| Real Life Strategies for Building Wealth
How to Get Out of Debt and Stay Debt Free Forever: Six Money Management Systems to Help You Along

How to Get Out of Debt and Stay Debt Free Forever: Six Money Management Systems to Help You Along

Today I’ll tell you what I know about money management and money management systems.

You see, to get out of debt and stay debt free forever you need to:

Understanding money management is very, very important. Let’s just say that I didn’t understand any of it and I’m a Business School Professor (okay, I don’t teach management but still…).

Another reason I decided to publish this tonight is that we had to have another ‘money session’ with sons. We had discuss an emergency bailout after I received texts from each of them saying: ‘I’m skint’. (For my readers in the US, this means ‘I’m broke’.)

You see, our sons think that they know how to manage their money and they simply don’t earn enough. Still, one of them makes the average salary in the UK. (I’d agree that the average salary in the UK is miserly but many people raise families on that.)

This is why tonight I’d tell you about six money management systems I’ve tried; and you should try them too. It takes quite a bit of trying and adjustment to develop the system that fits you like a tight glove.

#1. Arkad’s Money Management System

This I probably one of the oldest money management systems and I love it because of its simplicity.

It comes from George Clason’s classic The Richest Man in Babylon. (And if you have not read this book do it; do it now. Don’t waste your time reading me when there is a little masterpiece waiting for you.)

Arkad is the main character in the book and one can learn a lot from him about building wealth. Still, one of the main things I learn from Arkad was his money management system.

According to this system:

  • Ten percent of all you earn should be saved and invested.
  • Twenty percent of all you earn should be used to pay debts – if the amount is insufficient one should negotiate with their creditors firmly and convince them that this all that they can afford but that they will pay diligently.
  • Seventy percent off all you earn should be used to cover all living expenses.

This system is beautiful in its simplicity but don’t let this deceive you. It appears simple, and very practical, because it works by proportions rather than absolutes.

What does this mean?

Well, there are two clear messages in the system:

  1. It doesn’t matter how much you earn you should always follow these proportions. If you have to change your life and make sacrifices to fit within the 70% allotted to living expenses, so be it.
  2. To expand your life – and the amounts you pay off your debt and save/invest – you have to increase your income.

Verdict: This money management system is probably my favourite because it focuses the attention on increasing income, not further reduction of living expenses.

#2. The Balanced Money Formula

The Balanced Money Formula approach to money management was developed by Elizabeth Warren and Amelia Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan .

The Balanced Money Formula uses three elements; these are ‘needs’, ‘wants’ and ‘savings’.

‘Need’ is everything that you absolutely have to pay and this group of spending would include shelter, facilities, cars and insurance, food and basic clothing.

  • ‘Want’ is everything above the basic needs that we have in our lives like eating out, going out, holidays etc. This category can include the things that you can cut out but this will cause temporary discomfort.
  • ‘Savings’ includes also debt repayment until this is all gone. (You may be wondering about the rationale for this but remember that paying off your debt increases your net worth; just like saving and investing more does.)

According to the Balanced Money Formula principles, you should:

  • Spend no more than 50% of your net income on needs and ideally spending in this category should be kept under 35%.
  • Spend on ‘wants’ up to 30% of your net income.
  • Put in savings no less than 20% of your income.

Verdict: This money management system is practical as well and easy to follow. A potential point of confusion is the distinction between ‘needs’ and ‘wants’. This one also doesn’t clearly send the message that the way forward is to increase your income; if anything, when testing it I had a tendency to cut down the ‘wants’ and increase the ‘savings’ category.

#3. The JARS Money Management System

For the non-initiated ones: if you think that JARS stands for something you’d be wrong. This system involves jars; as in the glass pots that you keep jam in.

The JARS money management system was developed by T. Harv Eker in his book Secrets of the Millionaire Mind.

According to this system, you ought to think of your money in terms of going into six jars:

  • Necessities jar (55%): this is to cover all your monthly expenses.
  • Financial Freedom Account (10%): this is the one that you should use for investing and building passive income.
  • Education Account (10%): to succeed in anything one need to learn, right?
  • Long term savings for spending account (10%): this one is for ‘extraordinary’ spending like holidays etc.
  • Play account (10%): this is the money you spend on things you wouldn’t otherwise buy. It is supposed to nurture yourself (like order steak instead of chicken when you next go out to eat).
  • Give account (5%): this is for giving away to good causes of your choice (we give to The Trussell Trust because I believe that people shouldn’t go hungry in the 21st century).

You are free to add jars and change the proportions. What is important is to always put something in these basic jars (well, you can use bank accounts to do this).

Verdict: I tried this one and found it hard going. It lacks the simplicity of Arkad’s money management and the balanced money formula. Still, I found that the ‘play’ account and the ‘education’ account are a great reminder to keep things in proportion when paying off debt. And so is the ‘give’ account.

#4. The Envelope Money Management System

This was quite popular with some of my buddies when we were paying off debt together and even I used it for a while.

Its main principles are very simple:

  • Your first step should be to work out how much money you have left after paying off the bills and, ideally, putting some money in savings.
  • Next, you ought to work out your spending categories (e.g. food, drink, transport etc.).
  • Get envelopes and write the spending category at the front (e.g. food).
  • Put all the cash (yes, this is a cash based system) for food in the appropriate envelope. Do the same with the other envelopes.
  • Spend only the money in the envelope and get creative.

Verdict: I used this one for a while and have to say that it is working. Found it hard going because of the cash (you have to plan) and because of the categories. Interestingly, these are exactly the properties of the envelope system that are most useful because they develop good habits.

#5. Money Management The Money Principle Way

When we were in the heat of paying off our debt, we experimented with all these money management systems.

At the end, we ended up using a system that combined elements of the different money management systems.

There are three elements that I found particularly helpful. These are:

  • We started a ‘millionaire account’. In this account we put a minimum of 10% of our monthly net income and we didn’t touch this money except for investments (including attending courses and education). This account will not necessarily make you a millionaire but it will certainly open opportunities and contribute to a more secure future.
  • We create a ‘financial buffer’. This is also known as ‘emergency fund’ but I always saw out debt as THE emergency. We kept £1,000 in it for unforeseen or accidental expenditure.
  • We maintained ‘I’m so worth it’ funds. This fund is probably what distinguishes The Money Principle approach and the rest. Even when you are paying off debt aggressively, you should remember that life is for living. We maintained these funds the whole time we were paying off debt (and still have them). At the moment we put in these funds (John and I have separate ones) very small proportion of our income but since our income has grown quite a bit it is enough to get us the ‘finer thing’ we enjoy. I’d probably say that the ‘I’m so worth it’ funds made the biggest difference to our lives when paying off debt and kept us going.

Verdict: I’d rather not. Just try it and let me know whether it was worth it.

#6. The ERR Money Management Strategy

The ERR money management strategy is another innovation by The Money Principle and it is somewhat different from the systems discussed above.

The ERR money management strategy is about three things:

  • Eliminate (waste);
  • Replace (activities and the way you do these); and
  • Reduce (consumption).

This assumes that you already know what your monthly cash flow is. If you haven’t done this, please do (using The Money Principle Monthly Budgeting Tool will help you do that with as little pain as possible).

You can learn more about the ERR money management system and how to apply it here.

Verdict: I’d rather not do this one either. I’d just say that I use this every three months or so and it does help me keep our spending down (without restricting what we do).


To get out of debt, you need commitment, knowledge and action. Here you can learn about six money management systems and how to apply this to your advantage.

If you find this post helpful, please tell others about it. We want as many people as possible to learn how to get out of debt, don’t we?

photo credit: Chinese Acrobats via photopin (license)

How to Pay off Debt Fast and Stay Debt Free Forever: all you need to know about your debt

How to Pay off Debt Fast and Stay Debt Free Forever: all you need to know about your debt

Editor’s note: I’ve been writing a book on how to pay off debt fast in secret. Now, the secret is out and I’m publishing it as a series of posts (initially). Hope you find it useful and enjoyable to read. Mainly, I hope that now that the strength of your resolution has weakened, it helps you to stay focused on paying off debt. Oh, and this one is long. To be specific over 8,000 words long. To make it easier to navigate, I’ve made a mindmap of it; and feedback is very welcome.

Yes, that’s me and I know a thing or two about how to pay off debt fast. Because I’m the woman behind paying off debt of £100,000 in three years flat.

We became debt free (except for the mortgage but we are working on it) in the first week of February, 2013. I was facing a large roomful of students when my phone pinged. John’s message said:

‘Done and dusted!’

You know what?

I’ll never forget the heady mixture of elation, fulfilment and pure joy I felt.

I want you to feel it as well!

Apart from that, you can’t achieve financial health and have a lot of consumer debt (this is all debt except mortgage).

This is why, I decided to write this guide to paying off debt. I’ll share the only secret to paying off debt fast; I’ll also tell you exactly what I (we) did to pay off so much debt in such a short time.

You can do it as well: you just have to stop making excuses for yourself. Yes, I know…

  • My circumstances are different.
  • My numbers are rather outlandish.
  • My ambition is outrageous.

This may be so.

However, the principles, attitude hacks, techniques and tools shared here can be used by anyone, anywhere: you just have to have the ‘debt busting lust’.

The rest, as they say, will soon be history.

Now, grab a notebook and a pen, make yourself a cup of coffee and let’s go. This is what we’ll be working on today:

pay off debt

I can’t wait! Can you?

The secret is out: this is all you need to pay off debt fast


People often ask me how we managed to pay off debt so fast.

I tell them that my strategy for becoming debt free was very simple: earn as much as you can, spend as little as you can and use the difference to hit the debt. Then spend some time watching it crumble and celebrate.

This is when people tell me that I’m lucky because I can earn more. They tell me that my numbers are ‘mental’.

You know, friends, this has next to nothing to do with luck. Yes, I can earn a lot but I do work very hard to keep at the forefront of my profession. I also use every opportunity to learn and have trained myself to be very good at spotting and mobilising opportunities. Being ‘at the right place, at the right time’ is a matter of preparation, strategy and initiative; not luck.

As to my numbers, yes they are a bit ‘mental’.

  • We had £100,000 worth of consumer debt.
  • At the moment we make more than this annually between us (we did increase our income a lot since we first found out about the debt).
  • Now we have a new goal: to have £2,500,000 (or the equivalent which is £10,000 passive income per month) by October 2018.

But you know what? Coping with my ‘mental’ numbers is easy.

First, remember that I arrived in the UK, 25 years ago, with $20 in my pocket. Yes, seriously.

Second, you can just cut a zero or two off the end. You see, if you have £10,000 worth of consumer debt and you make £25,000 per year you are roughly in the same situation we found ourselves in 2009. (I’ll explain why £25,000 and not £14,000 in one of the follow up posts).

What I’m saying is:

Don’t be distracted by my numbers, by thinking me lucky or simply by seeing me as a ‘rich, stuck-up bitch’.

Start paying attention to the one thing that matters for how to pay off debt fast. Here it is:

The secret to paying off debt fast, and staying debt free forever, is learning


Now, when people ask me how to pay off debt fast I tell them:

Learn to control your money if you don’t want money to control you.

Control is often misrepresented as discipline and seen as restrictive. This is not what I’m talking about.

I’m talking about controlling you money by:

  • Having information and knowledge;
  • Having standards that allow you to decide on specific course of action; and
  • Taking certain actions (and making habits out of these).

This is all you need to pay off debt fast and stay debt free.

This is why I’ll tell you:

  1. My (emotional) take on debt and the wonder of being debt free;
  2. What you need to know, and what information you need, to pay off your debt fast;
  3. About ways to decide how to tackle your debt (some will call this ‘strategy’); and
  4. What actions you need to take to pay off debt fast.

(The first and second points are largely covered here. The other two points will be in separate posts.)

I’d also have to tell you that this post is long. I could have made it shorter but then I would have been sacrificing the opportunity to help you pay off debt for entertaining you and not over-loading you.

My choice was to do the best I can to help you pay off debt; this is why researching and writing this series of posts took me over 60 hours work. I’m offering you the result FREE.

Whether you spend couple of hours reading it is your choice. Still, I so much hope you decide to read further!

Reading this post won’t be enough; you’ll have to do the things I tell you to do and then stick to it for a year or two. Can you do this?

(If you can’t, there is no point reading further; my object here is not to entertain but challenge to action. Well, not only entertain anyway.)

Remember the notebook, pen and cup of coffee I mentioned earlier? May be it is time for a refill.

Let’s talk about debt, baby?

I know debt intimately.

In my youth, debt was a casual acquaintance. I will run out of money and survive the month by borrowing a bit from friends. Than pay it back.

Later debt became an ignored suitor. In my late 20s my life changed: I had a wonderful husband, two step children and a truck load of consumer debt. I ignored the debt completely, I refused to think or talk about it. I focused on the people I loved, instead; I focused on my career.

This is how debt became my formidable enemy. In 2009, when I was in my mid-40s, I found myself pacing in a hotel room in Lausanne (Switzerland): we’d reached a crisis and the debt couldn’t be ignored any longer.

The evening before, between sips of smooth Malbec, my husband cleared his throat and said:

“Darling, we seem to have built a bit of debt.”

For me ‘a bit’ would have been anything up to £5,000.

‘A lot’ would have been around £15,000.

What my husband said next made me spew my wine and swallow my words.

We had consumer debt of around £100,000 ($160,000).

Would you sleep peacefully if you had so much consumer debt?

No, I didn’t either.

I paced, I cried and I raged. I was scared, upset and without future.

Do you still wish to know what it felt like?

It felt like I had been dropped on a very high and steep mountain peak.

I looked down, my head spinning with vertigo, my belly knotted with fear and my mouth dry with anxiety. There was one thought in my head:

“I can’t f*cking do this.’


Next, debt became my worthy adversary. One morning, weeks after the unfortunate night in Lausanne, I woke up and simply knew that enough is enough: I’ll fight the debt and I’ll win; I’ll take back control.

This is when I started learning, strategizing and acting.

We did fight and we did win! It took us three years (okay, and a week) to pay it all off; all £100,000 ($160,000) of it and with the interest.

Now, debt is my supportive angel. We’ll never be in debt again; I’ve made sure of that. But I still look back, smile and think that if I were able to do this, I can do anything.

So you see, I know a thing or two about debt.

I also know about being debt free. To me being debt free means beauty, freedom and opportunities.

It also means I stopped fearing:

  • My phone ringing;
  • Letters from the bank;
  • Losing our house;
  • Stealing my son’s future;
  • Older age; and
  • The drudgery of life itself.

Instead, I learned to love:

  • Buying flowers;
  • Watching our wealth grow;
  • Hustling; and
  • Dreaming about a great future with John.

If you are still reading, you are probably on first names with debt as well.

Are you ready to make your debt a memory of strength rather than a shadowy threat stalking your future?

Let me tell you; if I managed to pay off debt in such a short time, you can do it too. After all, I do belong to the ‘I can resist anything but temptation’ club.

“Okay, but what do you offer others don’t?” – you may ask.

Many pages have been filled with ‘advice’ on how to pay off debt. This, in a nutshell, boils down to telling you that paying off debt is easy; you only have to make sure that:

There is always money left in your account at the end of the month;


You throw it all on the debt without fail and until it’s gone.

That’s it. And in theory this is how it works; this is how we did it.

Still, in practice, too many people still in debt. In the UK alone, the level of household debt has increased by over 300 per cent between 1990 and 2013.

Experts have written a lot about how to pay off debt. Why are more people getting into even more debt?

And here is where I break with tradition (and the reason you should probably read what I’ve written and do what I say).

You see, to learn about paying off debt you need an ‘expert’ who knows.

To pay off your debt fast you need a ‘maverick’ who knows many things and has lived what they preach.

Because, paying off debt fast requires:

  • Knowledge and action;
  • Information and wisdom;
  • Innovation and experience; and
  • Inspiration and belief.

Most of all, it requires that you change your thinking and your approach to life.

This is what I offer you!

  • I offer the knowledge I gained and a blueprint of what we did.
  • I offer the information I collected and the wisdom to make sense of it.
  • I offer the experience of many who have paid their debt and the innovations we made.
  • I offer the inspiration of knowing that it is possible.
  • I also offer support without judgement and condescension.

Keep reading and taking action.

When you are finished with paying off debt, let me know – you’ll owe me a beer!

All you need to know about how to pay off debt

It is time to ‘grab the bull by the horns’, friend.

Or if you prefer, it is time to grab the debt by the balls and pay it all off. One thing that you have no time for – and I would have wasted my time writing this to offer you support – is continue to accumulate debt.

Because debt is a bit like carrying excess weight: it doesn’t stay still. You have a clear choice: you commit to positive change and lose it, or it keeps creeping up.

Do I have your attention?

Great. Now have your notebook and pen handy: this part is about the things you need to know, and the information you need to collect, so that you pay off debt fast; or pay off debt at all.

Six early warning signs that you are in too much debt

How could one be in too much debt and not know about it?

You may be surprised. Five years ago I had the feeling that all is not well with our finances; but did I know we have so much debt? No.

Here are the six signs that you may be in too much debt.

#1. You have ‘the feeling’: This is difficult to explain but before I even did my numbers I had a feeling that things are not right. My worry about money kept coming to the surface and I kept pushing it back. ‘The feeling’ is difficult to pinpoint but anyone who is in serious debt would instantly know what I am talking about.

#2. You don’t look at your financial statements: This is very common behaviour in people who have the feeling of impeding financial doom but don’t have the guts to check exactly how bad it is. I didn’t look at a financial statement for almost a decade; I know!

#3. You have no idea how much is in your bank account: This is an immediate consequence of not looking at your financial statements; because you never check, you never know. It also may be a sign of wilful neglect for money and this is really not a healthy attitude to maintain.

#4. You think ‘my problem is so much bigger’ when you buy things you don’t need or want: Oh, yes. This is exactly what went through my mind every time I bought something. And of course, my problem became even bigger than it was.

#5. You have no idea how much a pint of milk or a loaf of bread costs: We are talking basics here. Still, you should have seen my face when a friend went to her fridge, took out a pint of milk and asked me how much it costs. I had absolutely no idea: it could have been 20 pence, it could have been 20 pounds. Problem is, if you don’t know how much you pay for a pint of milk it is unlikely you will notice any other spending.

#6. You are surprised every time you open your wallet: Yep, you either have too much money in it or too little money. But you never really know what to expect. Whilst this is certainly a way to make your life that that much more exciting it is also a sign that you are not in control of your money.

How many of these signs did you spot in yourself?

If you spotted three or more of these signs, you need to take action and fast. Fail to tackle your debt and you’ll drown in it.

Commit to seeing it gone and you’ve committed to transforming your destiny.

Now, take a deep breath and keep reading.

Three stages of paying off debt

People will tell you not to compare yourself to others. You can try this one and I wish you luck; although I know that you’ll fail.

How do I know this? I know because science, as in behavioural economics, says so. Our very existence depends on our ability to adapt and to be able to adapt, we need to make comparisons. You can decide to go against evolutionary rule but I’d have to short you on this one.

You cannot help making comparisons. What is important than is to compare properly. Or as a friend of mine wrote ‘never compare your beginning with someone else’s middle’.

To avoid doing this when you are paying off debt, you need to be aware that there are three stages of debt repayment. These are:

#1. Stabilisation: This is the initial stage where you make sure that you’re not getting in more debt and can make debt payments that reduce it (even if very slightly). This is the paying off debt stage at which you:

  • Gather all information about your debt;
  • Know your monthly income and spending;
  • Look at spending and reduce it in obvious ways.

Please keep focused. Remember, the fasted way to ensure that your monthly income exceeds your spending is to reduce your spending.

And I’m not saying that it is the best or most efficient way; just that reducing spending works so fast that you can be through with this stage in couple of months – it took me exactly seven weeks.

The most obvious places to look to cut spending are:

  • Monthly payment on debt (how to do this is explained later on);
  • Utility bills (this can take a bit longer);
  • Insurance (look for cheaper insurance if you still need it);
  • Your ‘variable’ expenditure offers the fastest gains: food, clothes, coffees, lunches out and other spending. Sounds like ‘small fish’ but I used to spend over £300 every month only on lunch and coffee at work.

During this stage of paying off debt, the main results you’d feel are on your confidence – once you get to a positive cash flow you’d know that you can do it.

You’ll need to get to the next stage to see results with your debt.

#2. Expansion: Now that you’ve stabilised your finances, you can focus on ways to increase your cash flow (and use it to overpay debt). This is best done by a combination of becoming a frugal artist and by increasing your income.

Working to increase your income sounds scary or unrealistic, depending on how you feel at the time. It works, though. I’m yet to meet someone who decided to increase their income and failed.

During this stage of debt busting frugality takes the back stage and you have to focus on making more money.

#3. Acceleration: Once you’ve ensured that your budget is as tight as well fitting corset (stabilisation) and that you have different income streams (expansion) you’d notice that paying off debt happens at a neck breaking speed.

You are paying off debt so fast that it is literally crumbling under your two-pronged assault.

Once you reach the half point – this is half of your initial debt – the speed to being debt free will increase even further. This is because you start to pay more principal than interest. (Put simply, this means that larger proportion of your payment goes towards paying off debt and a smaller part pays the interest on the debt).

It is important to know at which stage of paying off debt you are at any point. You don’t really want to get impatient at the ‘stabilisation stage’ or complacent at the ‘acceleration stage’.

Still, to pay off debt fast you have to get to the ‘acceleration stage’; staying at the ‘stabilisation stage’ would get you there, and you may pay off your debt, but very, very slowly.

I don’t know about you but when I was in a lot of debt I couldn’t wait to be rid of it so that I could start my debt free life (as I suspected, it is rather glorious). If we stayed at the ‘stabilisation stage’ we’ll still be paying off debt.

I shudder to think about it.

What are the options for tackling your debt?

There are four clear cut options when it comes to tackling your debt. You can: a) do nothing; b) choose IVA; c) go bankrupt; or d) pay off debt.

(Note: There are equivalent arrangements in the US; IVA is just a different way to go bankrupt in the UK.)

#1. Do nothing

Of course, the zero option is that you do nothing; which is convenient in the short run and devastating in the long term.

There is no point writing more about this one: it is not an option. If ‘do nothing’ is the best you could do, it will be better if you stop wasting your time and go do something else.

#2. Do an IVA

IVA stands for ‘individual voluntary arrangement’ and means that you’ll be paying off your debt but at a rate (amount) you can afford. IVAs usually last for six years and at the end any remaining debt will be written off.

If you can’t afford to make ‘normal’ payments to your debt, IVA is probably a preferable option than bankruptcy.

During an IVA, you’ll be paying at an agreed rate you can afford, your creditors can’t contact you and can’t be increasing your debt and you can keep your house (if you own one) provided you keep up with mortgage repayments.

Naturally, being one of the more extreme way to deal with debt, IVA has some problems. These are:

  • Doing IVA will completely ruin your credit score. You may think that this is not that important given the gravity of your situation but let me remind you that lately landlords have started using credit scores when deciding to lend their property. Just reminding you that credit scores don’t matter much only if you have somewhere to live and don’t need to borrow. If you need to check your credit score, you can use Cafe Credit.
  • Should the IVA fail, your creditors can backdate interest or even insist on making you bankrupt.
  • You’ll need to live on a very strict budget till the end of the IVA. Now this, I don’t think is a bad thing if you use the experience to learn.
  • Now, this is about your house. Remember I said that when going down the IVA route you can keep your house? Well, there is a snag. You can keep it but six months before the end of the IVA you’ll be asked to re-mortgage to release equity. This needs to be watched carefully.

#3. Go bankrupt

One thing I remember from the day after we realised the true depth of the debt hole we had dug ourselves in really, is that all I wanted was for IT to go away. All fight was knocked out of me by the nasty surprise.

Making all your debt go away is possible: it is called bankruptcy or sequestration if you live in Scotland. Tempting, isn’t it?

All your unsecured debts written off in an instant and no further calls from creditors, no bailiffs knocking on your door and no sleepless nights painting un-imaginable horrors and deprivation.

Thing is, bankruptcy (sequestration) is a very serious matter in the UK and has serious consequences for your life and career.

To begin with, it is a way to deal with debt only when you really can’t pay it off under any other conditions.

Next, going bankrupt in the UK means that all your assets may (probably will) be included in the deal; your assets may be sold to cover some of the debts. There is good news: pensions that are in ‘approved pension schemes’ won’t be included in the estate (you’ll be able to keep those). You are still likely to lose everything else, though. And, I know people who have gone bankrupt and their ‘new start’ is very much like the one that got them in the whole mess in the first place.

Last but not least, going bankrupt in the UK means that you cannot hold certain jobs (you can’t be charity trustee, insolvency practitioner, justice of the peace, part of local or national government etc.). Even more importantly, you cannot be a company director: this means that you cannot start a company either.

You see, bankruptcy may seem like an attractive option when you are still in the shock of discovery. In the UK, it has to be considered only as a last resort and after consultations with insolvency and debt relief practitioners.

#4. Pay off your debt

Last but not least, you have the option to decide not to share your life with debt any longer and pay it all off.

If you are not determined to pay off debt fast, you may as well stop reading this now. Don’t waste your time; go shopping, spend some more money and get in a bit more debt.

Why I think people should pay off debt?

When we paid our debt off our story got on the Business Insider. Some reactions surprised me.

One reader said:

“Why would any sane person with that much debt ever pay it back?”

And another one stated:

“Stupid people. They should have filed for bankruptcy…”

So, you see, one questioned my sanity and the other my intelligence.

Which I don’t usually mind but it has been almost fifty years since I was on the primary school playground and someone called me ‘stupid’ (and got away with it).

All because we paid off an obscene amount of consumer debt!

As the person who called me ‘stupid’ helpfully pointed out one possible solution to debt is bankruptcy.

I already told you why going bankrupt is not an option that should be taken lightly; particularly not in the UK.

There were other options open to us. We could have sold our house, for instance, and used part of the equity to pay off debt.

Problem is, we did sell assets to pay off debt before. And you know what?

We always found ourselves in debt again.

This time, we chose to pay our debt off the old fashioned way: by increasing our monthly positive cash flow and putting it all against the debt for three years; without fail.

This was (is) the right decision because:

  • We learned how to control our money rather than allowing money to control us.
  • We learned how to make money and how to make money work for us; e.g. we learned how to build sustainable wealth.
  • We developed (and have maintained) key wealth building habits.
  • I learned that there is no problem that cannot be solved and that my main task is to convert my predicaments into problems.
  • Every time I remember that we paid off £100,000 worth of debt in three years, I blush with pride.
  • Paying off our consumer debt is a great lesson to our sons: a lesson about money, honour and love.
  • Paying off our debt was my redemption. My irresponsible, wasteful Self was sacrificed on the altar of consumerism to come out leaner, stronger and so much more present.

I don’t manipulate debt; I pay off debt.

Because by paying off debt, and killing it forever, I built myself into the woman I like and respect.

You should try this as well.

Get to know your debt intimately

I’m not going to tell you to become friends with your debt: this will be far too ‘new age’ for me.

Still, you do have to get to know your debt intimately if you are to pay off debt fast and in the least painful way.

These are the six question you need to answer so you could claim to be intimately acquainted with your debt.

Q1. How much debt do I have?

This may sound ridiculously simple; so much so that you may wonder why I am including it here.

Simple as it sounds, finding out exactly how much debt you have is not nearly as straight forward as you may think.

Would it surprise you to hear that I had absolutely no idea whether and how much debt we had? Neither did my husband. When he started ‘digging’ we found that we are in too much debt; so much, in fact, that I refer to it as ‘obscenely large amount’.

We are not uniquely inept at this; on any web forum about debt you will read the stories of people who thought their debt is much smaller than it actually is. Go read some.

Trust me on this one and save yourself, and your partner, a lot of grief: work out how much debt you have systematically and meticulously.

I’ll offer some ideas how to do this in the part on ‘debt mining’; so keep reading.

Q2. Who are my creditors?

This is very straightforward: you need to know whom you owe money.

It is still a time-consuming exercise and needs systematic approach. Make sure you don’t miss anyone from the list. Include the banks, the credit cards, your best friend and your parents. Oh, and your student loans and your store cards, and…

…well, you get the picture.

Having this information is very important for building your debt repayment strategy.

Q3. What is the rate of interest I’m paying?

Yep, you need to work this out for each and every debt you’ve identified.

In some cases, like credit cards, it is easy: you just need to open your credit card statement (or go on the card website) and read the small script. This should do it.

In other cases – like borrowing from friends and family – you’ll need to do some more digging.

Do it! This will help you develop a payment strategy, a plan and will motivate you to pay off your debt faster. Who wants to pay all this interest?

I felt really motivated to pay off debt faster after I realised the interest we pay keeps one lower level bank employee in wages for a year. How crazy is that, eh?

Q4. Which part of my debt am I paying?

Every time you make a debt payment you are paying two very different things:

  1. Interest
  2. The debt itself (principal)

You’ll need to work out what proportion of your payment services the interest and what proportion actually reduces the debt.

You’ll find, that in most cases – and certainly when you pay only the minimum payment on credit cards – your payment is mostly interest and very little principal.

(Credit cards offering 0% interest are the exception but the payment is still calculated by the provider so that the offer ends before you’ve paid the debt off. Than you start paying high interest which is smart business and lousy debt management.)

Your aim, if you wish to pay off debt fast, is to get as quickly as possible to the ‘tipping point’ – the point where your payment pays off more principal than interest. This is usually when you have paid off half of your original debt.

Sprint to the middle and watch your debt crumble!

Q5. What proportion of my income goes on debt re-payment?

Many see this as a question about how much they are putting towards repaying their debt. I see it as a question about how much you have left to live on.

There is a life to be lived and fun to be had even when you are in debt.

Remember that this is about paying off your debt; it is not about having a date with the Spanish Inquisition!

Q6. How long would it take me to pay it all off?

This is easy: you know how much debt you have, how much you are paying off and the interest. The rest is simple arithmetic.

There are many debt calculators around.

I think the debt calculator on ‘This is Money’ wins ‘best in its class’ outright. Go, play around with it for a bit.

If it tells you that it will take you 150 years to pay off your debt, don’t panic.

Just use the second part of the calculator and see how much more you have to throw on your debt to pay it off fast (as fast as you wish).

(Note 1: I did mention that this post is long. It may be time to bookmark it and take a break.)

(Note 2: You can find detailed instructions on how to do your ‘debt mining’ and keep ‘debt records’ in the third post in the series.)

Paying off debt strategy

‘Strategy’ is a big word. You hear every day about ‘strategic thinking’, ‘business strategy’ or even a horse betting strategy.

Strategy doesn’t have to be big and scary; it simply means that you need to focus on the ‘long term’ in very specific ways.

To have a strategy you need to know where you want to be (have a goal) and use this goal as a compass that attracts all your actions.

Having a strategy is like playing chess. To win a game of chess you need to:

  1. Want to win;
  2. Master the rules of the game and use them to achieve your goal (win);
  3. Read carefully what your opponent is doing; and
  4. Ensure that you plan about twenty moves ahead.

I told you it is simple.

Now, let me tell you how this all is relevant to paying off debt fast.

I used to joke that my strategy to pay off debt fast was very simple: I spend no more than necessary, earned as much as possible and put the difference on the debt every time without fail.

This is true but our strategy was about much more than that. Our strategy to pay off debt fast used few of the tools in the arsenal for becoming debt free but I got to know about most of them.

Here is what you have at your disposal:

#1. Three ways to reduce interest

Your first priority when looking to develop a strategy for debt repayment is to reduce the interest on the debt. Why? Because lower interest means three things:

  • It makes it easier to be able to afford paying off the debt on the same income;
  • It means that higher proportion of your payment goes against principal; and
  • Ultimately you pay less to pay off your debt.

In my case, for example, moving the debt from credit cards with between 20 and 26 per cent interest to a consolidated loan at 7% meant that we can afford payments. Otherwise we would have had to sell the house.

There are three ways to reduce the interest on your debt.

First, you can apply for 0% interest rate credit cards. Please pay attention to the following:

  • The interest rate is not actually 0%, it is about 3% (or however much the transfer fee is);
  • Make sure that you pay as much as you can off before the 0% deal expires. If you haven’t finished paying off your debt when this happens, make sure you have another 0% deal lined up.

Here is the bad news: if you have amassed considerable debt you are very likely not seen as a good risk; therefore you are probably unlikely to get a 0% interest rate credit card.

Between you and me, when we had just started paying off our debt I applied for one. I was refused. Now, I get 0% credit card offers through the door all the time.

The next best thing is to consolidate your debt. This simply means to take one large loan (usually secured against some of your property) instead of a number of credit cards.

Consolidating you debt into one large loan can save you a lot of interest. This is what we did: we took out a loan and used it to pay off all credit cards. This brought the level of interest from an average of 20% per year to slightly over 7%. I know this doesn’t look a lot but it has enormous effect because it not only saves you interest in the long run but also reduces the regular monthly payments from ‘an absolute killer’ to ‘doable with a bit of imagination’.

There is a lot to be said about consolidation loans.

On the positive:

  • Taking out a consolidation loan saves interest: taking out a loan to consolidate many smaller debts usually saves rather a lot in interest payments.
  • Taking out a consolidation loan ensures you are paying your debt down: loan repayments are calculated so that one always pays some of the principal rather than only interest. Keeping debt on credit cards always contains the risk that you will minimise the pain of changing your life and repayment by paying only the minimum amount. This is plainly dumb but at the same time it is a very successful business model for the credit card companies; which tells me that it is something many of us do most of the time.
  • Taking out a consolidation loan means that you are not exposed to interest rate increases: the contract that sets out the conditions of the loan also state the interest rate; so it is very unlikely that you will get a letter informing you that the interest rate on your borrowing just went up 3%. This happens regularly with credit cards.
  • Debt consolidation saves energy and bother: yep, I really mean this one. It would have really drained me to have had to deal with debt across nine different places. Having it all in one saved me loads of energy, worry and bother. It is really easy to follow progress as well – I have a lovely chart that keeps going down. I never thought that this could be so aesthetically pleasing – but I can admire it repeatedly.

On the negative:

  • Taking out a loan usually entails collateral: what this means in simple terms is that because the bank wants to ensure you are going to pay back it asks you to put something down as security. Usually it is your home! This is a real problem if something goes wrong and you can’t pay back: if your debt is on credit cards the worst that could happen is that you will damage your credit rating, if it is a loan you could lose your home.
  • You are stuck with the interest rate: most of the time this works in your favour. However, if your credit rating is good and your borrowing to income ratio is not atrocious there are 0% interest rates on credit cards. During the last two and a half years this has been often a point of regret for me: consolidating meant that we could not take advantage of these deals.
  • Loans can stretch over a long period: in fact they usually do. Our loan is for ten years and I have to tell you that when we took it out I thought that this is the twilight of my life gone. Where we got it right is that we checked and double checked that there are no penalties for overpayment and early repayment; after that we attacked the loan with a vengeance and as a result we very quickly reached the point where the monthly repayment covered more principal than interest.
  • Repaying a loan is a long term commitment: so is repaying credit card debt, you may think. Not the same! Keeping your debt on credit cards (and paying it down) is like running a number of sprints – each run is hard but there is a positive emotion at the end; so you can take a breath and go for the next sprint. Repaying a large loan is like running an ultra-marathon – you just have to keep going; and when your head is telling you to stop you just keep going! You can’t afford to ‘hit the wall’!

Where or not you use this option depends on the following:

  • Can you take the collateral?
  • Do you have a strategy for overpayment of the loan and have you checked that its conditions allow that?
  • What kind of person are you? If you are a ‘sprinter’ stick with many smaller debts; if you have the mentality of a long distance runner consolidating is for you.

Last but not least, you can negotiate the interest on credit cards and private debts. My problem with this is that the outcome is uncertain and the creditor can bump it up again at any point (e.g. you have limited control).

#2. Off the shelf strategies for paying off debt

There are ‘tried and tested’ strategies to pay off debt. These are:

  • Small to large: According to this strategy you order your debts from smallest to the largest one. Focus on paying the smallest debt first, than the next in order and…continue until all debt are paid off. This is a good route to take if need something extra to keep you motivation in top shape. There is are few things more motivating than seeing some success.
  • Highest interest first: This strategy is about ordering your debt according to the interest these incur. Focus the paying off debt effort on the debt with the highest interest. Once this is gone tackle the next one. Don’t stop! This approach is supposed to save you interest but I remain to be convinced.
  • Snowballing your debt: This is really cool and simple. It was pioneered by David Ramsey and state that you keep the amount you pay on your debt constant till it is all gone. Now, imagine you have three credit cards and pay £100 per month on each. When card one is paid, you don’t spend the £100 you don’t need to pay any longer on new clothes but add it to the payment of card number two. When this is paid off, you pay £300 per month off the last card. You see? It works like a snowball. Using it you’ll be able to speed up paying off debt.
  • Snow-flaking debt: This is about putting any small amounts of money that you make or save against the debt. We used this one – every month I zeroed our budget. If there was £30 left, I threw it on the debt. Have I mentioned that our smallest payment was £4.35 (John did this) and the largest one was £8,348. This works but you have to develop the discipline and focus to put all ‘left over’ money on the debt.
  • Race to the middle: This is the single most important thing for paying off debt fast and I figured it out at the beginning of 2010. The secret to paying off debt fast is to pay off half of your starting debt as fast as possible. We got there in 18 months (August 2011). This is the point at which your monthly payment starts paying more principal (the debt itself) than interest.

#3. What is your strategy to pay off debt?

This where things get a bit more complicated.

You can go with an ‘off the shelf’ strategy but it doesn’t mean it will work for you.

You strategy for paying off debt depends on your debt and your personal circumstances (see next sections of this post).

To be able to formulate the strategy for paying off debt that will work for you, you’ll have to answer these questions:

  • Why do you want to pay off your debt? (Motivation is important and I had to remind myself all the time what this was about.)
  • What is your time line? (Don’t be afraid to be ‘unrealistic’; I’d rather undershoot an ambitious goal than overachieve a very modest one.)
  • What are the options best suited to your situation? (Are you going to consolidate? Snowball or snowflake? Etc.)
  • How much per month you’ll have to pay to pay off your debt within your time line?
  • What are the conditions for his to happen?
  • Who do you need to talk to?
  • Who may help you? What alliances you need to build?
  • Who (what) may be in the way?

Now you are set. You have the goal, you have the motivation and you’ve done your thinking.

Write it down. Print it out and pin it where you can see it.

(This is because you will waver on the way. Trust me: I had so many wobblies that at one point I suspected I’ve morphed into jelly. Every time your motivation wavers, read why you want to be debt free and all will be well.)

It is time to make all that into a realistic plan.

How to make plans that work?

Okay. If your strategy is about answering the question ‘how do I get from where I am to where I want to be?’, your plan is the answer to the question ‘what do I have to do to get from where I am to where I want to be?.’

Also, the plan has to be very specific.

Plans that work share two characteristics:

  • You develop them by planning from the future. Most people set their goals and develop their plans starting from where they are. This is obviously restrictive – if I started planning paying off debt from where I was, I would still be doing it. Start planning from where you want to be; work out the exact conditions (knowledge, skills, jobs, habits, alliances etc.) that will get you there and plan yearly, monthly weekly and daily the actions that will get you there.
  • They are comfortable as a broken in shoe. Yes, good plans feel comfortable and they are flexible enough so that you can change them if you need to do so.

Does this sound like hard work? Do you feel confused about all these strategies and plans and all sorts?

Well, there is always Walt Disney if you do.

No, I’m not suggesting that you escape in the fantasy that Disney movies offer.

What I am suggesting is that you use what I call ‘Walt Disney’s Creativity Hack’ – it works when you plan how to pay off debt as well.

Walt Disney’s Hack

Walt Disney started his career as a journalist; and was told that he will never be creative enough to make a good one and sacked.

This only made him more determined to discover the ‘holy grail’ of creativity. Through observation and self-analysis he figured out that there are three sides to all of us: a dreamer, a realist and a critic. Normally these are in an ad hoc conversation dominated by the Critic. For example:

Dreamer: ‘I really want to become debt free in three years.’
Critic: ‘You know that this is rubbish and completely impossible. You need to pay over £3,000 per month to be able to do this. Now, there are dreams and there is delusion; and this, my friend, is a delusion if I have ever seen one. The money you need to pay off the debt every month to be able to pay it off in three years is exactly as much as your take home pay. What are you going to live on? So, you may as well forget it. ’

Conversation over; dream over. One more thing to mention at parties as an entry in my ‘Anthology of Selected Intentions’.

Clever Walt noticed this one and thought:

‘What would happen if the three sides talk in strict sequence: the dreamer goes first, after that the realist and only after that the critic is allow in?’

What happens is immensely powerful. Take a look at this:

Dreamer: ‘I really want to become debt free in three years. It would be lovely – the feeling of achievement, the freedom to do the things I won’t be able to afford for the next three years and the heady feeling coming with the knowledge that I’m completely in control of my money and my life. I won’t owe ‘nothing to nobody’ and my life will be mine to live. I can start building savings, investments and can even prepare an early retirement.’
Realist: ‘To do this you’ll need to learn a lot of stuff about debt, money, how to make choices, organisations that can help you…well, a lot of stuff. You have to come up with ways to decide what to do about your debt and distinguish between stretching goals and complete delusion. You can do this; you can learn. You’ll have to make sure that your budget is as tight as a little, black cocktail dress and it leaks from nowhere. You’ll have to look into options to increase you income. This has all been done before and if necessary you can go back to college or take some courses to learn. You have to make yourself act and do it fast. Still, this can be done. ’
Critic: ‘What can go wrong? Where are the holes in the plan? What can you do to either hedge against the risks (losing your job, for instance) or taking control?’

See the difference?

I’ve used this method a number of times and still use it when I’m at a turning point in my life.

Try it! What is there to lose? But remember:

  • Your dream has to be very detailed; dream the colours, the smells, what does it feel like, who is with you. Detail is very important to develop the animal focus and desire that will carry you through the hard patches.
  • Don’t let in the Realist and the Critic before you have finished dreaming. After that let them loose and transform this dream into a workable plan.

You remembered to write everything down, didn’t you?

If you did it, by now you have selected (developed) a strategy for paying off debt fast and have a detailed plan of what you are going to do so that your strategy works.

This is all for tonight. I’ll publish the second instalment next week.

Beyond the Personal: The is Why Debt is so Destructive

Beyond the Personal: The is Why Debt is so Destructive

Noam Chomsky is one of a rare breed of people.

He is a polymath (linguist, philosopher, logician and cognitive scientist) and an erudite.

Even more importantly he is a public intellectual who speaks with the voice of reason in a time of mercantile opportunism.

For some time now, I’ve wanted to write a blog on why debt goes beyond the personal and destroys the very fabric of our society.

There is no more need; just read this carefully.


You see, most personal finance sees debt as the fault, and responsibility, of individuals.

You are in debt?

You must have done something silly; like spending more than you earn.

You have a lot of debt?

You have to pay it off, of course. And any self-righteous Dick and Harry can have a swipe at you. They do; the abuse that pours on public forums over people in debt is surprising.

And we, poor debt sinners, hang our heads in shame! Or we fear debt because of loss of lifestyle and threatened consumption.

I know I did! Shame and fear were my immediate responses to hearing how much consumer debt we had.

Debt, however, is not about shame and fear: these are only emotions and it’s your choice whether to indulge them.

Debt is devastating by:

  • Robbing your freedom;
  • Limiting your choices;
  • Draining your energy; and
  • Restricting your life.

Noam Chomsky is right about that: when you are trapped in debt you don’t want to change the world any longer. Your world shrinks to the next debt payment, to the next pay day, to the next wholesome meal.

Debt is devastating for the individual; it almost killed me and I’m not a weak willed flower.

Debt reaches far beyond the personal, however. It is a disciplining device used by our consumer societies.

Debt is what keeps us locked in a cycle of mindless consumption. We get in debt to pay for our education, our houses, cars and life style. We use this education to make money to pay for our education, for our houses, cars and lifestyle.

We keep our noses to the grindstone; our eyes on the task of making money. We spend money to relax from the strain of making money.

Most of us yield and live a life locked in a cycle of debt and consumption.

How about you? Have you broken away from this destructive debt cycle?

These Are Your Options if You Can’t Pay Your Debt

These Are Your Options if You Can’t Pay Your Debt

pay your debt

I never thought that I’ll read through some of my old posts about how to pay off debt, and paying off debt, and think:

‘Gosh, I do come across as a sanctimonious halfwit. Where did all this missionary zeal come from?’

Okay, I know where it came from; the zeal came from my complete focus on paying off our debt. I spent three year, stalking the debt like a hungry tigress stalks a young gazelle.

Carried away by the excitement of the hunt, I seem to have forgotten that I’m not exactly what you’d call ‘a normal’ case.

Do you know what reminded me about this?

I published a guest article on Lazy Man and Money. Naturally, I did mention that by implementing the ERR strategy for money management we reduced our outgoings by about £2,000 per month (about $3,000).

Than someone left a comment that knocked what was left of my ‘high earning-high spending’ mentality out of me. This is what he said:

‘I don’t even net $3,000 a month. I already live quite frugally, watch all the pennies and dollars, know how to cook, can, shop, have a minimal carbon footprint. I splurge on what’s important to me (museum memberships, bicycles…) and have zero debt. When I read something like this, it annoys the hell out of me.’

Well, if I didn’t even make $3,000 per month and someone told me they shaved this off their monthly budget, it will annoy the hell out of me as well.

You see, sometimes we have to face some simple truths:

  • We get in debt because we don’t earn enough.
  • No money management system, irrespective of how good it is, will help if you just don’t earn enough.
  • If you hardly earn enough to pay for your necessities, it is likely you can’t pay off your debt.

At least, you won’t be able to do the way I’ve been preaching on The Money Principle.

I have always stood for demolishing debt. Today, I’ll venture in the territory of manipulating it.

Here are your three basic options if you live in the UK.

Bankruptcy or Sequestration (if you are in Scotland)

One thing I remember from the day after we realised in how much debt we really are, is that I only wanted it to go away. All fight was knocked out of me by the nasty surprise.

Making all your debt go away is possible: it is called bankruptcy or sequestration if you live in Scotland. Tempting, isn’t it?

All your unsecured debts written off in an instant and no further calls from creditors, no bailiffs knocking on your door and no sleepless nights painting un-imaginable horrors and deprivation.

Thing is, bankruptcy (sequestration) is a very serious matter in the UK and has serious consequences for your life and career.

To begin with, it is an appropriate way to deal with debt only when you really can’t pay it off under any other conditions.

Next, going bankrupt in the UK means that all your assets may (probably will) be included in the deal; your assets may be sold to cover some of the debts. There is good news: pensions that are in ‘approved pension schemes’ won’t be included in the estate (you’ll be able to keep those). You are still likely to lose everything else, though. And, I know people who have gone bankrupt and their ‘new start’ is so much like the old one that got them in the whole mess to begin with.

Last but not least, going bankrupt in the UK means that you cannot hold certain jobs (you can’t be charity trustee, insolvency practitioner, justice of the peace, part of local or national government etc.). Even more importantly, you cannot be a company director: this means that you cannot start a company either.

You see, bankruptcy may seem like an attractive option when you are still in the shock of discovery.

Bankruptcy is a very serious debt option and has consequences you may regret. In the UK, it has to be seen as a last resort and decided only after consultations with insolvency and debt relief practitioners.

IVA or Trust Deed

IVA stands for ‘individual voluntary arrangement’ and means that you’ll be paying off your debt but at a rate (amount) you can afford. IVAs usually last for six years and at the end any remaining debt will be written off.

If you can’t afford to pay your debt, IVA is probably a preferable option than bankruptcy. During an IVA, you’ll be paying at an agreed rate you can afford, your creditors can’t contact you and can’t be increasing your debt and you can keep your house (if you own one) provided you keep up with mortgage repayments.

Naturally, being one of the more extreme way to deal with debt, IVA has some problems. These are:

  • Doing IVA will completely ruin your credit score. You may think that this is not that important given the gravity of your situation but let me remind you that lately landlords have started using credit scores when deciding to lend their property. Just reminding you that credit scores don’t matter much only if you have somewhere to live and don’t need to borrow.
  • Should the IVA fail, your creditors can backdate interest or even insist on making you bankrupt.
  • You’ll need to live on a very strict budget till the end of the IVA. Now this, I don’t think is a bad thing if you use the experience to learn.
  • Now, this is about your house. Remember I said that when going down the IVA route you can keep your house? Well, there is a snag. You can keep it but six months before the end of the IVA you’ll be asked to re-mortgage to release equity. This needs to be watched carefully.

Trust deeds in Scotland are similar to IVA. These are schemes appropriate for people who are struggling with debt over £5,000. After it is made sure you qualify, and you choose to go this way, you’ll be contacted by your Insolvency Practitioner who can set up and administer your Trust Deed; he/she also acts as a trustee who will work out what you can pay and negotiate with your creditors to accept the terms.

When the majority of your creditors accept, your Trust Deed will become ‘protected’ and your creditors won’t be able to take any further action against you.

When going for Trust Deed remember that your Insolvency Practitioner is, for the length of the trust which is four years, your best friend. And while this all sounds very complex there are people, like the folk at Scotlands trust deed, who are there for you.

Please, be careful when you are deciding whether or not to go for IVA or Trust Deed. Always discuss your options with qualified professionals.

Debt Management Plan (DMP) or Debt Arrangement Scheme (DAS)

A debt management plan (DMP) allows you to pay off your debts at a more affordable rate by making reduced monthly payments.

The way this works is that a debt management company will help you work out a ‘survival’ budget: this meets your basic bills but there isn’t much left for anything else. Any money that is left over is consolidated in one monthly payment to the company and it distributes it to your creditors.

Please, before you commit to working with a company check for any charges and fees: many debt management companies charge. There are some charities around (StepChange.org is one of them) that will set up and administer a plan for you for free.

Here are several other things you should be prepared for:

  • You budget will be tight; very tight. Thinking about it, you’d have a powerful incentive to earn more (and tell your DMP).
  • Some of your creditors may still pester you. If this happens, get in touch with your DMP people and they’ll offer support and advice.
  • Your credit score will be affected and there is no ‘maybe’ about it. It will be affected and not in a good way.
  • Make sure you know whether your creditors have agreed to reduce or freeze interest. This will save you a lot of disappointment if they haven’t and you realise that you owe more than you think you do.
  • Reduced payments mean longer to repay the debt. There is no way out of this one: simple arithmetic. The good news is that you’ll be debt free one day; which is more than one could say when they are not paying their debt.

The Debt Arrangement Scheme in Scotland is very similar to the DMP. Under this, a debtor commits to a debt payment programme (DPP) which makes it possible to repay the debt based on disposable income.

You can’t apply for a DPP without having sought the advice and assistance of a money advisor (DAS administrator). A DAS can last any reasonable length of time depending on the amount of debt and the amount of disposable income.

When the DPP is submitted to the creditors all changes owed (including interest) are frozen provided the application is approved.

You will also be protected from any further action that creditors may wish to take against you.

Again, it is important to research this option carefully and to seek advice from knowledgeable professionals.


In this post I set out three options you can use when you can’t pay your debt. These vary slightly between England, Wales and NI, and Scotland though there are many similarities.

Please, choose carefully. Going bankrupt is not something one can decide lightly and from a position of relative ignorance: this can seriously mess up your life.

When considering an IVA or a Trust Deed it is important to read the small script and plan well ahead; failing that you may find yourself in a bit of a pickle at the end of it.

And if you decide to go for a DMP or a DAS, you’d better be prepared for a long slog.

Do you have experience with any of these? Please, do share.

photo credit: Connecticut State Route 15 via photopin (license)

10 Specific Actions to Take When You Have No Money At All

10 Specific Actions to Take When You Have No Money At All

have no money at all

Editor’s note: When I met Sara Williams in London several weeks back, I could hardly contain my excitement. After all, I was chatting to a woman who is a fellow UK personal finance blogger and could contribute to The Money Principle a no-nonsense blog post on the emergency actions you ought to take if you have no money at all. So I asked! Guest what? Sara agreed to contribute an article and this is it. I hope you never need to take these actions but if you do use this post as a check and reference list. I give you Sara Williams: a CAB volunteer who blogs about debt and its possible solutions on Debt Camel, her personal website.

What should you do when you have no money at all? Not a can’t-afford-to-go-out-on-Friday problem; I’m talking about having £6 in cash, two kids and no more money coming in for the next two weeks.

Perhaps there have been benefits delays or errors, perhaps your ex has left and emptied the joint account, perhaps you have started a new job but don’t get paid until the end of the month. Millions of people in Britain are only one pay cheque away from an emergency.

Some of the following options aren’t at all nice, but look at them all as none of the nice options may work for you.

#1. Make a list of all the food that you have

Check the cupboards, fridge and freezer. If you have UFOs (Unidentified Frozen Objects) then this is the time to defrost them and enjoy! Then make a list of the meals you can make with them, even if these are boring or rather odd. Of course this only works for a week or two, but we are talking about getting through a crisis here.

#2. Check the back of the sofa

Look in all the places where some notes or change may be lurking: any old purses, pockets of coats you aren’t using at the moment, a spare pound in the car for supermarket trolleys etc. Do you have any foreign currency or an odd traveler’s cheque left over from a holiday?

#3. Visit a food bank

To get food from a Food Bank you need to get a voucher first. This could be from a wide variety of support agencies such as your local Citizen’s Advice Bureau, your doctor, health visitor, social worker, Job Centre or even the police. If you are meeting any of these in the next few days, ask about a referral to a food bank. I recommend going to Citizen’s Advice, because there you may get help with your underlying money problem as well as a food bank voucher.

I visited my local Food Bank a few months ago and wrote this Behind the Scenes article about it. That tells you what sort of food you are likely to get and may reassure you: food banks are friendly places and you will be made welcome, even if they are based in a church hall and you have no, or a different, religion.

#4. Short Term Benefit Advance

If you have applied for a means-tested benefit such as JSA, ESA, Income Support, Maternity Allowance or Pension credit and it hasn’t yet been paid, you should ask at the Job Centre for a Short Term Benefit Advance. There is a complete list of the benefits covered here. The decision time for STBAs is quick – you should hear within 3 working days.

This is a loan that will be deducted when your benefits start to be paid. Because it isn’t a benefit in its own right, there is no form to complete (!) and no publicity about this, so don’t be surprised if you have never heard of it! If the Job Centre refuses to allow you to apply, go to your local CAB and ask for their help.

#5. Local Welfare Assistance Scheme

These have replaced what used to be called Crisis Loans. They are meant to help with essentials for people leaving prison or care or fleeing domestic violence; provide goods to help people with disabilities with independent living; enable families to replace broken white goods and essential furniture; and enable vulnerable individuals to afford food and heating.

What you can get will depend on what area you are in – find your local scheme here.

#6. Budgeting loans

If you have been on JSA, ESA or Income Support for more than 6 months, you may be able to get a budgeting loan. These are interest-free loans that are repaid by deductions from your benefits. They would, say, let you replace a fridge or a broken washing machine. If you are eligible, this will work out much cheaper than a commercial loan or by going to “rent to buy” rip-off shops such as Brighthouse.

#7. Stop non priority debt repayments

Credit cards, unsecured bank loans, payday loans, doorstep lenders – these are all “non priority” debts. You won’t lose your house or go to prison if you don’t pay them, so if it’s a choice between repaying these debts and food or heating, then the debts just aren’t important.

If you have large debts for your income, then debts may indirectly be causing the current crisis by preventing you putting any money aside for an emergency or leaving you so short you can’t manage things like children’s uniforms or the car insurance. Consider talking to a good debt charity such as National Debtline or StepChange about what your options might be. This may not solve the current crisis but it may prevent the next one!

#8. Stop paying bills

This is getting into seriously scary territory. It’s best to talk to a debt advisor before you decide you have to do this. Not paying utility bills, rent, mortgage, council tax is storing up major problems for the future. And never, ever drive an uninsured car.

If you are 100% certain you can pay the bill in a week or so and you aren’t already in arrears, then you may want to consider this. But be very, very honest with yourself – if you have to pay this bill late, are you going to be in just as much difficulty next month? And make sure you really are looking at an emergency – your child’s birthday may feel urgent, but getting council tax arrears is not the solution.

#9. Sell stuff?

Unwanted clothes, old DVDs, toys the children have grown out of, old mobiles – this is a good thing to think about, but may not get you money fast. It could be another way of preventing the next emergency, not solving this one.

#10. Credit Union loan

Even if your credit cards and overdrafts are at their limit, you could try talking to your local credit union. They tend to take a less rigid “Computer says No” approach than commercial lenders, see this case study. That doesn’t mean you will get a loan if they feel sorry for you, but they will look at your whole situation and whether you will be able to repay it.

You may be wondering about other borrowing – isn’t this what payday loans were invented for? No, actually they were invented to make a lot of money from desperate people. Payday loans, Amigo (guarantor) loans, logbook loans – all these sorts of “bad credit” lending are extremely expensive and also hard to extricate yourself from. And never consider borrowing to repay an existing debt – that is getting yourself trapped in a bad downward spiral.

Oh, and one last thing. Your employer may be able to help – it may be possible to have a conversation in confidence with your HR department? Are you a member of a church? Swallow your pride and ask a relative? If you or your partner are ex-forces, contact SSAFA.

Have you been in a crisis like this? What did you do?

Debt is Temporary, Putting Up with It is Forever

Debt is Temporary, Putting Up with It is Forever


Today’s post is my contribution to the #DebtIsNotForever movement started by Jackie Beck over at The Debt Myth. You can also take part in it by taking a picture of your top reasons to want to get out of debt and posting it to her Facebook page. Check out this link for more details – Jackie is also hosting a giveaway for all that participate in the movement, and publicly take a stand against debt. Stand up with the rest of the people taking part and be counted!

Do you know what my first thought was when John told me how much debt we had?

‘Oh, f*ck! This is a curse that’ll stay with me for the rest of my life.’

Yes. When you first find out that you are in debt it feels like this unsurmountable obstacle that will shadow the rest of your life.

I discovered that debt doesn’t have to be forever. After you commit to pay off debt, it doesn’t need to take too long either.

To pay your debt off, and to pay it off in record time, you need to make some mental adjustments.

How do I know? When we were paying off our debt, I used each and every one of these; we did the more practical stuff as well. Still, I don’t believe we could have paid off £100,000 ($157,000) worth of debt (and interest) in three years without changing the way we think.

Here are the five key mental shifts I believe are necessary to make your debt a temporary and short occurrence in the timeline of your life.

#1. Develop the focus of a hunter

You may have heard a lot of talk about ‘gazelle awareness’ when paying off debt.

To this, I cry BS. Developing the awareness of a gazelle will only help you continue to see yourself as a victim of circumstance.

Gazelles are prey. Gazelles are hunted; sometimes they can’t run on time or fast enough and they get eaten.

Do you still want to approach your debt as a ‘gazelle’?

When I was paying off debt, I decided that I’ll be a tiger. I’ll develop all the awareness of a gazelle and the hunting instincts of the tiger.

This way, I was never again a victim. Things stopped happening to me; I happened to things.

Try it. Become a tiger and see your financial situation – and most other areas of your life – improve beyond recognition.

#2. Move from emotion to action

Fear, regret and anger.

These were only three of the emotions I felt when I realised in how much debt we were.

Worst of all, I felt paralysed: I could not think; I couldn’t make decision and I certainly couldn’t sleep.

In short, for couple of weeks, while being a whirlpool of strong negative emotions, I was no good to anyone. Most of all I was absolutely no good to myself and my family.

This changed when I managed to switch off all these negative emotions (or at least tone them down a lot) and started acting.

Stop feeling sorry for yourself. Get thinking, planning and acting and your debt won’t be forever.

#3. Turn your predicament into a problem

Do you know what the difference is between a predicament and a problem?

It’s easy. Problems have solutions.

To turn your debt from a predicament into a problem you’ll have to start thinking in a different way and ask completely different questions.

‘Life has dealt me a horrid blow.’

‘That’s it; my life is over.’

‘I’ll never crawl out from under this debt.’

These thoughts go through the heads of most people facing debt. If you stay with them, your debt is a predicament and you are unlikely to ever be able to deal with it.

You’ll have to start finding solution and these are often answers to some simple questions.

‘How do I make this £10 last for a week’s food?’

‘How do I make sure that all my money above what is needed for necessities goes against the debt?’

‘What can I do to have fun without paying a penny?’

‘How can I make an extra £100 per month? Can I make an extra £1,000?’

Yep. Try moving from the first set of statements to working out the answers to the set of questions. Learn to do this every minute of every day.

You can help train yourself with a simple tool: you just need to find a strong elastic band and wear it around your wrist. Every time your thoughts are ones of predicament, pull the elastic and release it. Than start thinking of an answer to a question.

It hurts. This is how you train yourself. Keep the band on till you don’t have ‘predicament’ thoughts any longer.

#4. Concern yourself with today, not with ‘forever’

Looking into the distance is great. Problem is that it makes it likely for you to miss a pothole just in front of you and break your neck.

Keeping focused only on the future can have a similar effect.

To deal with your debt, you’ll have to learn to focus on today; and how what you do today brings you closer to what you want from your distant future.

Celebrate every payment; rejoice in every small decline of your debt bill.

Do this and celebrating being debt free will come before you even know it.

#5. Think about a specific day, not about ‘someday’

I always knew that we’ll take three years to pay off our debt. I had a specific time frame in mind.

I played with the numbers, I dreamt and I sent wishes to a benevolent Universe.

I never allowed myself to think ‘we’ll be debt free someday’.

It is another question that people’s reaction to my timeline was somewhat disturbing.

John, for instance, looked at me with the eyes of an indulgent husband. His expression said: ‘I love you and I’ll pretend this could happen.’

Our financial advisor thought it is a joke. He laughed and made a joke about winning the lottery. Everybody knows that I never play the blasted lottery.

So, I stopped mentioning my time frame. I certainly never said anything on this blog.

It felt so good when I told everyone that we did it – in three years and one week.

You see, if you think about ‘someday’ rather than a specific day you lack focus and determination.


I know it is hard. I know it feel that debt is forever.

I also know that you can do that; you can pay it off and in record time.

After all, I did it and I really sucked at this game of wealth.

People can learn.

People can change.

People can act.

So how about it? Are you ready to learn, change and act?