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…:

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.

• Dig Yourself Out of Debt: Spend Less Than You Earn
• A Fundamental Question
• Reclaim Bank & Credit Card Charges
• Say Hello to Kublax
• Dig Yourself Out of Debt: Know What You Owe

This is part 1 of the “Dig Yourself Out of Debt” Series, published every Thursday. Surfing old posts? You can access every post in this series by clicking here.

I’m a regular over on the Money Saving Expert forums, particularly the ‘Debt-Free Wannabe’ area. On a daily basis, people post that they owe money, but they’ve no idea to whom, how much for, or at what rate. Before you can even begin to cut your debt, you have to know what you owe.

Priority Debts – First things first. Do you have any Priority Debts? These generally are:

• Council Tax
• Mortgage / Secured Loan / Rent
• Child Support
• Court Fines

Falling behind on these can see you homeless, sent to prison or both, hence the term ‘priority debts’. Either is unlikely though, if you make a best effort to pay back what you owe with what you have available to you. In terms of council tax, the minimum arrears payment for someone on a low income can be as little as £2.65 a week.

Once you have got your priority debts under control, it’s time to attack ‘everything else’.

Find your loan agreements – Hopefully you’ve kept them safe and accessible. These will show what you’re paying, at what rate, and when it ends. If you can’t find this then check your bank statements to at least get some idea of the monthly figure. We’ll see in a little while how to find the remaining missing information.

Find your credit card statements – or access them online. Credit cards with revolving balances are usually one of the most expensive ways to borrow money longterm, with perhaps the exception of the payday loan sharks. Interest rates vary wildly from a very good 6% up to a wild 55% and beyond, depending on your own personal circumstances and payment history.

Are you in arrears with utilities? Don’t forget to take into account any arrears with your electricity, water, gas, or telephone suppliers. These generally won’t affect your credit rating but can have much more direct consequences, i.e. disconnection.

Are you in arrears with credit companies? You need to take action right here. These will affect your credit rating, and can and will end up costing you a fortune for up to 6 years after the fact. Talk to your lenders and come to an arrangement to pay what you owe, including arrears. Ask them if they can freeze your interest, effectively turning the credit product into a fixed-term loan. Don’t bury your head in the sand over the issue, as it’ll only get worse the longer you leave it. You’ll also probably start to get harassing telephone calls hourly or daily around this point, demanding you make payments you probably cannot afford. You don’t have to take this though: demand all contact by written form in future and advise them that further telephone calls will be dealt with as harassment. Speak to one of the debt charities (CCCS are very good) or Citizens Advice as a matter of urgency.

Defaulted. Debt sold. Now who do I owe? – This is where it gets murky. If you know who you owed prior to this point, contact your old lender. They may be able to tell you who they sold the debt onto.Alternatively pull your credit reports and see where the defaults are, and who they are from. This will also give you some idea of the amounts. If it has got to this point, your credit rating has already likely taken all the battering it’s going to for this debt, so it gives you the upper hand. Your debt would have been purchased likely for pennies in the pound, so you may be able to make a vastly reduced payment to the Debt Collection Agency. They would get their ‘profit’, even though you pay far less than you originally owed. It won’t fix your credit report though, but neither would paying back the full amount.

Get Your Credit Reports – There are three Credit Reference Agencies (CRAs) in the UK: Equifax, Experian and CallCredit. These folks compile your financial history in terms of your borrowing and more importantly, your reliability in paying back. Other lenders then use this historical information to credit score your future suitability for a particular product.

The information on the files remains for 6 years from the point of settlement, so if you had a bumpy credit card ride when you were 18 and finally closed the account when you were 20 it can still affect you when you try and get a mortgage at 25! Check their respective websites for a 30 day free trial, but remember to cancel before the period is up to save paying anything. Right now (at the time of writing) Experian and Equifax offer free trials. CallCredit charge £12 for 3 months of access.

One benefit of accessing your reports is they can help fill the gaps in your lending knowledge. The CRAs will know what you owe, to whom, when the agreement started, how much you should be paying, and when those payments are due!

Knowledge is power, and once you know what you owe, you are very knowledgeable indeed.

Continue reading the Dig Yourself Out of Debt Series – Part 2 is here.

• Dig Yourself Out of Debt: Avalanches and Snowflakes
• Dig Yourself Out of Debt: Spend Less Than You Earn
• Frugal Friday! 20 Ways to Cut Your Annual Vehicle Costs
• A Humble Return
• My Networth Update - Aug 2009

A downturn in the economy isn’t always bad news; there are the obvious negatives such a job losses, less easy access to credit and that uneasy feeling of general insecurity. But a lot of people are using all those as a catalyst to better themselves financially. Some statistics have recently been released by FDS Social Research that a newfound financial learner like me finds comforting and interesting and worrying, all at the same time.

34% of households are paying off debt or reducing mortgages – Over a third of the country are making concerted efforts to reduce what they owe. I’m a proud member of this statistic! This will have short-term consequences to their perceived standard of living, but the long-term benefits will be well worth the effort. Interest rates are currently at an historical low, with many ‘height of the boom’ 2 year fixed rate deals coming to an end if they haven’t already, resulting in dropping onto a providers Standard Variable Rate which tracks a few points above the Bank of England base rate. For those in this fortunate position, they would find their monthly repayments dropping by hundreds of pounds. Use this time effectively to be paying off masses amounts of the principle sum borrowed without any extra effort.This is further backed by news yesterday that mortgage repayments are outstripping new lending by £418 million and that personal debt has dipped for the first time since records began in 1993.

What are the other two-thirds doing? I will assume half of the remainder do not have debt or a mortgage, which leaves 33% of the country still spending more than they earn and doing nothing about it.

28% have stopped using credit cards altogether – This depends ultimately on the context, and sadly, FDS didn’t elaborate further. We could conclude that 28% of households, having paid off their balances, have returned to the old-style way of saving for what they want instead of returning to the ‘buy now, pay (much more for it) later’ culture of the last decade. Alternatively we could conclude 28% of households have simply maxed out their cards, can’t get new ones, pay the minimum balances and so have been stopped from using credit cards altogether. I suspect the truth is somewhere between the two.

There are negatives to this though if they have stopped using credit cards out of their own choice: MBNA currently have some good reward card offers, and both Egg and American Express have good cashback cards for those who know they’ll be spending more than £4,000 a year on plastic. The important thing though is to ensure the balance is always paid in full every single month, otherwise the interest charged will dwarf any cashback deal.

23% of households who don’t currently save plan to start within the next 12 months – This is a pretty good statistic from my point of view. Everyone should be saving something out of their take-home, even if it is just a few pounds. The very first step to getting out of debt is spending less than you earn, paying off your highest interest borrowing first (I was shocked to see someone paying 53.95% on a credit card yesterday!), and then keeping going until you are debt free. At that point, you can begin saving in earnest. This statistic could therefore be viewed that 23% of all households in the UK who are currently in debt, with good planning and willpower on their part, will be out of debt inside the next year. I’m included in this statistic.

34% of households are saving more than they did a year ago – Perhaps even though you may be in debt, you had it drummed into you as a child to ‘always put a little by for a rainy day’. It’s good to know that again, over a third of all households in the country will be putting a little more by each month than they did last year.

Of course there are economic knock-on effects to this. Money saved is money not spent. When the economy is generally in good shape, that’s a good thing. Interest rates are stable and worthwhile and other peoples’ spending keeps things ticking along. When there is a downturn, sometimes the only way to get the fires stoked is to spend. If more families are saving, then the recession could be prolonged.

Despite the different ways these statistics can be interpreted, in general I believe they’re a good thing. It shows our country is waking up and smelling the coffee. I just hope that when things begin to improve, access to credit eases and people start getting raises or find employment again, that as a nation we don’t gravitate back towards our old ways.

Are you a statistic? Share your views in the comments!

• Dig Yourself Out of Debt: Spend Less Than You Earn
• The Importance of Redundancy Planning
• My Networth Update - Aug 2009
• My Financial Meltdown: Part 3
• Dig Yourself Out of Debt: Avalanches and Snowflakes

Up to the point that my life began to change for the worse, I had never considered the worth of debt. Sure, like everyone else I’d felt the consequences of debt: less disposable income; having to work harder just to stay stationary; and the niggling feeling of not quite owning whatever I was supposed to actually be enjoying. But did I ever stop to consider whether debt was worth all that?

Of course not. Debt is just the way our society works. We want things now, and we have them now. Does it matter if we might still be paying premium, hard-earned pounds for them long after they’ve depreciated to the point of being worth a fraction of their purchase price (in the case of cars, for example)? Does it matter that the high spec laptop you got on a 4 year finance deal 3 and half years ago is now just decidedly average, but you are unable to afford to upgrade it because you’re still paying premium for the old one? Does it matter that those home improvements you put on the credit card a year ago with the intention of paying it off in a month or so are still around, costing you hundreds in interest payments? Are you enjoying those improvements, or are they feeling like an elephant tied round your neck?

By and large, I’ve come to the conclusion that yes it matters, and no, debt isn’t worth it.

You can have all these things without the debt negatives by putting the cash you’d pay the finance company in your own savings account. Overpay yourself, make micropayments, work a little extra overtime here and there. If you want it enough, then pay with your own cold hard cash and not somebody elses. That new laptop or car is yours. You own it, and you won’t be making payments on it for the next year or some multiple thereof.

Of course, this isn’t always possible, but by and large it should be your first option before reaching for the credit monster.

Sounds a little preachy doesn’t it? But it makes sense. It also makes you double-check yourself. Buying things on credit is easy, and deliberately so. It’s just £50 a month here, £125 there. But these regular increased outgoings month in, month out, quickly make you poor. When you come to part with your own money though, take that 10-second pause and consider “do I really want this?” or could you make do with something a little cheaper? Do you need it at all, or is it a pure want? If after that 10 second introspection you still want to do it – go ahead. You need it, you earned it, you get it.

There are scenarios where debt can be worth it. Few people can afford to buy a house right out. Sure, a mortgage costs you a fortune over the term, but you get your home out of it. Outside of this realm, I still struggle to convince myself that debt is worth the price it requires anymore.

And I don’t just mean monetary.

• Personal Recessions
• The Importance of Redundancy Planning
• The SCRAM Plan
• A Humble Return
• My Financial Meltdown: Part 3