Seven Steps to Debt Reduction
Controlling Your Financials
“We all know a variety of ways to make a living. What’s even more fascinating is figuring out ways to make a fortune.”
-James Rohn. Treasury of Quotes.
Setting Up Your Goal Planning Sheet
“If your outgo exceeds your income, then your upkeep will be your downfall.”
-WWII Poster
Do you spend more than you make?
The first step in controlling your finances is to look at what you are doing with them and the results you can expect from that.
You may be spending less than you make and saving the balance. If this is you I suggest you read this section anyway.
95% of the population however, do spend just exactly, if not more, than they make. Hence the credit card debt in this country (Australia) being well into the billions. It is a safe bet that you are spending just on your limit and saving little if any. This section then is for you! Debit is an area for many of us that is easy to get out of control. Credit card companies, banks, loan companies are making it easier for us to have larger and larger debt and loan capacity and it is just so easy to buy now and pay later.
Enjoy now and pay nothing for 2 years! Is the catch cry.
After the two years (because how many people actually pay within the one or two years and pay no interest?) the fun begins with repayments on a high interest debt that means the original item, now worth a quarter of its value quite often, has basically increased in price by about 25% or more!
I fell into this trap a few years ago and racked up hugh debts which were difficult to pay off due to the enormous interest created and which I struggled to overcome. I also found that, apart from the actual loans and repayment difficulties, I was felt mentally trapped’. My attention was beginning to become fixated on the loans and the repayments. It as like being a cage. I would lie awake at nights thinking about it. My hair changed to what now humourously call silver but was actually grey.
The moment all my debt was paid and I owed no one I had such a feeling of exhilaration, of freedom, of space like I had never experienced before. It was truly amazing.
The main hinderance to reducing DEBT of course is interest.
How do you reduce the interest?
There are a number of ways you can reduce your debit. One such method is consolidation. Consolidation is the activity of bringing all your debts into one, usually at a reduced rate of interest. This works fine provided that you do get the reduced rate of interest and a repayment plan that is well within your budget. While you are doing this you should eliminate the debit instruments, such as credit cards, which you are consolidating. Otherwise the debit simply builds up again. You then have more debt than you started with.
An alternative and more independent, albeit slower, method to reduce your interest bill on your debit is to do the following.
List out all of your debts. Credit cards, hire purchase, mortage, borrowings from everywhere. Every penny you own under the sun.
List them, not in order of largest to smallest or earliest to latest but in order of highest interest rate to lowest interest rate.
Pay off the debt with the highest interest rate of all first, irregardless of how much it is or how long you have had it. Try to repay AS MUCH AS POSSIBLE ON THIS PARTICULAR DEBIT, while at the same time paying the minimum amount required on the debits with the lower interest rates. The aim is to reduce the biggest cost on your debts. The interest rate. The more you pay off on this particular debt the more your interest payments reduce. This would typically be a Hire Purchase Agreement or a credit card such as a visa or mastercard. When the the debt with the highest interest rate is fully paid off, take the next highest interest rate debt and do the same with that. What if you have two or more debts with the same highest interest rate? Ok, take the smallest one and pay that off first. Then take the next one and pay that off and so on.
Credit cards are murderous. Particularly to the undiciplined. They are the easiest credit to acquire and the banks are forever offering a high credit limit. Plus incentives such as points, flybys etc. These are totally engineered to get people to use the card and rack up hugh debt. There was even a commercial where a woman insisted her card be used to buy drinks for anyone and everyone so she would get the points on ‘her’ card. She was portrayed as feeling and looking smart. Pure insanity! Why would anyone rack up a debt of hundreds of dollars just to get a few measly points! AND pay interest on that debt also! The ratio is 1 point for every dollar usually. So to get some product for 5000 points that normally costs about 50 dollars, means you have to rack up about 5000 dollars in debt! No. The only time credit cards with their ‘bonuses’ are of value is when the ENTIRE amount is paid when the bill comes in and so no interest is incurred. Even then many of the cards have a annual charge so you actually pay to have a credit card irrespective of whether you use it or not Cut up your credit cards! If you simply must have one. Pick the one that has the LOWEST INTEREST RATE and do not carry it around with you but leave it at home. And restrict the credit limit to within manageable means.
Cut up the rest. Have a ceremony and bury them in the garden!
Do not purchase anything on Hire Purchase. This has one of the highest interest rates around. There may be business reasons why you have debt of course. Leasing, Mortgage with taxation considerations. Talk to your accountant or financial advisors. However keep in mind not to incurr more debt that you can adequately service even in business and especially in the lean times.
Elsewhere on this website there are some spreadsheets provided. Assuming you have worked out your goals and completed the Personal Goals Sheet, you will be ready now to work on your personal finances so you can start to make progress on your goals. The sample spreadsheet shows you how you can gain control over your financials in a practical manner.
You will notice that when working out the distribution of the income, you get to pay YOU first. Everybody else gets paid after you.
This Control Sheet is so versatile you can use it for both home expenses as well as to control the finances of a business. You can use this sheet to work out a weekly, monthly, quarterly or a yearly income and expenditure. Taking the blank Control Sheet you can tailor it to suit your individual needs and requirements. These can be kept in a computer and used at the end of the financial year as a record of how much was allocated for what and when.
Ensure that you maintain a close relationship with a good financial adviser or accountant. It is a good investment to have and it is always worth while paying for an excellent accountant who is professional and knows what he is doing. The same goes for legal advice also when required. These are an expense not to be skimped on.
Extract from the book, “KickStart to Wealth” by Michael Moore, available from Author Services