are always better deals to be had.

Electricity bill

Look for ways that you can permanently reduce your electricity bills. For example use energy saving bulbs. They may cost more initially but they will save you money in the long and there are more environmentally friendly. You’ll need to get creative while at the same time trying not compromise your standard of living.

Magazine subscriptions

Do you really need these subscriptions? Can’t you just check the magazine out in the store, see if there is anything interesting in it and then buy it if there is but don’t buy it if there is nothing that interests you in it.

Gym memberships

Be honest, how many times have you gone to the gym in the last three months? Is there anything that you do in the gym that you cannot do outside the gym? Things like going for a run, cycling etc.

Insurance

Shop around for the best offer. Usually if you go with one company for your home and car insurance then they will give you a discount. Keep looking!

Website memberships

As with magazine subscriptions – do you really need the membership? Most of the information contained in the website is probably available for free on the web somewhere else. It just takes a bit of searching.

Cable TV

Do really need those 200 TV channels? When was the last time you really watched anything on channels 50 to 200?

Rent/mortgage

If you have a mortgage, then shop around for a better deal. There are some good deals still on offer but it will depend on your individual situation. With rent maybe it is possible to rent a place for $100 cheaper a little further away from your current place? It might be worth a look. That extra $100 would go a long way.

Banking fees/credit card fees

Again shop around. Change banks if you have to. A lot of these fees can be reduced or eliminated.

The list above is only a sample of the passive expenses that people incur every month. There are other things that you could probably identify in your own situation that could be classified as a passive expense.

If you are determined to generate a second income then may I suggest that before you start that you tackle your passive expenses first. You are better off, initially at least, spending time and energy reducing your passive expenses. That way you can be sure that any additional income you earn will be adding to your bottom line and not to go to pay passive expenses.

It could be the case that in some situations if you reduce your passive expenses enough that the need for a second income could be eliminated. You may not need to take a second job or start a side business in your spare time.

Impulse spending – it’ll be the debt of me

Jun 052008

Cheesy title I know. I had to think about that for a long time. J Cheesy as it may be it does contain a lot of truth – for me anyway. When I look back at my spending habits since I started working, impulse spending has played a huge part. In my opinion it was one of the primary causes of my debt downfall. For me there was no such thing as impulse spending there was just shopping. Every purchase came under the umbrella of ‘Shopping’.Now before we go on I want to point out that my spending was on the most mundane stuff you could imagine – books, CDs, DVDs, clothes. The thing was that I bought a lot of each. I would simply wander into a music store with the intention of browsing and come out an hour later with three CDs and a couple of DVDs. I can only begin to imagine the damage that impulse spending does on the bank balances of women. I’m not being sexist but there are some women I know that could buy three pairs of shoes in a day.

Women only?

No I think guys are affected by impulse spending as much as women. The difference is that the stuff that guys buy are probably not as expensive and can fulfil them for longer. The latest Xbox game will probably see more mileage than the little black number bought for the Christmas party. You see advertisers want everyone’s money. They will differentiate their advertising campaigns based solely on whether their target market is predominantly female or male. The thing is they go after everyone’s money with equal gusto.

Some of the best and brightest minds are employed with one goal and that goal is to separate you from your money. You shouldn’t feel too bad about it when you impulse spend. The reason why is because “they made me do it” is a very valid excuse. And no we’re no talking about the voices in your head. We’re talking about the hundreds of little tricks that advertisers use to get you to take action. You too can have a body like mine…for $9.99…ok you get the idea.

What can you do?

Hide in a cave somewhere? Erm maybe! But as an alternative solution you just need to take a look at your buying behavior.Have you ever gone into a shop for no reason only to come out with a bag full of ‘stuff’? Then when you get home you realize that you don’t even need any of it? It was almost like you were in a hypnotic trance. The key to defeating this behavior is to gain clarity about what you want and to become strategic about your shopping. You need to become more conscious of your shopping decisions. Sounds very grand doesn’t it?For some shopping is fun, for others it’s a chore. Either way becoming more strategic about your shopping will help eliminate impulse spending. The simplest way to become more strategic about your spending is to write a list and wait for it – stick to that list.

By writing a list of the items that you want you are pre-programming you brain to focus on the items on the list. As a result your mind will help push out the potential impulse items that are not on your list.

To strengthen your focus, make sure that when you write a list of the items to include the stores that need to go to get them. This way you are reducing the number of stores you are ‘allowed’ visit. If it’s not on the list then don’t allow yourself to go to that store.

When you go shopping do you have a list? I’m not just talking about grocery shopping. I’m talking about shopping in general. Ok I know you might like to browse and this is fine but you need to be browsing with intent. So say you want to buy a new pair of jeans, by all means browse until you find the right pair but make sure to browse with the goal of buying a pair of jeans. Not with the goal of just ‘browsing’.

If you see something else you like, resolve to buy it tomorrow and let yourself sleep on it. The decision not the item! Usually the following day you will have either forgotten about it or it will seem less appealing.

Another thing you can do to stem the tide of impulse spending is to set yourself a time limit. If you are under time pressure you are less likely to meander around the stores ‘browsing’ for stuff. If you have a time limit to do your shopping then you will be in and out and won’t have time to browse.

Ideally you should think about your shopping like a military expedition. You have your objectives – the items on your list. You have the targets you have to hit – the stores you can visit. You have a time frame in which you need to reach those objectives. This way you limit your options and reduce exposure to radiation – sorry I mean impulse spending.

Is this way of shopping fun? No not really but it is a very effective way of reducing your impulse spending. Shopping this way tends to be very matter-of-fact with very little room to enjoy the whole shopping experience. That’s the point. The more you enjoy shopping the more you want to do it and the more you shop the more you spend and the more you spend the longer it takes to get out of debt. You get the picture.

Are your vices keeping you in debt?

Jun 042008

Before your eyes glaze over and you go to sleep this is not going to be a rant about the morals of alcohol and smoking. You know the facts or at least you should make it your business to know the facts about alcohol and smoking. You see in this article I’m really only concerned about money and in particular debt. Your debt. There are plenty of other websites out there that will tell you about the ills of alcohol and smoking so I’m not going to waste too much time here. Check this link out if you want to know more. EasyQuit

If you look up the word vice in the dictionary you will get something like this

Vice: Definition: bad habit, weakness; sin

Now I’m not going to sit here and cast the first stone on the sin part so I want to use the word ‘vice’ in the sense of bad habit. I want to go further and I want you to think of your habits and whether they are good or bad in the context of your debt only. For example going for coffee with friends every morning can be considered a good thing from a social point of view but from your debt point of view it is a bad habit or a vice.

Think about your average day or average week. Can you spot any vices that you may have that are costing you money? Do you buy a daily newspaper but only read the sports or fashion section? Do you buy gourmet sandwiches for lunch even though you could make nicer sandwiches yourself for half the price? You see it’s the little daily routines that when combined have the effect of keeping us in debt.

The sandwiches and the daily newspaper are pretty worn out examples and I think a lot of people get annoyed when they hear them. Like c’mon I’ve heard this all before. Ok and I agree but it is a point worth repeating. Those daily expenses will burn you in the long run. Imagine that on average that the daily cost of your habits is $15 (including weekends) so in one year on average you will have spent $5475 on things that you don’t really need or things that you could replace with cheaper alternatives. Think about what that money could do to your debt.

As an experiment calculate the savings that you would make on a daily basis if you cut out your vices. You don’t even have to cut out your vices completely just cut down on them. So if for example you smoke ten cigarettes a day reduce it down to eight – you’re still making a saving of 20%. Once you have at least cut down on your daily vices and have calculated the saving then simply take that amount out of your wallet at the end of the day and place it a jar or money box. So if you save $7.50 a day by cutting down on your vices then place that $7.50 in a jar. At the end of the week you should have $52.5 ($7.5×7) in cash saved in the jar.

The use of the jar is very important. It acts as a psychological reminder of both the progress that you are making and the amount that can actually be achieved if you start small and work it day to day. If you were simply to cut down on your vices but not physically take the money everyday and place it in a jar it is unlikely that you would notice any difference in your debt. I’m not sure why this is because the net result should be the same. The money saved just seems to get lost among all the other details on your financial statements. I think it is probably due to the fact that when you place the money in the jar you set it aside and assign it a purpose. That money now has meaning to you.

Saving money in a jar? Are you crazy? So you’re not an eight year old anymore? No you’re not but can you remember when you were? Did you save your pennies in a money box? It felt good didn’t it? By saving the money that you free up from your vices I’m trying to get you to tap into that same feeling you had as a child. I’ve always saved some of my money this way. Whenever I had loose change in my pocket I would throw it into a jar at the side of my bed. I remember once in college I was so broke that I couldn’t afford my train ticket home. Then I remembered my jar full of change. I didn’t think that there would be a whole lot of money in it but I decided that I needed every cent I could find. When I was through counting it the total was about $170. It was first class all the way home!The simplest things are usually the most effective and I have found this to be true over and over again. The idea of saving money in a jar is nearly too simple. I’m not saying you should be putting your life savings into it. What I am saying is that any money that you can honestly say that you have saved as a result of cutting down on your vices should be put in the jar to help motivate you and keep a record of your progress. Simple but effective – just the way I like it.

Debt Management – Analysis Paralysis

Jun 032008

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

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

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

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

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

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

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

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

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

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

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

Cash flow calendar – a lifebuoy in a sea of debt

Jun 022008

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

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

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

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

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

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

Cash flow calendar

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

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

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

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

Building a cash flow calendar

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

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

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

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

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

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

May 302008

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

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

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

What are you trying to achieve with your paperwork?

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

Cardboard box clarity

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

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

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

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

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

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

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

X marks the spot

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

Don’t be afraid to ask questions

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

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

Destroy the evidence

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

How long should you keep paperwork?

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

Storing your paperwork

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

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

In Summary

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

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

Do you have the energy to fight debt? Part 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.

In Debt? – Let go and move on

May 272008

It’s hard to believe that the party is over. The last few years that have been so good to so many people are now over. Years of excessive spending fuelled by easy credit have now come to a bitter end. The banks were literally throwing money at us and boy did we stand up and accept their challenge. Yes we can spend more than our neighbors and Yes we will spend more than our neighbors.

Then it changed, at first a whisper of change and then suddenly a roar of change. We all became familiar with the term subprime and what it meant. It basically meant that banks no longer want to know. They don’t want to know you or anything about your debt situation. The nice man down at the bank no longer works there anymore. Those tricky loan forms have become even trickier without his help.

Where does that leave you now? Your debt didn’t seem so big and scary when you were been given easy money by the banks.  But now after the tide has gone out it seems that your debts are an even bigger problem that you first thought. Your escape route of more easy credit is drying up fast and you’re finding it hard to make ends meet. At first you were stunned but now you are slowly coming round to the fact that things have changed. So how have you responded? Have you made changes to your lifestyle to match your changing circumstances?

The lifestyle you have become accustomed to has been the cause of your debt. The question I have is why are you still living that lifestyle? Why do you still go for your latte in the morning? Why do you continue to pay lip service to cutting up your credit card yet we still find you down the mall at the weekends? Why haven’t you downsized your car yet?

What is so precious about the lifestyle that you cling to so dearly? Are you worried about what the neighbors will say if you downsize your car? Worried about what your friends might think when you don’t meet them out for dinner anymore? If you think about it most of the people you know are probably in a similar situation. Everyone is impacted by this debt storm in one way or another. Why should you be a martyr to a lifestyle that is no longer useful?

Times have changed – but for many they are still living in the past. Still living the highlife and not realizing that the music has stopped and the smart people already left the party long ago. Isn’t it time you did the same? Get up now and leave the credit party. Go home and take stock of your situation and realize that times have changed and its time to do something about it. Its time to let go of your old lifestyle and move on to a new lifestyle based on financial awareness.

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.

Did Self Help books cause your debt and ruin your life?

May 232008

I really enjoy reading self help books. They give me an emotional kick and the powerful words have helped me through some tough times. However the cynic in me has always questioned some of the claims made in them. Is it really that easy to make a million? Someone once said that the people who made the most money during the gold rush were the people who sold the digging tools. I think in a lot of ways this applies to the self help industry. I also think that the self help industry can take some of the blame for the current tsunami of debt.

Let’s cut to the chase. When you read a self help or motivational book you are generally looking to feel good. Sometimes you are looking for answers and other times you are looking for ideas. It was the ideas contained in some of these books that in part caused the debt problems of this generation. I am talking in particular about financial self help books.

As the boom in technology stocks began to fade a number of books appeared on the market. These books claimed to have the key to wealth. The premise of these books was that people who worked in jobs were fools and the only truly successful people were investors who managed to create a passive income. In one book I can think of, which shall remain nameless, the author was relentless in his recommendation of property. He went on at lengths as to how he bought condos left right and center and how his cash flow was positive. This got people thinking – if he can do it then so can I.

I genuinely believe that it was books like this and others that prompted a lot of us to go in search of our fortunes in the property market. The boom in technology stocks simply transferred to property. Combined with a low interest rate environment people now had the means and motivation to pursue their dreams and for a lot of people this has turned into nightmares.

What these books did not tell you about was the hard work and risk that was involved in property or indeed in pursuing your dreams. The books led people to believe that it was simply a case of “build it and they will come” or more like “buy it and they will rent”. In a lot of cases this didn’t happen. I know of people who bought rental property at the height of the boom and are still having difficulty renting them out. They are faced with the situation of paying two mortgages a month. They too were seduced by the talk of easy profits and the supposed fast track to wealth.

Aside from the financial self help books that were glamorizing the property market and the fortunes to be made there were other self help books that persuaded people to be easy with their credit. The key thing about self help books is that they promise you the world and when they didn’t deliver people went out and bought the world they wanted anyway…on credit.

Who is to blame? Is it the authors of the self help books who claimed that they could help you or is it the person who buys the books, tries the techniques, fails and buys their dream on credit? To be honest I think both parties get something out of this relationship. For the author the obvious reward is monetary for the reader the reward is that warm fuzzy feeling that yes some day my dreams will come true.

Unfortunately for most readers of self help books their dreams do not come true. Why? I really don’t know, maybe its lack of commitment or maybe it’s because people knew that if they really wanted a house on the hill they could have gone to their nearest friendly mortgage broker and got a nice big mortgage to buy it.

Self help books sold you the dream. They made you write down in detail all the material goods that you wanted. They made you write wish lists. And you know what? The universe delivered you the things on your wish lists. How? With a little help from your plastic friend of course but that’s not the point is it? The universe still delivered. The live for the moment brigade got what they wanted.

As I said at the start of the article I like self help books, especially the financial ones. There are some really good ones out there. At the same time if you believe all the hype contained in them you are likely to be very disappointed. While self help books can point you in the right direction it is ultimately up to you to travel that road. The thing is it is generally a road that is a lot longer than the books would have you believe. This is something you need to be aware of. There are no short cuts, no get rich quick schemes. You could buy your dream on credit I suppose but you will end up paying for it the rest of your life.

Gasoline, Groceries and false economies. It’s your call.

May 222008

What do you need to survive? If you are in debt then where do your limited resources go? What should get priority? As always it depends on your particular circumstances but there are a number of key things to consider. If you are going to get out of debt you need to maintain a basic level of existence. You can’t simply turn off everything and sit at home in the dark eating crackers.

Some things you simply cannot function without. The thing you have to ask yourself is that if you reduce or remove something from your lifestyle will it compromise your ability to function? By function I mean your ability to get up and take positive action to reduce your debt. For example if you decide to reduce your grocery budget right down and you end up living on crackers and cheese then you can be sure that in a short time you won’t have the energy to go take any action. This type of logic is what is commonly referred to as a false economy.

Beware of the false economy

In simple terms a false economy can be defined as some action that you think will save you money in short term but in the long run it actually ends up costing you more. Using the example of eating crackers – this will slash your groceries budget to pieces but in the long run you will end up paying more in a number of ways – trips to the doctor’s, missing days at work, general sluggishness – you get the picture.

With any budget you need to be conscious of the fact that you can overdo the cutting. What happens in a lot of cases is that people tend to have an initial wave of motivation and then draw up a budget that is unrealistic and full of false economies. They cut too deeply into the key essentials. After what is usually a very short period of time life becomes uncomfortable and they become disillusioned and wonder why they can’t stick to the budget.

The whole point of a budget is that it is right for you. It should force you to think about your spending choices but it should not be so hard on you that you won’t stick with it.

There are some things that you will need to maintain and you simply cannot and should not compromise on. Some of the obvious ones are food and transport. The price of gas is rocketing? – So what. You need to get to work. So the price of food is also rocketing? – So what. You need to eat. Health insurance gone through the roof? – So What. You might need it some day soon.

In any budget there are things you can cut back on and there are things you shouldn’t cut back on. Those mentioned above are just some examples of the basic things in life that you need. Notice that cable TV is not mentioned? Or are expensive dinners out. You need to make sure that you don’t blur the lines between what is a necessity and what is a luxury. Take the example of gasoline – I said it was important and that you need it for transport but what I didn’t say is that you also need a top of the range SUV for transport too. There are plenty of ways to cut your expenses without compromising on the basics of life.

With this in mind you need to ask yourself if you are cutting in the wrong place?

What is your problem with people in debt?

May 212008

I was browsing the web recently and I came across an article about people in debt. The article outlined all the facts and figures about how we are all doomed. Then I got to the comments section and I couldn’t believe what I was reading. Almost every single comment was in a negative and derogatory tone against the people who were in debt. It was unbelievable. Some of the people’s comments were pure poison.

One such comment went something like this

“Don’t try to educate these fools. Having their homes taken away from them and their lives destroyed will teach them”

I mean come on what is that all about? I was a little shocked to say the least and this got me thinking. Why were these people so angry at people in debt? What motivated them to post such vitriolic comments? 

I think some of these people who posted the comments feel that they lost out during the boom times and for whatever reason feel angry about it now. They seem to want to blame the people who were trying to make a better life for themselves. I’m not denying that there were excesses during the good times – this is always the case. Some people went overboard with the easy credit. But in my opinion the vast majority of people who find themselves in trouble today do so because they were simply seeking a better life. What’s wrong with that? What’s wrong with trying to make extra cash doing something like flipping properties – ok it is highly risky but you got to admire the people who were willing to take those risks. A lot of people got burned but they will be back again doing something different trying to better themselves and improve their lot.

I know people who simply wanted to improve their kid’s education. Give them the best start in life. How can you judge someone who goes into debt for that? How can you judge the college graduate who is up to their eyeball in debt as a result of tuition fees? Man some people can be cruel.

The Germans have a word called “Schadenfreude” which basically means “to take pleasure in someone else’s misfortune”. A sort of “serves them right” mentality. This kind of attitude is wrong and unhelpful. How are we supposed to solve our debt problems with people beating on us?

Amid the negative comments there was one comment that I agreed with. The comment went something like this.

“People need to live by the choices they make and accept responsibility for them”

Yes I couldn’t agree more but just because some makes some bad choices about their finances should they be labelled a fool? These people who have made bad decisions about their finances are paying the price whether they like it or not. Some may lose their homes or have their credit rating ruined – is that not penance enough? Why start the name calling as well?

In the end we are all responsible for our own financial wellbeing and it is only us that can put it right. So what if we make a few mistakes along the way. It’s how we learn. Mocking people who are in debt now is like laughing at someone who has a car crash and saying – you should have learnt how to drive properly. You just don’t do it or at least you shouldn’t because someday that person could be you.

To those people who are in debt and are struggling to get out of it I salute you. Pay no remarks to those little people who are trying to exercise some sort of moral superiority. Simply by trying to do this they show that they don’t have any moral superiority – no one does. Stick with the fight. No matter what happens simply by going through your debt situation you will come out the other side as a stronger person.

There I said it - Personal Finance is boring. But I’m still in debt.

May 202008

Up to this point it may not have mattered. You may have been happy to put your faith and financial future in the hands of that nice man down at the bank. You didn’t need the hassle and if you’re honest filling out forms scares you. Better just take their word for it and sign on the bottom line.

Recently though you’ve become worried and frustrated. Worried that you don’t fully comprehend all this financial speak that is coming at you from every angle and frustrated at the fact that it seems so hard to understand. You may be feeling stupid and that other people seem so much smarter than you when it comes to money. You may even feel helpless and that you are being left behind in the race for a better financial future.

These feelings are a lot more common that most people care to admit. No one wants to be seen as stupid. However financial knowledge is not something you are born with. In most cases financial knowledge comes from hard fought experience. Learning the hard way is not something that I advocate. Learning the hard way means that you must face financial problems in order to overcome them and learn how to deal with them. These situations can be avoided but for many people it is only when they face real financial problems that they begin to learn about personal finance.

The truth is financial education is probably not on the top of everyone’s to do list. There is a good reason for that and in my opinion financial education can be unappealing to most. If I’m honest the thoughts of sitting down and learning about loan rates and credit card debt is not my idea of fun. It can be draining and boring. There’s no two ways about it and no matter how much some of the financial gurus try to dress it up learning about personal finance is boring.

There I said it – Personal finance is boring. You don’t have to feel bad about not wanting to learn about it. The unfortunate thing is that if you don’t learn even the basics of personal finance then you are destined for trouble.

So what can you do to make it interesting? Well I’ve always found that if I you have a vested interested in learning about a subject then you will put more effort in and learn more quickly. What is your vested interested when it comes to your financial education? This should be become clearer when you think about your existing financial situation. If you want your existing financial situation to improve then you need to start investing time and energy in your own financial education.

The amount of money you have in your bank account or the amount of debt you have are not going to change until you change. How do you change? You strive to learn more about personal finance.

Yes I know it will be hard. Yes I know you have very little interest in it. Yes I know you have better things to be doing. What I want you to think about is the long term. Think about your financial future. What do you see? A grey and bleak place where you continue to struggle with your finances?

Here’s an easy way to think about it. Learning as much as you can about personal finance and debt management is the most effective way for you to increase your wealth. For the amount of time and money you invest in your own financial education you will reap massive dividends in the future. The great thing is that the all the information you are looking for is out there on the web and it is for free. The only thing you have to do is invest the time and effort.

Don’t make the mistake of leaving your financial future in the hands of someone else. What makes you think they know more about personal finance than you do?

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