DEBT
It’s the biggest industry in the world, so no wonder you’re part of it. And it’s no wonder it’s so big. There’s nothing to manufacture save the odd bit of plastic, no distribution costs and it lasts and lasts.
Here’s my take on it . . .
Debt is great when you’re using it in the right way. Controlled debt to expand a business, buy a house, go on a dream holiday, improve your home, etc., is liberating.
Fred Tilney, whom I acknowledge as the person who invented ‘12 months’ interest-free credit’, allowed people of the small town of Leadgate, in the north-east of England, to own a hi-fi or a new television when they could previously only have dreamed of it.
Sir Peter Vardy made it possible for people from small mining villages to buy themselves a new car. As he said: ‘They deserved to drive a new car and I helped them to find a way.’
The darker side of debt
However, there’s another side to credit and, unfortunately, it has become an epidemic in some parts of our society. And the solution to getting out of debt is often presented as ‘take more (or a different kind of) debt’.
If you do an internet search on ‘how to get out of debt’, you will be inundated by dozens of ‘offers’ to see if you qualify for ‘debt consolidation’, ‘a new loan’ or ‘that little known piece of government legislation’; in fact, there are over 100 sponsored links. To put this into context, when you search on ‘how to save money’ there are half the pages and only five sponsored links.
Clearing debt is a big challenge. It will have a huge impact on what you do and will require a big change of mindset. But once you have put some simple changes in place and are working towards an end goal, you’ll be amazed at how good you feel for taking on the challenge.
The five things you must do if you’re suffering from debt
- Get rid of all your cards other than one debit card that you can use at the bank, etc. Don’t just push them into a drawer, really get rid of them. Cut them into little pieces and throw them away (divide disposal of them between two litter bins to avoid identity theft).
- Write a list of all your debts. BE HONEST. Note down the level of interest you are paying each month for each loan or line of credit. It may be that you can benefit from consolidating all of your debts – but shop around and get advice. Consolidating is not always a good idea. The main reason you are in debt is because you spend more than you earn. Consolidation can often lull you into a false sense of security so you continue to spend. Beware: if you consolidate your current debts into your mortgage you are signing up for a long-term deal where your house can be taken if you default.
- Create a plan to pay off all of your debts other than your mortgage (if you have one) over a sensible period of time. This may be up to 10 years but it will be worth it. Time flies and before you know where you are you’ll be able to pay off more than you had planned and the debt will be cleared much more quickly. Use ‘snowballing’ (see the following Brill bit) as a rapid way to help you to do this.
- Use the 20 savings ideas in the saving chapter to help you clear more debts and avoid creating new ones.
- START NOW. This is one area where procrastination will cost you dearly.
BRILL BIT
Snowballing your debt is a clever technique if you have several different liabilities such as credit cards, loans and store cards. It basically means you pay the minimum payments for all your debts other than the one with the highest interest rate. Then you focus the rest of your available repayment money on this, the highest one. Once the one with the highest interest rate is paid off, you focus on the next one and so on until you have cleared your debt. This method can save you thousands and reduce debt payment time significantly.
Now here’s a twist championed by a debt management expert called Dave Ramsey. He suggests a similar system but rather than putting your debts in interest rate order you put them in amount order and pay off the lowest first, then the next lowest and so on. Although this method will normally mean you pay more interest, you get the fantastic early psychological boost of having paid off some of your debts quickly.