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 is 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 of Money Doctors.ie shows how to conquer those debt fears and take control of your financial life with five simple steps.
1. Categorise and strategise your existing debt
List all your existing debts, whether it be a home loan or the €500 borrowed from your parents for that post-college holiday that you never paid back. 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 – 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
Track your daily spending to create a detailed report of where you are spending money over a four to five week or calendar month period.
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 magazines? That’s a lot of potential savings toward repaying debts.
A simple diary could document all those items of expenditure or you could download a budgeting app (the free Money Doctors app has 13 categories).
Look also at your annual budget – could you reduce any or all of your expenditure items bar energy bills even by 10%. The savings could not only be significant but a means to 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 and Permanent TSB’s 2% cash back 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.
Being 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 three years and if you can, save over those same three years specifically for the day when your new car will need to be upgraded. Cars are depreciating assets.
Watch out for the Personal Contract Plans – they can wind up being a loan for life! And always review your mortgage annually - you could be saving a small fortune by switching with the brilliant low fixed rates available today.
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 four credit card companies offering 0% – Permanent TSB & KBC Bank for six months, Bank of Ireland for 7 months and An Post Money for a whopping 12 months.
If you can repay your total card debt over 6 to 12 months, the incentive is apparent. If not, at least it gives you that time 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 around 20 years to clear the debt entirely!
5. Take expert advice
It is not fun having debts, and trying to cope on your own is 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 €3 million) will resolve whatever issues you have.
Check the Insolvency Service of Ireland website for further details. 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 does not stop us from being smart and thinking smart.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.