Debt is the ultimate four-letter word when it comes to financial stress. Whether you have credit card debt, personal loan debt, student loan debt, or you are starting the equally stressful journey to obtain your first mortgage or car loan, you're basically dealing with debt.
Debt is the major stress point in every household that I’ve worked with. Albert Einstein spoke about compounding – it’s mankind’s greatest invention as it allows the reliable systematic accumulation of wealth - of course, it works against you when you have debts.
So what do you do? John Lowe the Money Doctor shows how to conquer those debt fears and take control of your financial life with 5 simple steps:
1. Categorise and strategise your existing debt.
List all your existing debts, from the home loan to the € 500 borrowed from your Dad for those much needed new tyres. You must do everything to pay at least the minimum repayment due on every debt. As long as you’re on target with that, the next job is to pay more than the minimum on the debt that has the highest interest rate.
Once that debt is paid off, focus on speeding up repayment on the next debt with the highest interest charge. This is called the sniper approach - it makes sense to pay off the highest interest, short term debt first as it’s the most painful.
2. Free up more money to pay off debts.
The free Money Doctor app which tracks your daily spending will create a detailed report of where you are spending money today (incorporating Googlemaps). Once you’ve input all your data, you can start to see where to make economies and seize opportunities to reduce some of that spending.
Do you really need all those lattés, those glossy magazines, those chocolate bars? That’s a lot of potential savings toward repaying debts. Look also at your annual Budget – could you reduce any of your expenditure items even by 10%. The savings could not only be significant but a means of helping you to pay off debt.
3. Borrow smart.
There can be huge differences between the lenders, from interest rates to special incentive offerings ( e.g. Bank of Ireland, EBS and Permanent TSB’s 2% cashback on mortgages ) So whether you are searching for a home loan, a car loan or even that 1 year student loan, always shop around and look at all the competition.
Be smart will also tell you not to over-borrow. Remember you are the one who has to repay that loan, not the lender. And if you plan on financing a car purchase, keep the loan term to a maximum 3 years and if you can, save over those same 3 years specifically for the day when your new car will need to be upgraded. Cars are depreciating assets. Be wary of Personal Contract Plans – you could wind up with a never-ending car loan.
4. Credit card debt.
If you have good credit history coupled with sufficient surplus income, you could elect to transfer your card balance to one of the two credit card companies offering 0% for 6 months – Permanent TSB, KBC Bank, while Bank of Ireland offers 7 months and An Post Money a whopping 12 months at 0% interest.
If you can repay your total card debt over 12 months, the incentive is apparent. If not, at least it gives you up to 12 months to think how you are going to reduce or pay off entirely this high-interest debt. Remember if you only make minimum repayments every month, it will take you c. 20 years to clear the debt entirely!
5. Take expert advice.
It is not fun having debts and trying to cope on your own even less fun. No matter how bleak your situation, there is ALWAYS hope and a solution awaiting. The three areas of the Personal Insolvency Act – Debt Relief Notice (for unsecured debts up to € 35,000 in total) Debt Settlement Arrangements (for unsecured and secured debts over € 35,000) and Personal Insolvency Arrangements (for secured debts up to € 3million) will resolve whatever issues you have.
Check the Insolvency Service of Ireland website for further details and the location of your nearest Personal Insolvency Practitioner (yours truly is one) – www.isi.gov.ie. The final option of bankruptcy is also an option for some, especially now with the bankruptcy term reduced to just 12 months, the same as in the UK.
I am reminded of that silly suggestion from Polonius in Hamlet "Neither a lender nor a borrower be" – all very well if you have the money but sadly, we are all not rich. But it doesn't stop us from being smart and thinking smart.