Yesterday I read the story of a guy who took loads of pills and booze trying to kill himself because of debt.
He survived and was left with sore tum, hurting head and the embarrassment of failure. Embarrassment for which his parents were very, very grateful.
You know, it was the usual story.
Guy goes to university and builds up debt in student loans.
These are just about enough to cover tuition and accommodation; still, a guy has to eat. The guy is young and goes out for the occasional drink with friends.
He invites a girl out and buys her a drink.
Next, the guy has reached the limit of his overdraft. He takes his credit card out.
And so on and so forth. Until the guy has thousands of debt.
It doesn’t have to be a guy; it can be a girl.
It doesn’t have to be someone young; it can be someone who is just about to retire.
It doesn’t have to be tens of thousands; it can be only couple of thousands.
Anyone can find themselves in debt. It can hit you out of the blue (if your business goes bust, for instance) or sneak up on you (with every little purchase that you shouldn’t be doing).
As I’ve said before, the important thing is not whether you are in debt; the important thing is what you do next.
I know it is very tempting to call it a day; I considered this one myself. But then I thought about John, about our sons, about my sister and about my Dad who was still around.
And do you know what I ended up thinking?
I thought that enough is enough and decided that I’ll pay the debt off. I also decided that I’ll never, ever be in this situation again.
It doesn’t matter whether you are young or mature, whether you are skilled or not, whether your debt is high or not: every debt problem has a solution.
There are different solutions. You can go bankrupt; you can do an IVA (Individual Voluntary Arrangement) or you can buckle up and pay your debt off. I’m very old-fashioned and believe we should pay our debt off.
This doesn’t mean that you should go it alone as we did. If you have any doubts, or need help, you can approach a number of debt advice services and/or arrange a Debt Management Plan (DMP).
More importantly, you have to learn about – and remember – these six rules of debt busting.
#1: Make your budget really tight
Look at your income and expenditure; if you have looked recently, look again – this time properly.
Make sure you really know what you spend every day, every week every month down to the penny. A friend of mine has a line in her budget for the difference between what she has recorded as spends and how much money has left her account – she calls it ‘GKW’ (God knows what).
If your GKW budget line is large it is time for mindful spending again.
This doesn’t mean that there shouldn’t be space for life – it only means that your GKW line should be no more than several pence.
#2: Your budget is the story of your life
Teach yourself to look at you budget as the story of your life.
Most people get this wrong – they look at their budget and see numbers so they start adjusting them. Many organisations and businesses do the same: budgeting is a number gymnastics and then they wonder why reality is so different from their spreadsheet.
Would you rather go to a concert or have a bottle of really good wine? You may decide to do either but this has to be a decision; not a bodged arithmetic exercise.
#3: Stabilise your budget by spending less
If your budget is as tight as it could be and you are still getting in debt instead of getting out of debt your cash flow is negative.
In other words you do spend more that you earn. Your first task is to ‘stabilise’ this and the fastest way to do it is to reduce spending.
Forget about the ‘latte factor’ – depriving yourself from the small stuff that can give you so much pleasure will only make you feel resentful.
To decide what needs to be cut and how look at the different kinds of expenditure on your list.
Do you pay more than 60% of your income on ‘constant’ expenses like mortgage, loans repayments and taxes? If you do, you may need to make some hard choices – you may have more house than you can afford!
Immediate gains in saving though can be also made by looking at your changeable expenditure – this includes all kinds of insurance and contracts that can be negotiated. This is a budgeting tool you can use to do this.
This step is about stabilising your budget so that you know that every month there is enough money in your account to cover all your financial obligations.
#4: Increase your income
Only after that look at your income – but look carefully! How can you sustainably increase this?
Selling stuff on e-bay and doing garage sales helps temporarily but is unpredictable and unsustainable.
To kick the debt’s ass you need to develop reliable, regular and sustainable sources of income.
And please do note the plural – one is a very unstable number.
It is like trying to make a tooth pick stand vertical – impossible. Now try the same with three toothpicks; easier, huh? It is the same with income – it is better to make $1,000 from three different sources than from one source.
#5: Become an ‘ideas generator’
Start generating ideas about how you are going to earn more.
It is very tempting to come up and stay with one ‘big’ thing; something that you have come to regard as your ‘special gift’ or something that people tell you is easy. Don’t do that!
It is likely that your ‘special gift’ is fairly thin; it may be wise to go with something you value less as a gift but is a niche.
Yes, I would like to make money writing best-selling novels. But I know that though I am not that bad as a writer, there are so many who are so much better and the competition is cut-throat.
I make a bit from my writing but I certainly can’t live on it. So I keep looking. And no, I don’t think I can write porn, lucrative as this may be.
Dreaming is easy; realising ideas is never so. This needs persistence, research, knowledge, learning and so many other conditions.
Did you know that roughly two of any ten ideas you may have will succeed? Well, now you do!
#6: Throw everything on your debt
Earning more and spending less is great.
For it to result in a kick butt debt busting you need to make sure that the whole difference between what you earn and what you spend goes against the debt.
When we did this one our smallest payment was slightly over £4; our largest was over £8,000.
Do that, keep focused and watch your debt crumble.
Having too much debt doesn’t have to be the end. It is a problem and every problem has at least one solution.