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
• The Importance of Redundancy Planning
• Dig Yourself Out of Debt: Cleaning Up
• My Financial Meltdown: Part 3
• Say Hello to Kublax

This is part 3 of the Meltdown Monday series. You can catch up on part 2 here.

My solicitor (it still feels weird saying that) gave me a bit of a grilling about my personal finances, and how stupid I’d been to have been taken for such a ride in the first place. I think he felt sorry for me in a way, and I’m glad he said what he did. I walked out of his office very depressed, but inside me something clicked. I suddenly became very determined to beat my debt situation and turn my life around. I’ve since discovered this is commonly termed your ‘Light-Bulb Moment‘, particularly by the folks over at the money forum I frequent.

When I got home, my drive was still there to do it. I went over my bank statements again, except this time concentrating on my own spending; Every month there was hundreds of pounds of unnccessary spending of my own doing on there. Expensive organic food shopping, premium diesel, takeaways, gadgets, insurances and more. I was also paying off 2 credit cards and 3 personal loans with wildly varying interest rates, so I needed to work out what I owed and to whom. I worked up a spreadsheet (budget) of my essential spending, and vowed to cut out everything else, trying desperately to spend less than I earned. I drastically cut spending even on essentials: my food shopping allowance to myself dropped from an average of £300 a month down to just £50, my diesel average spend had to drop from £250 as that was an insane amount of money just to spend on getting to work and back.

Then, it was time to attack my debts.

One credit card I’d ignored for the best part of 3 years: it refused to work in the petrol station one morning and I buried my head in the sand from that point onwards. I assumed that as I was paying upwards of £100+ a month on it, the balance must be shrinking. Instead – after biting the bullet, phoning them and resetting my access details for online banking – it turned out I was over my credit limit and had been incurring £16 fees every month for the privilege for the last 3 years! I was also paying interest on these fees every month, so my balance was going up not down, despite my payments. £120 was taken automatically from me every month, but after £90 interest was added, £20 Payment Protection added, and then a £16 fee on top,  my monthly repayments were not touching the balance at all.

Despite this, my credit rating was still good. I arranged an appointment at my bank with a financial adviser and went down with my tail between my legs a few days later in the frigid January morning air. I’ve been with my bank since I was 12, and I honestly believe in this instance, loyalty paid off. I explained my circumstances, was brutally honest, and despite the bank earning loads off me, the lady I saw was keen to help me. She consolidated my existing loans (one at 19% APR, the other at 12% APR) into one loan at a much more preferable 8%, and said I was also showing as pre-approved for the Barclaycard Platinum card that carried a 15 month 0% balance transfer for new customers. She said it was unlikely I’d get a great initial credit limit due partly to policy and partly my existing credit commitments, but anything would be better than nothing for transfer purposes. She also made a point of saying that I shouldn’t be tempted to spend on the card, as despite it having 0% on new purchases for 3 months, the terms of the card meant my balance transfer would be paid first, meaning I’d be stung for interest on the purchases all the while any transfer remained.

Honest advice from a bank – how terribly refreshing!

I walked out instantly having saved £55 a month in loan repayments, and shaved 12 months off the term. Even better was the payment holiday the loan gave me to begin with; 2 months with nothing to pay. I needed this, as it helped me work out where I was without worrying I would end up in my overdraft again.

Shortly thereafter my new credit card arrived with a £1,000 limit. Not great, but £1,000 at 0% is better than £1,000 at 16.9%, so I transferred what I could off my old card onto the new one, and planned to pay off the remainder as quickly as I could. The other credit card I paid off and closed instantly, as it had a surprisingly low balance already. I upped my automatic payment to £400 every month, and made an immediate one-off payment to get me just under my credit limit again to stop the charges. For the first time in 3 years, my credit card balance would reduce on the next payment!

I felt terribly alone at this point. Despite having a good relationship with my family, it’s not a topic I personally feel comfortable discussing with them in great detail. I wanted to feel part of a group in my fight, and to know I wasn’t alone. I mentioned debt to a trusted friend at work and he introduced me to Money Saving Expert (or ‘MSE’ to its friends). The website is a goldmine of information, but the forums are the real feature; Thousands of helpful people from all industries, sectors and walks of life combine together to cut bills, reduce outgoings, help the environment, help each other and play big corporations at their own games. I was hooked instantly – I felt like I belonged – and with their help, I planned my way out of debt for good.

Quite arbitrarily, I set my Debt Free Day as New Years Day 2010. I knew I would struggle to meet that goal, and struggle a lot. I owed £16,000 (if I included my overdraft), or potentially £20,000 (if I include my projected divorce cost), but the difficulty of it is in part why I chose it. I work best under pressure, and it was a significant date, too. It was almost exactly a year after I moved out of my old home and back in with my parents, and it also signified a new beginning: A new year, a new decade, and a new, debt-free me.

Since that moment, I have been working every possible hour of overtime humanly possible, and saving every penny after paying off my debts according to my own plan.

Continue to Part 4…

• My Final Credit Card Payment Coming Due
• My Networth Update - Aug 2009
• 7 Reasons My Friend is Poor
• American Banking v. English Banking
• The Importance of Redundancy Planning

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!

• 10 Economic Predictions for 2010
• Dig Yourself Out of Debt: Avalanches and Snowflakes
• Dig Yourself Out of Debt: Know What You Owe
• The Importance of Redundancy Planning
• Dig Yourself Out of Debt: Spend Less Than You Earn