Now I am really starting to enjoy this – did I tell you I don’t do feelings very well? Some may argue that my numbers are not something to be proud of either but they are certainly better than feelings (I am after all a self confessed pre-clinical Aspie). Let’s get serious about this ‘debt butt kicking’!
In my previous article, I focused on feelings; the ones that we have when there is no certainty about whether we have debt or not and how much this may be. These feelings are important because they are early warning signals and may be a sign that you have too much debt. This is why, were you to identify with the feeling(s) the smart move would be to get your numbers straight.
Here, I’ll focus only on the numbers regarding your debt – my experience is, that debt busting works a bit like eating an elephant, in small bits that don’t intimidate. I also found that it is wise to leave several days between steps (elephant portions) so that our brains and emotions can cope with the pressure (what the heck, in my case it was the shock of my life).
What to do?
If you are to get anywhere with debt busting you have to do the following:
- Open all boring looking letters that you have received and piled in a corner (or behind a cupboard): you may find that some of these are in beautiful but threatening red inside.
- Check your monthly financial statements for the last three months; pay attention to the outgoings and link them to bills (particularly rapidly increasing ones), credit cards and loans.
- Sort out, and look through, all statements on credit cards and loans; if you use internet banking go online and order your statements.
- Check your credit rating; and/or
- Find a friend or hire a professional with associates in accounting that can help balance your pocketbook.
Trust me; not knowing is the real killer and the thing that makes having debt a ‘predicament’. Do it! Do it even before you finish reading this article!
Then again, you may wish to know what you are looking for :).
Look for the following information:
How much debt you have
First and foremost you will have to find out whether and how much debt you have. This may sound as a ridiculously simple thing; so much so that you may wonder why I am including it here (after all, I am not famed for knowingly patronising my readers). I am writing about this because it is not that simple!
Would it surprise you to hear that, although I had the vague feeling that we are in financial trouble, I had absolutely no idea whether and how much debt we had? Neither did John; it had all taken a life of its own and, to a degree, this was the issue. Even when John and I started sorting things out we first found about £60,000 (about $96,000) and gradually went up to a mind boggling £100,000 ($160,000). Did I mention that I had the shock of my life? Yeah, it happened at the lower number; every time I learned about a new debt I went completely mad with rage…and this went on for about three months!
So trust me on this one and save yourself and your partners a lot of grief: work out how much debt you have properly and meticulously.
Before you go any further exercise your primary school maths and add the numbers. Surprised? Most people are.
Having a panic attack? Just take deep breaths and repeat after me:
‘This is a problem not a predicament!’
And the main thing: just let it out; if you feel like crying, do so; if you feel like kicking some furniture around – please do! Just get done with the emotion and return to reason!
Who are your creditors?
Assuming that you have ‘the number’ and you know how much you owe, you need to figure out who your creditors are.
Working this out will allow you to take various decisions regarding how urgent it is to pay the debt back; whether you need to consider consolidation etc. For instance, owing money to payday loan company is obviously a very high priority in the order of repayment; or if you find that you have over five creditors you may consider simplifying and consolidating (particularly if you could do this at lower interest).
And please, if you owe money to family and relatives don’t automatically see it as a ‘low priority’. From where I stand, ignoring debt to parents, for instance, is disrespectful and very hurtful.
What is the rate of interest?
Yep, you need to work this out for each and every debt you identified already. In some cases, credit cards for instance, it is easy; in other cases you may need to do a bit more digging around. Do it! Hopefully, realising how much money you pay the bank for the misfortune to have debt will be sobering and motivating. In my case, realising that our household was paying the salary of a junior bank employee gave me such impetus to pay the debt back – and as fast as I can – that I would count this knowledge as invaluable and very motivating.
What are you paying?
Often when people think that they are paying their debts they mean that they are keeping up with the minimum payments on credit cards. This covers very little more than the interest and keeping this up is like accepting a life sentence. Although the situation is usually not as drastic with loans (except payday loans, perhaps) you will have to realise that for considerable length of time your monthly payment is mainly interest and very little principal.
Would you believe that in 2010, after paying close to £1,000 ($1,600) every month for twelve months, we ended the year with a loan that was only £2,500 ($4,000) lower than at the beginning of the year? This is over £9,500 (over $15,000) interest! St this rate it would have taken us ten years to pay the loan off and…well, really a lot of interest!
What proportion of your income goes on debt re-payment?
This one is very important but it is not so much about how much you are paying off than how much do you have left to live on. Even when people are in debt they should remember that there is life to be lived, and experiences to be had.
You are to pay your debt off; not go on a date with the Spanish Inquisition!
How long would it take you to pay it all off?
This is easy: you know how much debt you have, how much you are paying off and what is the interest. Simple calculation, really. And there are some really good debt repayment calculators around – just search for one and use it if you can’t do it manually.
Sometimes, this one can be hard to stomach but if your calculation says something like: ‘It will take you 150 years to pay your debt off’ (with fewer words perhaps) do not despair. This only means that you will have to change some things.
…but not least, you will have to find a way to keep this information so that you find it easy to use and helpful when you need to take decisions and you can keep record of how you are getting on. This, however, is entirely up to you; I used a simple spreadsheet I designed myself (ok, John did some work on it as well).
How is it going so far?