Dealing with debt: frugality is not the answer
It has been some time now since I have written about frugality. The last time I did this, I suppose, was when I made my position on what I call ‘extreme frugality’ (cut your own hair, don’t spend anything on fun and use £4 of petrol to save 4 pence on a can of beans kind of thing) clear; and my position is that it makes absolutely no sense. In the same article I also mentioned something that I called ‘frugality as an art form’ – this is the case where one gets maximum value for their money.
Now, irrespective of not having any more consumer debt (we still have to pay the mortgage off, mind) I am still very much sensitised to anything to do with debt. Reading personal finance blogs (reading quite a few of those actually) I have noticed that: a) quite a few are about more or less ‘extreme’ frugality’; and 2) the frugality that entails great sacrifice, deprivation and, ultimately, suffering is linked to paying off debt in a reverent relationship. This made me think, is really paying off debt through sacrifice more honourable, commendable and admirable than paying off large amounts of debt by using your gifts (anyone has those), working hard and smart and increasing your income?
You know already which path we took and that we did pay off a shameful amount of debt in three years. When we started out we were faced with a total debt of over twice our after tax annual income so before thinking “well that’s OK for you guys”, translate it into your own situation – owing a consumer debt of 200% of your post-tax income. We had a mortgage to pay, family to support and all the regular bills; there was no way on earth that we could pay that sort of debt down. And I had just lost over £10,000 (over $15,000) of my annual pre-tax pay. We were looking at over £2,000 ($3,000) monthly negative cash-flow and our only option for getting out of the hole was a consolidation loan; this was over 10 years and to start with we could only just manage the payments.
Did we do frugality? You bet! But we did it as an art form. You want examples? Here they are:
- We changed all insurance so that we ended up better insured at lower premium;
- We changed all utilities, the last being to install a water meter (thanks Pat); the water meter saves us about £60 ($92) per month. But you know what? Some young people don’t even realise that water isn’t free.
- We more than halved our food bill by changing where we shop, how we shop, eliminating waste and…cooking from scratch and baking (have a look at the picture – these are the rye bread loafs I just baked).
- We went skiing but we started using the house of a close friend instead of hotels and package holidays.
So you see, we lowered our expense a lot with very little loss of quality of life; well, life as we see it anyway. And we always tried to keep the fun in it, to make a bit of a game of it. For instance, we made a bet with friends that we could serve three course French menu for dinner for £1.50 ($2.32) per head and we won the bet. I learned to bake (artisan bread) and this was a game my friend Elaine and I played.
- I had my expensive haircuts (hard to do what I do and cut my hair myself; I am not a mathematician).
- We kept our gym membership(s) – it is important to keep healthy.
- Had a lady to do the ironing (if you are cringing in protest at my indulgence do the arithmetic – an hour of my time costs about ten times more than an hour of hers; and I did work 13-14 hour days).
So we did frugality but…we did it differently and it would have never been enough. So, my good blogging buddy Edward is right: the best way to pay off $50,000 debt in a year is to earn $50,000 more than you normally do and apply it all to debt repayment. But let me illustrate this by using scenarios.
Scenario 1: Frugality is king!
After finding ourselves in £100,000 debt we would have had to cut expenditure severely so that we could meet the close to £1,000 ($1,549) monthly payments and the payments for what was left on the credit cards (estimated £400/$619 monthly). To do this we would have been able to afford little more than food and it is likely that we would have not been able to start pulling out of debt. I could see two options:
One, we couldn’t start reducing our debt (or even covering the monthly payments properly) and would have had to sell our house. There are many problems with that but the main one is that we would have learned little else than that we are highly educated failures.
Two, we could manage and start slowly paying the debt off. Doing this by frugality alone would have meant ten years (or even longer since the credit cards could not be paid without additional income) of extreme frugality and debt repayment. During this time:
- I wouldn’t have been able to go to my Dad’s funeral;
- We would have been unable to provide educational opportunities to our son;
- Very likely, because of the pressure this kind of thing puts on relationship we would have ended up separating.
More importantly by the time we paid off the debt, I would have been 58 and John in his late 60s. This means no chance of paying off the mortgage and really miserable and deprived old age (remember the ‘point of lost hope’ I was telling you about; no, it wasn’t as theoretical as it sounded at the time).
We worked all this out and we didn’t like the kind of life it charted; this is why we took the other route!
Scenario 2: Financial health highway
This is the one where lowering costs of living (without deprivation and loss of quality of life) is combined with a cumulative increase of income. What do I mean? We hustled like mad. In the first year of debt repayment we earned enough over our regular monthly income to pay off the credit cards completely. Each following year our side-hustle earnings increased by about 45% on the year before. And we put it all on paying off the debt.
Someone told me that their debt is a very high mountain so they can’t do what we did; we are people having large debt and large income so it couldn’t have been that hard. Let me tell you, guys, our mountain was high enough. We just became fit fell runners who traversed it cleverly!
This scenario brought us back to the ‘ideal healthy profile’. We are in our ‘autumn’ and we are ready to accumulate and invest aggressively. We shall see how wealthy we become – this is fraught with many uncertainties. But what we made sure is that we will have some fun time together and when (if) we get into the winter of our lives we will have enough income for more than a hot-dog for dinner and to keep our room in the old people’s home warm.
I have no problem with that!
A line from a movie went: ‘I grew up in a rough neighbourhood and learned that with a good word you can achieve a lot. But with a good word and a gun you can achieve so much more.’ (Yeah, imagine Robert De Niro saying that )
Paraphrasing, I’ll say that when paying off debt (particularly relatively large one) you can make some progress relying on sensible frugality. But you can get there so much faster if you increase your income as well.
The lesson we learned is clear – control your cash, increase your income, work together and don’t despair.