I’ve been watching the news just like anyone and I realise that there are tough times out there. People are being thrown into debt, through no fault of their own, by facing redundancy out of the blue, with no other income streams and no financial cushion. So I’ve decided to publish the Debt Busting chapter of my book in serial form, to hopefully help those many more people who find our website, having searched the key words “debt” and “get out of debt”.
But before we talk about what to do about debt, and whether you should look to pay it off quickly or go for debt consolidation, let’s look at debt itself, how and why it happens, and what, exactly it is.
Anyone who has read ‘Rich Dad, Poor Dad’ knows that good debt is defined by Robert Kiyosaki as debt that someone else is paying for you (a mortgage on a rented buy–to–let property for example) and bad debt is debt that you are paying for yourself.
Mary Hunt, in her excellent book ‘Debt Proof Living’ has a slightly different slant on it, which adds to the above definition, I think.
She says that good debt is debt that is secured on something of value thus decreasing the risk for both lender and borrower. Ideally secured on something that will increase in value, not decrease. So in the event that you were ever unable to repay the debt, you would have something to sell, something of more value than the debt.
For Mary, bad debt is consumer debt, where you incur debt to pay for a depreciating item, something that may not even last three years before becoming obsolete, and where there is risk for both borrower and lender because the debt is unsecured.
She sums it up brilliantly by saying
“Spending money you don’t have yet, to pay for things you (often) don’t have anymore, is anything but intelligent. Nevertheless, that is what millions of people in the country are doing every day, every month, year after year.”
As someone who is probably still paying for a hi–fi I bought in the 1970’s, due to what is called revolving credit (where you take out more debt to pay off old debt, albeit it at better interest rates or even 0% interest, I have to put my hands up and say “I’m no angel here.” But I have learned, oh, how I have learned. I would now no more incur any further consumer debt than run down Worthing High Street wearing nothing but a bikini made from Egg Cards.
Half of my clients are struggling with some kind of debt and the other half are generally debt free but so scared of incurring any debt at all that they are unable to move forward. They never get the power of leverage/gearing (other people’s money) working for them.
I had the surreal experience of hosting a teleclass on this subject to three people who gaily informed me at the start of the class that they didn’t have any debt at all. I was a bit flummoxed at that point. As we explored the topic of incurring debt to leverage your wealth creation and making sure that other people pay any debt for you (‘good debt’ in other words) I felt a little like the snake tempting Adam and Eve!
On my personal finances, I was tempted to pay off all my outstanding debt when we sell our house. Then I wondered if I might not be better to buy an asset with the money, that will generate an income for life, and use the income generated to pay off the debt first and then afterward, put money in my pocket.
A much more attractive idea, especially if the asset in question is a house in Greece! But no, I bought a hotel instead, and that actually added to my debt burden – failed businesses can do that!
I console myself with the saying that, “if you have half a million pounds worth of debt, then you are halfway to being a millionaire!” They are largely referring to debt secured on property, just for your information, however that’s no consolation to all those property investors with their money locked up in their houses and no way to get at it, due to the banks not lending.
Now that’s ironic – the banks are not lending, so property investors and business owners are struggling, so they are going further and further into debt. Madness.
DEBT BUSTING ACTION STEP
Are you brave enough to take a good long look at your debts and decide to do something about it?
The first step is to determine not to incur any more consumer or ‘bad’ debt. If you can freeze this moment in time and say, “no more!” then you will have taken a huge step in starting to bust your debt. You can only start to reduce your debt if you don’t keep adding to it.
If you are feeling really brave, just make a rough list of all the debt that you think you have. Your task over the next 10 days is to gather information about each debt. How much is it? What is the interest rate? What is the minimum repayment?
Call and ask them, if you just make the minimum repayment each month, how long will it take you to repay it?
This extract was taken from the “Debt-Busting Chapter” of
Nicola’s book “The Money Gym : Wealth Building Workout”