Tackle your debt headon and reap the rewards
Don’t let your liabilities take control of your life. Draw up a plan to turn your finances around – and then draw up another one to make sure you don’t fall into the same old traps.
Debt is one of the oldest problems people have faced throughout the history of the world. The amount of that debt varies dramatically from person to person. Some people manage it well while for others debt becomes a major problem.
If debt has become a problem for you then there are two major tasks ahead of you. The first is to pay it off and the second is to change the behaviour that caused it.
To achieve these objectives you need to know exactly what your current state of affairs is. Start with your liabilities. Write the amount you owe for each of your debts and total them so you know the value of what you owe. Record the interest rate for each of your debts. You have now gathered the facts so it is time to take action.
STEP 1: Negotiate better deals Reduce your fees and charges.
You have probably heard the saying, “If you don’t ask, you don’t receive!” You are now going to find out how true this really is when it comes to money. The goal is to reduce the interest rate you are paying on your credit facilities.
Phone your lending institutions, or visit them in person, and tell them you are looking for a better deal and ask what they can offer. If you are not happy with their response, simply say you are “thinking of paying off and closing your loan or credit card account(s)”. You would like to know how to go about doing that.
The staff member you speak to has been trained to respond in a way to encourage you to keep your account open, for example by asking you how you’d cover any unexpected expenses. Reply that you don’t think that will be an issue and you intend having money put aside in savings for emergencies anyway.
They will most likely then start offering you a better deal. Maybe they could lower or drop the annual fees? Would you keep the account open if the interest rate was lower?
Play dumb and allow them to offer as much as possible. If you do not get a favourable response, simply hang up the phone and dial again or visit another branch office and try again. You will get a different operator/staff member and perhaps a better offer.
If this does not work, you should try a more direct approach. Explain that you are experiencing financial difficulty and were wondering if they can offer you some respite in the form of a better deal. Of course, you could try this strategy straight off but then again you might prefer to keep holding this card close to your chest for when you need it more.
Refinance options. If you don’t get a better deal you might explore the option of borrowing money to consolidate your high-interest-rate debts into one lower interest rate loan. If this is possible it will give you immediate relief.
Be warned, though, that if you do manage to consolidate some debts into a lower payment loan, you must not then back away from your commitment to get out of debt.
STEP 2: One step backwards, two steps forward
“Cash up” your non-essential possessions. Identify things you may have lying around that you could sell, and think about how much money you could make to use towards reducing debt. Selling “stuff” for less than you paid for it may seem like an unacceptable option but you may be very surprised to find it could save you a lot of money.
For example, let’s say you have a $5000 credit card debt at 21% being paid off at $31.10 a week over five years. You sell a $1000 watch for $500 and use that towards your debt. Paying $500 off the debt saves $837 in interest and 43 weeks in repayments. Effectively that is worth $1337 from the garage sale (the $500 cash and the $837 saving in interest). You get back $1337 from selling an item that cost you $1000. That’s a $337 bonus!
The cash you bring in from the sale of this stuff should be paid off your highest-interest-rate debts where possible, although if some items you sold have loans against them then you may have to repay those specific loans.
STEP 3: “Snowball” the repayment of your debts
Debt snowballing is a strategy you can use to dramatically speed up the process of paying off your debts. You will channel all of your surplus cash into repaying your debts.
There are basically two trains of thought: 1. Pour any surplus cash and cash flow into paying off your smallest debt first and then, when that debt is paid off, add (or snowball) that repayment onto the next smallest debt until it is also paid off. Continue this process, always adding the repayments from the paid-off debts to the next smallest debt until all debts are cleared. 2. Pour any surplus cash flow into paying off your highest interest rate debt first and when you’ve paid off that debt add (snowball) that repayment onto the next highest interest rate debt until it is paid off. Continue this process, always adding the repayments from the paid-off loans to the next highest interest rate loans until your debt repayment is complete.
The second option is definitely the smarter one, but there are people who will try to tell you the first is better because of the emotional and psychological benefits that come from paying that first smaller debt off faster. Do not listen to them! If your water tank had two holes in it, and one was gushing out and the other was just trickling, which one would you plug if you had to choose one? Obviously not the trickle! You could end up paying thousands of extra dollars in interest by focusing any additional payments on the smaller debt rather than the highest interest rate debt.
Regardless of which strategy you choose, the smallest debt will most likely be paid off first anyway and you will get to feel good about that when it happens. If it takes a few extra months to get it paid off, the savings in interest will be well worth that small sacrifice!
STEP 4: Protect yourself from yourself
If you have done everything suggested you should have begun paying off your debts. To avoid backsliding, there are a number of safeguards you should take. •
Use cash. There is no better way to stop spending money you don’t have than to choose to only spend cash. At the start of each week you place a predetermined amount of cash in your purse or wallet and that is all you can spend. When it is gone, it is gone. •
Use a debit card. It allows you to make credit-style purchases but uses your own savings. •
If you have automatic periodical payments being charged to your credit cards – for example, insurance premiums – change this so you pay by an automated electronic funds transfer from your own account. •
Cancel your credit cards or ask your lender to put a freeze or limit on purchases. Also close any store accounts. •
Ask your institution to reduce your credit limit. • If you have a line of credit or a redraw facility attached to a loan or mortgage and you have proven yourself to be a bad risk with money in the past, you need to place yourself out of harm’s way. Get rid of these facilities. •
Find someone to be a mentor and/or coach to hold you accountable when you weaken in your resolve to stick to the plan. •
Begin to associate with successful people and see what happens. Join an investors’ club or a service club where you will meet
new successful people.
David Wright is founder of the Spending Planners Institute.