Part four in the ‘Fix Your Money Problems Forever' series.
If you had to name one thing that's kept you awake at nights, what would it be? I'm guessing you'd say ‘debts'. Or ‘bills'. Okay, some of you might say, ‘Kate Beckinsale' or ‘Eva Mendes'.
I've done this myself (not the Kate Beckinsale thing); laying there, cycling through my laundry list of obligations over and over again. It feels like paralysis. Sometimes it even feels like a heart attack. I went the whole hog one night and had one of those, too.
Centuries ago, men would either fight a threat head-on or they would run from it – fight or flight. But you can't do either of those with debt. That's why the problem is so debilitating.
There are a few ways you can tackle this problem and I'll lay some of them out for you in a minute but before you scroll down the page, there are two things you should do.
First, how exactly did you get here? Setting aside specific circumstances that are unique to you or beyond your control, there are probably some fundamental issues that drove your behaviour in the first place. I've covered these in the first part of this series, “Know why you are spending.” If you haven't read it, do that first.
Second, you must commit to never returning. It's terrible for your health; it poisons your relationships and it sucks the energy out of everything you do. The ripple effect is right up there with alcoholism and drug addiction. So promise yourself that once you're done with this, you're done for good.
Let the Killing Begin
If you ever daydream about winning the lottery – I bet the strongest feelings you have relate to the notion of living debt free. To live unencumbered; to be the master of your destiny is, for many of us, freedom on a stick.
The good news is, you need only begin this journey of debt destruction and the fog will clear and the burden will lighten. But this journey isn't for pussies, excuse-makers or status-hungry Jones-pleasers. It's a killing spree. If you're going to vanquish your debts, you'll have to be tough.
Now a lot of experts will tell you to start with the debts that incur the highest interest rate and technically, that's true. However, what you need right now is an early victory or two, so I recommend you go after the debt with the smallest outstanding balance first.
A key element of this process is the immutable principle – delayed gratification. Everything else you want right now needs to go on hold. Pay TV, dining out, holidays, booze, new clothes; in fact, anything you don't need – turf it! The pleasure you gain from these things won't outweigh the pain of staying in debt. If you have to keep one of them, go cheap. Get your red wine online from one of the big discounters. Pay for your movies or TV shows as you go. You get the idea.
Pour every available dollar into this first debt victim and do it more often than the standard cycle. If you're paid weekly, pay it down weekly. You want to reduce the amount upon which interest is calculated as fast as possible. This rule applies to every debt.
The thrill you get from this rapid style of progress will actually make the journey enjoyable. Do this for a while and you'll achieve something few others do; you'll know how to swim against the current.
Remember that most people live by circumstance, not conviction. By deciding how to behave; by deliberately eschewing bad debt and the burden it creates, you'll immediately become part of a wonderful minority who live with purpose.
Also, a great thing about this process is it resets your pleasure threshold (what you ‘need' in order to feel pleasure) and recalibrates your pain/reward ratio – the amount of debt you're prepared to carry to deliver a ‘reward'.
Okay, so once you vanquished your first debt, you now have these payments available to apply to the next one. Congratulations, you're on your way!
If you manage to knock over the first debt in less than six months, follow the same principle again and go for the next smallest debt. Momentum is everything here. You can go mathematical on the next one.
After killing your second debt, you'll feel a whole lot better than you did before heading down this path. Armed with the additional cash you've liberated from your first two debts, you're now in a position to swing for the fences. It's time to tackle your remaining debts in descending order, from the highest interest rate to the lowest. Often this will be a credit card, store card or personal loan. Apply all your freed-up payments to each remaining debt in turn, until they're all dead.
Emboldened by your progress and hopefully, with a new perspective on wasteful consumerist spending, you'll plough through the remaining debts with vigour!
What if I can't Pay my Debts?
If your debts are so out of control you simply cannot pay them; there are some options. Local laws and regulations will determine the impact but bankruptcy and debt negotiation are choices.
Delinquent unsecured debts like credit and store cards are often sold to collection agencies for a fraction of their face value. If one of your debts progresses to this stage, you'll probably have to accept a black mark (default) against your credit rating. It will have a demonstrable impact on your borrowing capacity – even your eligibility for a phone account – for at least a few years.
The upshot is, you can now negotiate the settlement of your debt for a substantially lower amount. If you can secure the funds from another source (equity in your home, the sale of assets, a family member) and settle the debt quickly, you might even be able to ask the creditor to write to the credit reporting agency requesting the removal of your default listing. The reporting agency in Australia is called VEDA – http://www.veda.com.au/.
Banks too can be surprisingly helpful. Most have structured application procedures and if your situation is genuine, they might dramatically reduce the debt owed to them. You might seek a reduced settlement value (to be paid in full), a protracted interest-free period or an extended repayment schedule.
If you have a home loan in arrears, you might be able to switch to interest-only payments for a few years and capitalise the outstanding principal payments. In all likelihood, the growth in value will take care of most (if not all) of the principal component you're not paying.
If you do decide to explore the bankruptcy route, just know that it isn't as simple as waving the white flag and hitting the reset button. Part of the procedure may still include garnisheeing your salary for a portion of your outstanding debts. It may also impose limitations on the assets you can hold; even the value of the car you drive. Many see bankruptcy as an easy way out. Phoenixing (the intentional transfer of assets from an indebted company to a new company to avoid paying creditors, tax or employee entitlements) was popular with small businesses until the Australian Government decided to focus on this activity. Illegal phoenixing is now a jailable offence.
Negotiating Tax Debt
I can't speak to the opportunities available in other countries but I know from experience that the Australian Taxation Office is extremely accommodating when it comes to outstanding debts – with two provisos:
- You must open a dialogue with them as soon as you know there's a problem.
- Your debt stress must be genuine.
When I got divorced, my finances took a real beating. Some of it manifested in a tax debt of around $15,000. I wrote to the ATO and explained my situation; making a heartfelt plea for debt reduction. To my surprise, they reduced it by about half. Some conditions were attached but I was more than willing to comply and before too long, my debt was extinguished.
The common theme throughout this is, you have options. None of them are quite as scary as you think. It is possible to get out from under it all and see daylight again.
If you want to move forward and blaze a trail to a less stressful life, start killing your debts today. It's time you breathed clear air again.
“Man sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future; he lives as if he is never going to die, and then dies having never really lived.”
The Dalai Lama
This post is part four of a series called ‘Fix Your Money Problems Forever'. Check out the others in this series.
1. Know WHY you’re Spending
2. Don’t do a Budget
3.Good Debt, Bad Debt and Ugly Debt
4. Trapped by debt? Go on a killing spree!
5. Pleasure-seeking may cost you your freedom.
6. Eliminate Crap from your Life
7. To Save Money, buy Premium
8. Create a Business From What you Know
9. Invest Well and Sleep at Night!
Thanks for stopping by and I hope we get to hang out more in the future. And in the meantime, please feel free to share your own experiences. You can also email me directly at firstname.lastname@example.org. I respond to all emails.
Disclaimer: I'm not a psychologist and I'm not a financial advisor's elbow. This material doesn't constitute financial advice but it is a collection of my personal opinions, based on my own experiences.