photo credit: caswell_tom
Living debt free is a lifestyle choice that had become a bit of an oddity in recent times with the availability of cheap credit and the constant increase in house prices. Many people are now starting to try and live this way (or work towards it) because of the credit crisis. Some will be doing it by choice, to secure a better standard of living for their family in the future and some will be doing it because they have no option (they can’t get any credit).
Why Living Debt Free is Good For You
Let me first clarify what I mean by living debt free. I am really talking about unsecured debt. Avoiding unsecured debt is something that most people can do (excluding medical emergencies). Avoiding a mortgage is not realistic for most people. I would suggest that you work towards living free of unsecured debts (credit cards, personal loans etc.) and then try and pay your mortgage off as soon as you can.
Whilst it may seem that people that indulge in debt enjoy a better lifestyle than those that don’t, this is an illusion and is not true over the long term (unless very unusual economic factors are in place, as in the 1970s). Let me explain by the use of a very simple example budget (apologies if you think this is a bit patronizing) :
Putting Your Vacation on a Credit Card
If a family has a monthly income of $2000 and monthly essential payments of $1000. They have $1000 a month to spend on food, clothing and anything else. If they want to go on a vacation that costs $2000 and they put it on a credit card that will cost them $100/month (5%) in monthly minimum payments. On average this will take about 4-5 years to repay if repayments are kept at the minimum level, giving a total cost of approximately $4,800.
This family will have spent $4,800 to go on a $2,000 vacation and their monthly spending budget for the 4 years after their holiday will have decreased by $100 initially.
Saving Up For Your Vacation
Take the same family budget and vacation cost. This time imagine that the family decide to save up for their vacation by putting aside $80/month. This will take them only 2 years to do allowing for some credit interest (more than 2 years less than it took to pay off the credit card debt). During this time their monthly spending budget will have been reduced by $80 but they will have access to their savings if they need them for an emergency.
Spending Tomorrow’s Money Today
If you take the above example and roll it forward a few years you can see how the family that uses credit for their vacations or other leisure expenses will very quickly spend their entire monthly budget on credit card bills (if the banks will lend them the money) for things that they enjoyed in the past.
The family that save up will have some savings built up and will be able to decide whether they can afford to go on a vacation without making any assumptions about their future income or deductions from it.
Does Borrowing to Spend Ever Make Sense
There are particular circumstances that make borrowing to spend more sensible than usual. One is where there is a negative rate of real interest (where wage inflation exceeds interest rates) for a prolonged period of time (as in the 1970’s). When this is the case the value of debts are eroded very quickly by inflation. Another instance where borrowing makes more sense (although this is really borrowing to invest rather than borrowing to spend) is where there is rapid asset-price inflation. In this instance the price of assets can be increasing faster than your ability to save up for them.
Making a Commitment to Living Debt Free
Living debt free is tough at first, especially if you have already built up debts. These will need to be cleared before you move over to a savings-based budgeting system. The rewards in the long-term will be worth it though.
Tags: Debt Advice, debt free
photo credit: milena mihaylova
When people give advice it is usually affected by their own prejudices and interests. Therefore if you are in debt and looking for credit advice and debt help in the UK (or elsewhere), individuals might tell you that you need to struggle to pay off your debt. This could be because they have not knowledge of debt relief procedures or that they resent the idea that people can be relieved of some of their debt.
Any companies that you get advice from will be influenced by the solution that they are selling, and how much money they can make out of it.
Even charitable organizations will be staffed by people who take their own life experience (and their record of success or otherwise with particular debt solutions) into account. It takes a very skilled debt counselor to completely ignore their own experiences and judge a debtors situation objectively.
This is why that I think that it is essential for people in debt to find out as much information about the various solutions (Debt Management Plans, Individual Management Plans, Bankruptcy etc.) as they can. I also strongly recommend that they get help from a qualified adviser. If the debtor has read widely on debt solutions then they are more able to work towards a satisfactory debt solution with their adviser than if they simply rely on the adviser to tell them everything. It is a case of using your debt adviser as a resource to achieve the most suitable debt solution for you rather than surrendering all control over the situation.
In my own personal debt crisis I had decided that a Voluntary Individual Arrangement (IVA) was the best solution for me, even though the debt advice company that I consulted initially suggested an informal arrangement. I persisted asking for my preferred solution and in the end they agreed. This was actually the method I ended up using to become debt free.
Tags: credit advice, Debt Advice, debt help, Debt Solutions
photo credit: Erik Charlton
It is my belief that if you have multiple debts problems then speaking to debt collection agents is not the answer to your problems. Some people will no doubt think that this advice is incorrect or irresponsible so I will explain why I say it.
If you have reached a debt crisis situation you need a debt solution that:
1. Pays your creditors what you can afford AFTER paying all your essential bills such as mortgage/rent/food etc.
2. Allocates the money that you have available fairly between all of your unsecured creditors.
Most agents working in collection do not care about the above points. The sole objective is to persuade (and that’s a polite term) you to part with as much money as possible. It is often no concern to them if you or your family go hungry because you’ve paid money to your creditors. They will also not care if you miss or reduce your mortgage payment for the same reason, pushing you down the road to re-possession/foreclosure.
It would not be fair to suggest that debt collection agents should be considering your other debts, if you have multiple debts they are in competition for your limited money with other commercial lenders. However their desire to increase the share that their company is getting will often create a lot of pointless (from the debtors point of view) pressure.
The best idea is to get independent advice on your debt situation from someone that can also represent you to your creditors. If you don’t want to do this then you can come to an informal arrangement with your creditors by preparing your monthly budget, and allocating the excess income fairly between your creditors. Update all of your creditors every few months or sooner if there are any significant changes and you will be fulfilling all of your obligations to your creditors without ever needing to speak to possibly threatening debt collection agents.
Tags: Debt Advice, Debt Problems, Debt Solutions
