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Signs of the Times Australia / NZ edition — lifestyle, health, relationships, culture, spirituality, people — published since 1886 |
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Signs of the Times Australia / NZ edition — lifestyle, health, relationships, culture, spirituality, people — published since 1886 |
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Debt is a bit like weight. It’s easier and much more fun to put on than to take off. It can accumulate slowly and then seem impossible to be rid of.
The assumption with debt is that the problem will be solved when I earn more; when the economy is stronger; when interest rates are lower; when lotto comes in; or when the current rush of bills is over. The reality is, we rarely emerge from consumer debt unless we tackle it head-on with a debt-reduction plan.
But first, let’s define debt. Debt is spending more than you earn, getting by on various lines of credit.
When your credit card cannot be paid in full at the end of the month or certainly two, you have “problem” debt.
Many people consider they are not “in debt” because they can easily make their monthly credit-card payments.
But this cycle of debt is costly with the high interest rates on credit cards, and is usually unsustainable because more credit is inevitably required.
The following five-step strategy should put you in control of a debt situation and prevent further relapses:
1. Acknowledge that your debt is out of control.
This is the first and most important step. It’s easy to deny, even to yourself, that the debt has become unmanageable. If the following symptoms apply, it’s time to get out of denial and into an action plan.
Total credit card debt is on the rise: (a) paying household bills has become a balancing act; (b) one form of credit is used to pay off another etc; (c) letters arrive in the mail on pink stationary.
2. List and total your debts.
Write down every bank, credit card or business you owe money to and the amounts. Total the “amount” column and get a picture of just what your situation is. Although seeing all your bills together at one time may be a frightening experience, it’s time to stop fooling yourself. Many people find that just going through this exercise gives them a sense of control for the first time.
3. Work out your budget surplus.
You don’t have to be a State Treasurer to calculate a budget surplus. Do some digging through past credit-card statements, look at some pay slips and come up with a no-frills budget. When you’re in debt, there’s no room for luxuries.
The only way out of debt is either to earn more or spend less. For most of us, the spending side of the equation is the only one we have control over. If you can’t come up with a budget surplus, then you’re living beyond your means and a major change will be required to avoid bankruptcy down the track.
4. Use your budget surplus to knock out debt.
While keeping to your budget and preventing new debt from arising, use the budget surplus to pay out the accumulated debt. Some authorities suggest you tackle the smallest first, pay it off and then move to the next biggest, adding some or all of what you were paying for that now nonexistent debt. The idea is that paying out a small debt gives one confidence— and cash—to tackle the next, and so on.
Obviously, minium payments would need to be maintained on all debts during this time to prevent the bailiff selling the family furniture. But these payments should have been calculated as part of your budget in No 3 above.
5. Live without debt.
Having retired the debt, enjoy the feeling and commit yourself to living within your means. Be determined not to return to the debt cycle, even if it means having to go without or waiting to make some purchases.
Here’s a tip that may help. We all like the convenience of credit cards, but it is credit cards that usually land us in trouble. Many banks now offer a credit card that is directly linked to your cheque or savings account. It looks and functions just like a credit card, but instead of buying on credit the money is actually coming directly from your bank account. It’s really a debit card in disguise.
The debt cycle not only causes stress, but can also destroy relationships and families. The aggressively commercial world we live in encourages us to buy now and pay later. The buying is fun; the paying isn’t. Getting finances back in control will allow you to get on with the really important things in life. And even though I’m an accountant, believe me, money is not one of them.
Extract from Signs of the Times, August 2002.
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