A British Man's Take on Debt, Saving & Investing

Dig Yourself Out of Debt: Spend Less Than You Earn 10

Posted on September 10, 2009 by Lee

This is part 2 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can catch up on Part 1 by clicking here, or view every post in this series by clicking here.

The title of this post may come as a bit of an obvious statement, “of course you need to spend less than you earn! Otherwise you’d end up in .. oh”. The accumulation of debt to problematic levels occurs when we spend more than we earn, often without realising it. A gym membership there, a mobile phone contract here.

In the worst scenarios we end can end up in a debt spiral where we keep taking on new credit to be able to make repayments on old, all the while hiding behind the pile of credit card and bank statements. Before you know it, your entire income is being spent making interest payments and there is nothing left to live on.

Worse still, when you come to grab more credit to live on, you get refused.

Congratulations: you’ve just financially imploded.

Now what do you do?

Hopefully you are not in that deep, but deep enough to have seen the danger signals. If you are in that deep or perhaps beyond, stick around because there is still some useful advice to be found here. If you’ve followed the advice in last week’s post, you hopefully know exactly where you stand in terms of what you owe. If you don’t have all that paperwork with you, go grab it. You’re going to need it.

A Statement of Affairs

Debt is only one part of the financial pie. To get to Total Situational Awareness, I’m going to get you to create a Statement of Affairs, or ‘SOA’.

This is basically a document that lists every single household expenditure and income source, debt, liability and asset. It sounds like a lot of work but it’s really not as bad as it sounds. If you can lay your hands on your recent utility bills or bank statements, you’re all set.  I’m going to provide a link to a little tool after the example below that’ll do most of the work for you but you will need to supply it with accurate numbers for the exercise to be worthwhile.

Selina Is In Trouble

I learn best by example, so I’ve come up with an SOA for my imaginary friend Selina. Her experiences are a little like mine, bless her. She’s had enough of her debt situation and wants to take charge, before it consumes her completely.

She holds down a well paid job but is finding despite this, she doesn’t have any money left after the bills to actually enjoy life and increasingly, is having to reach for her non-maxed credit card to make it to the end of the month.

For the sake of simplicity, she lives alone, and claims no benefits.

Statement of Affairs and Personal Balance Sheet 
Household Information
Number of adults in household........... 1
Number of children in household......... 0
Number of cars owned.................... 1 
Monthly Income Details
Monthly income after tax................ 1500
Partners monthly income after tax....... 0
Benefits................................ 0
Other income............................ 0 
Total monthly income.................... 1500 
Monthly Expense Details
Mortgage................................ 500
Secured/HP loan repayments.............. 0
Rent.................................... 0
Management charge (leasehold property).. 0
Council tax............................. 85
Electricity............................. 50
Gas..................................... 50
Oil..................................... 0
Water rates............................. 20
Telephone (land line)................... 15
Mobile phone............................ 45
TV Licence.............................. 12
Satellite/Cable TV...................... 45
Internet Services....................... 15
Groceries etc. ......................... 200
Clothing................................ 50
Petrol/diesel........................... 50
Road tax................................ 20
Car Insurance........................... 35
Car maintenance (including MOT)......... 10
Car parking............................. 0
Other travel............................ 0
Childcare/nursery....................... 0
Other child related expenses............ 0
Medical (prescriptions, dentist etc).... 0
Pet insurance/vet bills................. 0
Buildings insurance..................... 10
Contents insurance...................... 10
Life assurance ......................... 0
Other insurance......................... 0
Presents (birthday, christmas etc)...... 10
Haircuts................................ 25
Entertainment........................... 50
Holiday................................. 0
Emergency fund.......................... 0 
Total monthly expenses.................. 1307
 
Assets
Cash.................................... 500
House value (Gross)..................... 110000
Shares and bonds........................ 0
Car(s).................................. 2000
Other assets............................ 500
Total Assets............................ 113000
 
Secured & HP Debts
Description....................Debt......Monthly...APR
Mortgage...................... 80000....(500)......4
Total secured & HP debts...... 80000.....-.........- 
Unsecured Debts
Description....................Debt......Monthly...APR
Credit Card 1..................5000......250.......14.9
Credit Card 2..................1000......50........27.9
Total unsecured debts..........6000......300.......- 
Monthly Budget Summary
Total monthly income.................... 1,500
Expenses (including HP & secured debts). 1,307
Available for debt repayments........... 193
Monthly UNsecured debt repayments....... 300
Amount short for making debt repayments. -107 
Personal Balance Sheet Summary
Total assets (things you own)........... 113,000
Total HP & Secured debt................. -80,000
Total Unsecured debt.................... -6,000
Net Assets.............................. 27,000

In our example above, you can see Selina is currently spending £107 more every month than she earns. This equates to accruing £1,284 of new debt every single year until she implodes, if she does nothing. In Selina’s case, she was actually finding she was nearer £200 overdrawn each month rather than just £107. This was probably due to buying magazines and her weekly visit or three to Starbucks.

Working out your own SOA

The internet is great, and as usual someone, somewhere, has done most of the hard work already. You can work out your very own SOA by using this fabulous online tool. Once you have your own, see where you are at.

If you have cash left over each month, GREAT! You already spend less than you earn and that deserves a little pat on the back. Now carry on reading and get some tips for spending even less to free up cash for debt repayment.

If you calculated you have a shortfall like Selina though, DANGER. You’re heading for a debt spiral and definitely need to keep reading.

Cut Your Spending

This sounds really daunting and yet really obvious all at the same time. With some really simple and painless adjustments and a small amount of initial legwork, Selina ended up in the black each month instead of the red, and so can you. Alternatively you can use these tips to see just how easy it is go get extra money to repay debt quicker. Let’s see how:

She Switched Energy Tariffs

Instead of sourcing her gas from one company and electricity from another, she switched to a Dual Fuel deal and locked in with the same supplier for 12 months. This resulted in saving £15 a month. See if you could save and head over uSwitch, GoCompare, Money Supermarket or your price comparison site of choice.

She Cut Her Energy Use

Selina believed she was hopeless at “being green”, so she vowed to just do the simpler things and see how it helped. She turned down her thermostat on her heating by 1 degree, and reduced the boiler’s hot water temperature so it didn’t need to heat quite so often. She also changed to low-energy lightbulbs and made sure she switched lights off as she left the room. She found doing this saved her around £20 a month.

She Changed Mobile Tariff

In order to get the latest snazzy phone when she last upgraded, she had to up her price plan to £45 a month. This suited her at the time, but now she is looking for ways to cut back and this is a big expenditure (£540 a year!). A quick chat with her provider saw her  dropping from paying £45 a month to just £20: A £25 saving every single month, and she still gets sufficient texts and minutes to not need to pay for going over her monthly allowance.

She Dropped a Sky Package

Well, she threatened to. Selina realised she didn’t have the time to watch many of the sport and movie channels she got with her Sky package, so she phoned to cancel. However the person she spoke to offered to halve her bill for 6 months if she didn’t. She liked having the option of watching them so she went with it. In 6 months time if she is still feeling the pinch, she retains the option of dropping a package or two. £22.50 saved.

She Cut Her Food Bill

Selina loves Chinese takeaway, but at £10 a time on average, even if it supplied her with meals for two days, it was proving an expensive way to eat. She decided to cut down the takeaways to one a month, and cook more fresh food at home. This not only made her healthier in the long run, but made her enjoy her takeaways again rather than feeling like she ‘had to’. Additional savings can come from clipping grocery coupons. £50 saved.

She Sacrificed her Entertainment Budget

So far Selina has not had to make too many intrusive changes. In fact all but the food change resulted in no noticeable difference in her routines whatsoever. But Selina realised that if she wanted to be debt free quicker, then in the short-term she’d need to cut down on this. She did decide to keep her small LoveFilm subscription, and also a few pounds for drinks when invited out by friends but put the rest towards debt repayment. £40 saved.

She did a Credit Card Shuffle

In the words of Martin Lewis, there’s a conspiracy in the credit card world. The fact you don’t need new cards to cut your interest is covered up; new card applications are profitable – not just for lenders, but internet price comparison services that earn fees when you get cards through them.

By simply phoning her credit card companies and asking for a rate reduction – she got it, saving her another £40 a month in payments to her credit cards. All this cost her was (in her mind) the audacity to ask, and a 5 minute phone call to each card company!

Without even really trying, Selina has freed up £212.50 every month than that she was paying out needlessly, resulting in her being £172 in credit every month instead of deep in the red.

Could she do even better? She’s now caught the bug and wants to have as much spare cash as possible to pay off her debts. If you’re still with me here, let’s take a look at some other ways she can save some money.

Downshift

Selina is a bit of a foodie, and thinks nothing of buying premium brands, Finest bread and all the usual consumerist actions that supermarkets love us to do. She often grabs the first product that she spots, and that costs her dearly. Goods placed at eye level are usually the ones that the company makes the most profit on, so slow down and always scan the entire shelf space when looking to buy.

She decides to stop this practice and also buy less of the top branded products, and try dropping a level. This isn’t a case of going from ‘Finest’ to ‘Value’ (if you shop at Tesco), but instead trying the same product in a different price band to the one you normally buy. If you usually buy Finest, try a brand name instead. If you normally buy a brand name, try the stores-own. If you normally buy stores-own, try their value range.

Dropping one product level generally results in no noticeable difference in taste, but can mean pounds saved just on one product. If the drop doesn’t work for you in a particular product, by all means go back up again. This isn’t about torturing yourself.

Product Price Difference
Tesco Finest Lasagne (1kg) £5.50
Trattoria Verdi Lasagne (1kg) £3.29 -£2.21
Tesco Own-Brand Lasagne (1.2kg) £3.20 -£0.09
Tesco Value Lasagne (1.5kg) £2.98 -£0.22

The difference between the Finest product (1kg) and the Value product (which contains a full 500g more!), is £2.52. Every product level you drop down though, saves you money. The best value in that table when you consider taste and texture is likely the Own-Brand, saving you £2.30 in total for probably zero difference in taste. When you multiply that saving across your entire shopping trolley you begin to see how it adds up.

  • If you buy a lot of fresh vegetables and products for home cooking, ditch the Organics, at least for now.
  • If you buy a lot of meat, consider more vegetarian meals or bulk out the dish with vegetables and/or lentils.

By dropping a brand level and buying a little less meat, she shaved a further £40 a month off her food bill.

No Spend Days

Selina realised that on paper when she first did her SOA that she was – on paper at least – spending £107 more per month than she earned. Except, as we saw earlier, she was always nearer to £200 overdrawn each month.

Digging through the scrunched up ball of receipts in her handbag, she was horrified to add up nearly £80 of make up, magazine and Starbucks purchases that month alone.

Keep A Spending Diary

If you struggle to identify where your money goes every month, consider writing down every time you spend. At the end of the month, you’ll be surprised how much incidental spending you do. £2 on a coffee here, £5 on a couple of magazines while waiting for your train there: it all adds up. Once you know what you spend on top of your regular outgoings you can formulate a plan of attack.

Choose How Many In Advance

Not spending anything other than your budgeted-for items is hard. Doing it forever is even harder, and could lead to feeling deprived and splurging to compensate. Agree with yourself in advance how many days each week or each month you are not going to spend anything and then stick to it. Keep a diary and mark off your ‘NSD’s and then whether you managed it or not.

Keep a Reminder In Your Wallet

It can help to keep a reminder near your cards and cash, such as a picture of your kids, the house you want to buy, the car you want to get and so on. Every time you open your wallet you’ll see your reminder and hopefully consider whether what you are about to buy fits in with your own goal.

Know This: It Gets Easier

The first few weeks and months it will be hard if you’ve always bought what you want, when you’ve wanted it. However the longer you train yourself to not buy things on a whim, the easier it gets. I haven’t actually bought anything that hasn’t been in my budget now for 6 months and it feels great to have broken that consumerist cycle.

Up Your Income

This is slightly more difficult, requires work on your part, and  ultimately depends on how badly you need the money. Sometimes it’s no longer possible to spend any less than you already are without starving, but you find you are still spending more than you earn.

When you get to here, the only option is to up your income.

Do Surveys

Online surveys are a good way to earn an extra £20-30 each month if you dedicate a few hours a week to it. If you have the time, you can double this figure or better, but it depends on the survey site. Martin Lewis has some good advice on which are best. Selina made an extra £10 every month by spending just an hour a week doing surveys.

Sell Stuff

Artistic? Consider making and selling jewelery, cards or other craft items. If you work in an office and are allowed, put up a sign offering home-made ‘all occasion’ cards made to order. For 10 minutes of work you could charge upwards of £5 a piece.

Start a Blog

If writing is more your style and you have a topic you are deeply interested in, start blogging. The returns in the beginning are likely to be small, but if you are good at it and the topic draws large readership, it could make you thousands in the long term. Open your own free blog over at either WordPress or Blogger and see where it takes you!

Declutter

If your house is anything like Selina’s, it’s full of a lifetime of accumulation. She uses very little of the ‘stuff’ her place is full with. Start a Declutter Mission. Go through every single room in the house; every cupboard; under the stairs; in the loft; check the basement. Find everything you do not use or no longer want. Grab your camera, then eBay the lot. You could realise thousands of pounds! Selina managed to realise £480 just by selling old clothes she no longer wore, and some gadgets she had laying around.

Get a Second (or 3rd) Job

Sometimes the little things above won’t be enough, even when combined. See if you can get a second job paying part-time hours. This can easily supply an extra £250 to £400 a month and while perhaps not sustainable in the very long term, could help you out of a situation you find yourself in now.

Do A Credit Card Balance Transfer

Selina was struggling with the fact that the card she had the highest balance on (£5,000 in our example) was charging her nearly 15% interest. In credit card terms this isn’t all that bad, but she also knew that if they decided to hike up her rate, she’d sink very quickly. Paying the minimum as she was, would take her over 12 years to pay it off and cost her tens of thousands of pounds in interest.

Selina was unable to get a 0% BT card as her credit rating wouldn’t allow her any more credit. This doesn’t mean you’re going to be in the same boat though, so it’s worth looking at any current offers to see if you can save yourself a packet. Even if a new card doesn’t allow you to transfer the entire balance, any percentage at 0% is better than the rate you’re currently paying.

Remember the cardinal rule of balance transfers: Never, ever, ever spend on the card! Due to the way repayments are calculated, you could pay interest on what you purchase for the entire life of the balance transferred!

Get A Consolidation Loan

I’m not a fan of doing this as unless you’re very strong-willed, you can end up in the same situation you’re in now, only worse. The temptation for some (“my credit card balances are zero! Let’s spend!”), can be too much to resist.

However if you know you can be good and honest to yourself, don’t rule out getting one big loan at a reasonable rate to cover all your existing debt. Shop around for the best rate and be sure there are no early repayment penalties or restrictions on overpaying.

You could do worse than getting a quote from Zopa rather than a bank. The beauty of Zopa is it’s people like me lending you the money, and not some huge, faceless corporation that ultimately doesn’t care much about you or your personal circumstances, just about their shareholders.

Move House

Have you noticed that as we get further down these suggestions, they’re getting more involved and more serious? That’s deliberate. Depending on how short you are each month, depends on how far you’re prepared or need to go.

If you are spending £750 a month on renting a 3 bedroom semi, could you make do with a 1 bedroom flat for £350 instead? This may not be an option depending on your arrangements and situation already, but should be considered if you still have sufficient operating capital to finance a move before things descend further into a debt spiral.

Moving home will impact your credit rating in the shorter term, so if you’re going to apply for a loan or a new credit card for transfer purposes, do it before you move.

Individual Voluntary Arrangement

This is essentially one step away from going bankrupt. From Wikipedia:

“The IVA was established by and is governed by the Insolvency Act 1986 and constitutes a formal repayment proposal presented to a debtor’s creditors via an Insolvency Practitioner. Usually (but not necessarily) the IVA compromises only the claims of unsecured creditors, leaving the rights of secured creditors largely unchanged.

An IVA is a contractual arrangement with creditors and can be as flexible as an individual’s own circumstances; they can therefore be based on capital, income, third party payments or a combination of these.

Creditors take a decision at a creditors’ meeting called to consider the IVA proposal. The return to creditors is often higher than they would receive in bankruptcy. A vote is taken – by value. More than 75% in value of those creditors who vote at the meeting by person or by proxy must agree in order for the arrangement to be approved. If any of those voting are ‘associates’ (usually business associates, friends and family) then a second count is taken and 50% of non-associated creditors must approve it.”

As you can see this is not for the feint of heart,  but it does offer a lesser alternative to actually filing for bankruptcy, which can signal the end of your financial life for a considerable period of time. If your IVA fails then bankruptcy may be your only alternative.

If you’re considering going this route, please read Martin Lewis’ full IVA Guide before taking any steps. Some companies will charge you a fortune, when there are free charity alternatives (see below). Note that an IVA WILL affect your credit rating severely but perhaps not as badly as the alternative: going bankrupt.

It’s Good to Talk

When things get too much, it can be good to talk. There are a wealth of organisations you can talk to about your money worries, including if it is affecting your health. If, despite this post you find you still cannot manage, please speak to these folks – they are experts in their fields and will help you with good solid legal advice and support you through it.

The NHS runs a CreditCrunch helpline on 0300 123 2000 (8am to 10pm every day) and website for those suffering in the current climate.  Trained health professionals will give good, solid, practical advice for how to deal with the health side of being in debt or in the middle of the recession.

National Debtline run a website and also a helpline offering free confidential independent advice on dealing with debt problems. Contact them on 0808 808 4000 (mon-fri 9am to 9pm,   sat 9.30am-1pm).

CCCS is the Consumer Credit Counselling Service, a registered charity offering free, confidential advice and support to anyone who is worried about debt. Visit their website or call them to chat in confidence on 0800 138 1111.

In Closing

The purpose of this article is to prepare you for Step 3 in my 5 Step Plan for debt freedom (aptly called “Dig Yourself Out of Debt in 5 Steps”). In Step 1 we found out exactly what we owe, and seen how much spare cash – if any – we had and tried to increase that amount in this post, Step 2.

Are you spending less than you earn? Have you found any inspiration for cutting your outgoings in this article? Share what worked for you in the comments and remember to check back next Thursday for the next installment in this series.

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Continue reading! You’re getting closer to enlightenment. Part 3 is here.

My Networth Update – Aug 2009 3

Posted on September 09, 2009 by Lee

If you caught the first post in my ‘Dig Yourself Out of Debt‘ series last week, you will  know how important I think it is to know exactly where you stand in terms of your total immediate unsecured liabilities, and any cash reserves you may have. Now, before the uber-observant amongst us say anything – yes I realise that ideally if you have cash reserves you would pay down debt! Afterall, the interest you are probably earning on any positive balance from cash is likely to be dwarfed by the loan or credit card APR.

All that said however, you may like me be stuck with a front-loaded loan that offers no benefit of repaying early (other than to see the back of the loan) and no option of making over-payments. The only option in that scenario is to save up the lump sum necessary to pay off the balance (plus the penalty of one month’s worth of interest) if you want rid of it early – which I do.

At the end of my own ‘Know What You Owe’ fact-finding mission, I did some simple math and came up with my ‘net worth’ (net worth literally just means how wealthy you are), and it’s really easy to figure out.

Add up everything you owe (liabilities), and subtract that amount from any cash and savings you have. Whatever you are left with is your net worth. Simple!

I wanted to know how I was getting on with meeting my own debt freedom target (no later than New Years Day 2010) so I dug out copies of my loan account payments, credit card and bank statements, payslips and my budget spreadsheet, and made myself another spreadsheet with a few simple formulas thrown in to make things easier. Nothing too crazy required, just a couple of simple =SUM() calculations in certain cells to make the laborious leg work a little less laborious…:

Liabilities Spreadsheet

The current month is highlighted in bold. Taking my other liabilities into account (the last £203 on my Barclaycard credit card), you can see my total liabilities at the moment are £9,156. But, I have £4,204.51 in cash in a combination of my current and savings accounts. Subtracting total liability from total liquidity, my networth is currently -£4,951.49. Basically, I owe almost five thousand pounds more than I have. :(

Scroll down a few months into the future however, and things improve. By November I’m only £220 shy of breaking even. In other words, I am currently set to become debt free by 20th December (A full 12 days ahead of target). If I make up that small shortfall, that could drop back to 20th November, 6 weeks earlier than planned. Assuming I don’t get made redundant between now and then and my overtime plans come off, I could knock a couple more weeks off that.

One word of caution though: remember that any entries beyond the present are projections. If you are projecting your own, remember that things often conspire against you; If my car blew up tomorrow, I would have to use some of my cash to fix it, pushing me away from the projected freedom date. Use it as a ready reckoner however and we can see that if all goes well using current known-good data (e.g. the data up until the highlighted line), I won’t be any later than my target, and that was the whole point of this exercise.

Are you currently in negative networth? Do you even know with any certainty? Kudos if you do. You’re not in the minority if you don’t though. Take the first step to digging yourself out of debt and know what you owe. Once you know, you can work out your own net worth and project a date to get into positive growth (or be incredibly unscientific about it and just make up a date like I did!).

If you’re already digging, how is your own target prediction holding up?Leave a reply in the comments below. :)

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Giving to Charity 1

Posted on September 08, 2009 by Lee

Did you roll your eyes when you saw that title? It’s OK to admit it if you did.

As a child, I was routinely told charity begins at home, and therefore never really got round to doing much about ‘giving’. While my parents didn’t struggle for money, they were not rich by any means. I therefore grew up with the belief that giving to charity is something rich people do; something I’ll consider doing next year; or something I’ll do when I’m not in debt.  But I’ve slowly discovered giving to charity isn’t limited to donating £2 a month to the RSPCA or PDSA or WWF or whatever advert pops ups on your TV in the next 30 minutes.

Charitable giving doesn’t have to involve parting with your cash at all.

There are hundreds of ways you can give meaningfully. Organisations are crying out for volunteers with all sorts of skills from IT, to communication, to just being an ‘adult’ at kids clubs. When you donate your time rather than the loose change in your pocket, you get to see first hand at the difference you are making.

If you are 16-25 years old, V Inspired is the best place to start:

vinspired is the volunteering site for 16-25 year olds in England. We’re here to help you find your perfect volunteer placement, and we’ll make sure you get recognised for the impact you make on your community. How much time you give is up to you, from a few hours or the odd evening to summer jobs or full-time placements.”

If you’re outside of that age-range, or want to try something totally different:

Community First Responders work with their local NHS Ambulance Trusts to provide life-saving treatment to those in their immediate vicinity, bridging the gap between that first 999 call and the ambulance arriving. Full training and generally (dependent on the individual trust), full equipment is provided.

Police Special Constables give up their free time to police their community, but are otherwise fully-fledged, fully trained police officers who do it because they want to help people, and not because of the paycheck. It need not take over your life either: 4 hours a week is the minimum you need donate.

Volunteer firefighters do the same for the fire and rescue service in their area.

The examples above are great if you’re time rich but cash poor. But what if you’re cash poor and time poor? You may be working 2 or even 3 jobs trying to dig yourself out of debt and have absolutely no time left whatsoever, beyond the bare minimum needed to sleep.

There are still options available if you want to give something back, and one of the most rewarding for so little time is to donate blood.  Each donation you give can save up to 6 lives. It takes a maximum of an hour to do every 14 weeks, and you get free juice, tea, coffee, biscuits and crisps in exchange.

There is almost no better way to spend just one hour of your life and yet help so many. I put this off and put this off for almost a decade, coming up with a variety of excuses along the way; “I’ll do it next time”, or “I don’t like needles” or one of a thousand other excuses I came up with to appease myself. In July 2009 I ran out of excuses and gave blood for the first time. It was an amazing experience, and knowing that you help directly save lives is a feeling you just cannot beat.

The National Blood Service website has more details if you want to get involved.

Want some other takes on it? Trent over at The Simple Dollar (another personal finance blog that I read regularly) has a different view – he budgets money for giving to charity. If you can afford to do it, then do it! Cash rich, time poor is the ideal excuse to give raw cash to causes you identify with. Trent is further along in his money goals than I am, and I hope one day to follow his lead.

Free Money Finance has a couple of posts on the topic of giving, and ultimately does both. They follow the same principle of Trent by budgeting for giving financially, and also volunteer their time.

Charity doesn’t begin at home. Only financial well-being begins at home.

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