How to Get Out of Debt

Debt is a major problem for many people today.  We have been brought up in the “Want-It-Now” society and we are offered credit cards by every bank and major store.  Some stores offer interest free credit which is fine except that, when the time comes to pay it off, you don’t have the money, and they offer to convert it to a credit card.  Then, when you can’t pay, you are sometimes charged interest for the whole of the “Interest free” time.  This can double the original cost!

Then we use one credit card to pay off another, borrow from the bank to pay credit cards, and borrow from a nice friendly loan shop in the High Street – just until pay-day.  They charge 10% per month but because it is only for a few weeks that does not seem too bad.  But we can’t pay that because the rent is due and we need food so we get a default charge.  After a few weeks we owe double the amount we borrowed.

STOP!

You can get out of this debt cycle with a few simple steps:

1. Work out where you are now
2. Look at your options
3. Get support
4. Plan
5. Monitor to make sure you are following your plan.

In this series of articles I will give you some help and advice about each of these steps.

First, however, you should imagine what it would be like to be debt free.  No worries about how to pay for the food or rent.  No phone calls at dinner time from credit card companies.  No mortgage payments.  Money in your pocket and in the bank.  Wedding invitations are a delight to receive, not an agony.  Think about this for a bit.  Think how it would feel.

How did that feel? Wouldn’t it be great?  I am sure it is well worth a bit of an effort now and for the next few months!

Dr Phil says “If you keep doing the same thing you will get the same results.”  He is right!  To change your circumstances you need to start doing something different.

But, before you can change anything you need to be certain where you are now. 

Establish the Baseline

The baseline is made up of two papers.  One is a Statement of Position or Balance Sheet.  This shows what you have now (Assets) and what you owe (Liabilities).  You prepare it to show the position at a particular date – like Today!!

Record your Assets

The assets you include are:

• Your house if you own it (at what it is worth now)
• Any investments
• Cars
• Valuable jewellery
• Antiques and valuable furniture
• Money in the bank
• Superannuation funds if they are available to draw.

Do not include the general everyday furniture and other miscellaneous stuff which it would be difficult to sell for a reasonable amount.  Do not include improvements to the house separately – they should be reflected in your estimate of what the house is worth.

This part might look like

Assets

Record your Liabilities

The liabilities you include are anything you owe anybody except household bills which are not yet due.  Include the amount owing on your house mortgage any amount to banks or on credit cards.  Include any tax liabilities.  Also include any amounts, you owe on family loans even if they interest-free and have no definite arrangements for repayment.  Don't forget any store loans, even if they are interest-free and have no repayments until sometime in the future

Against each liability put down the interest rate and the period over which is payable.  Also make a note of any overdue payments.

The liabilities section might look like.

This shows you have a net worth of 206,300 less 161,143 which gives 45,157.  In addition you may have superannuation which will mature at some time in the future.  If you can find out the current value of your superannuation fund put that down as well.

Review the position

Have a careful think about the numbers.  Are they right?  This is no time to tell yourself lies and half-truths.  If you do this will only make it more difficult for you to solve your problems.  If you can think of anything you have missed out, put it in.  Have you overestimated the amount that your house would sell for?  If so correct it.

Good!  You should now have a clear picture of your current position.  And now we will have a look at your income and expenditure.

Your Income

Write down all your sources of income, showing the gross (before tax) amounts and be after tax amounts you actually receive.  All these amounts should be shown from the same period.  You could show them for a year, and month, or a week.  Whichever period you choose, you may well have to adjust some of the amounts to find out how much relates to the period.  For example, if you decide, unless you're going to use a period of a month, and you are paid weekly, you should multiply the weekly amount by 4 1/3.

The income budget might look like this:

And Now Your Expenses

Record your expenses in the same way.  There are a heap of things to include in preparing this.  Again you need to arrive at the amount for your chosen period (Week, Year, or Month).

Some of the things you might find quite difficult to estimate to start with, particularly food and other general shopping.  If you regularly take a fixed sum out of the bank and use this for general shopping.  You could use that amount, however, it will be much better to try to get some breakdown of this.

It is probably worth the exercise of trying to make a detailed note each day of what you have spent and what you spend it on for a short period, say a week, and use this as the basis, but you will need, also, to allow for items which occur irregularly such as haircuts, medicines, etc.

Particular items to include:

Interest identified separately for each account.  Do not include the capital repayment of the mortgage at this stage.

• Housing costs such as rates, house maintenance, etc
• Insurances
• Car expenses including motoring Association.
• Fares and other travel costs.
• Food
• Clothing
• Pet expenses.
• Medical expenses, including medicines, doctors, and health insurance payments.
• Electricity
• Water
• Communication, telephone and Internet
• Birthday and Christmas presents.
• Entertaining and theatre etc
• Cigarettes, Alcohol, Gambling (including Lotto and Poker machines)
• Lessons, courses etc
• School fees and books and uniforms

There are many other items that will apply in a particular case.  Just think about what you spend money on, have a look at your bank statements, and your credit card bills and try to make the list as complete as possible. Again, and I must stress this, do not lie to yourself.  It is important to get all your expenses recorded.  If you miss any, they will make it much more difficult to stick to the plan you are going to make

You now need to add the amount of capital repayment you are required to make on your mortgage or house loan.  This is the total amount payable each month less the interest element which you have already recorded.

Review your income and expenditure

The last stage in this part of the exercise is to compare the total income, with the total expenditure.  If the income exceeds the expenditure.  Then your situation is going to be a fairly easy to manage.  If the expenditure is greater than the income, then, the first stage will be to consider reducing the expenditure or increasing the income.

Look at the figures again to see if that is what really happens at the present time.  Do you think it is what has been happening over the last week, month, 3 months?  If you think the reality is something else then amend the figures.

In the next edition we will look at ideas for increasing income or reducing expenditure.

If you are interested in learning more about managing your debt and obtaining a complete workbook with all the necessary forms, as well as having some live support and assistance in the process, then please visit my website

www.get-out-of-debt.mydearfriend.net

© David Grugeon 2007.