Debt Rules

If the response to my last blog is anything to go by it appears that many people are keen to make a change for the better with their finances starting right now. It also appears that debt is a major concern to many people.

So today we start looking at the simple steps you can take to reduce the debt burden in your life as quickly as possible and create a better life for you and your family, one where you have little or no money stress.

I’ve talked a lot about debt in the past and no doubt will do so again in the future. Here’s the reason why…. If your good fairy came along, waved her magic wand and wiped away all of your debt, I’d just about guarantee you would borrow more money in the future. Probably within the next year or two.

We are all so used to having debt that if we had none, our minds would start thinking about what we could do if we were to take out a new loan. Very few of us would never borrow money again.

While there is no debt pressure we’re comfortable with it and it seems OK. It’s only when there is debt pressure that we decide we want out!

So, if you currently have uncomfortable debt that is making life stressful, to avoid going back to uncomfortable debt in the future you need to set some clear personal ‘debt rules’ before you start the process of getting out of your current debt or you may end up right back where you started!

You need to consider questions like these…. Would you borrow to invest? Would you borrow to buy a new car or boat or some other ‘toy’? What does a sensible investment look like? Is it OK to borrow for a car? What about borrowing for toys? What’s the difference between good debt and bad debt?

Let’s get started!

Here is Step 1….

You need to decide what your rules will be and make sure you choose smarter rules than you have used in the past. It’s quite likely that circumstances beyond your control contributed to your current position so now you’ve learned from those experiences you are smarter than before and can make smarter rules.

Here are some sample rules and thoughts that will help you start shaping yours.

•Never borrow for things you don’t absolutely need.
You need a house (but not a mansion)
You need a car (but not a Rolls Royce)
You don’t need a holiday that is paid for by debt.
You don’t need a techie gadget because your kids are nagging you or your friends have one.

•If you just can’t wait to purchase something you want that is not a need, save half of the purchase price before borrowing the other half. That way if the sky falls and you need to get out of debt in a hurry you can sell the item and clear the debt.

•Never pay the recommended retail price for anything, and especially not for things you intend paying for with debt. You need to look for smarter ways to get what you want.

•Always pay more than the minimum loan repayments so you can miss or reduce your repayments for a while in the future if you fall on hard times.

•Change the way you think about possessions. They really are overrated!

•Use a broker rather than going directly to one lender and hoping to get the best deal. A broker will get you more options.

•Make ‘looking for ways to earn more money’ your hobby rather than being conned into thinking that you’ll get more pleasure out of spending it. Is there some way you can generate extra income from your passions? It might not be obvious at first but if you keep looking for opportunities and work on developing skills you will find a niche.
If you love cars, can you make money taking photos or creating You Tube videos about cars? If you love clothes can you make money designing them and selling ‘How To’ video’s online?

•Make sure you understand the ongoing cost of ownership with every purchase you make.

•Before you decide to fix the interest rate on a loan, if there is a penalty for unlocking the rate, consider if your circumstances might change during that fixed period. E.g. it would be crazy to fix the interest rate on your mortgage if your home is for sale!

•Understand the difference between Good Debt and Bad Debt.
Good Debt leads to more wealth.
Bad Debt leads to less wealth.

So now you’ve seen my sample rules it’s time to make your own. Think about what debt you would be prepared to take on when you have paid off your current loans and the reasons why and WRITE YOUR RULES DOWN.

That will keep you busy for a while so I’ll stop there for now. Next week we’ll move to Step 2, looking at the debts you currently have and seeing what can be done to reduce them faster.

That’s me for today.

I’m looking forward to hearing about the rules you chose and why! Feel free to send me your thoughts/rules by e-mail.

Warm Regards
David Wright