Wednesday, 28 August 2013

The Frugal Route out of Debt (Part 1)

The Road to Debt Freedom

Long and boring? Perhaps
 
Full of personal opinions you may not like? Most Likely!
 
A pack of lies? No, just an honest look at some spending habits.
 
The problem with debt doesn't lie in how little money you earn, it lies in how you spend that money. Never having been in a household that has cleared £20,000 a year, I cannot begin to imagine what it must be like to have two fulltime salaries coming in, not even basing them on today's phenomenal (to me) minimum wage. In absolute honesty, the current minimum hourly rate has been close to the highest hourly rate I have ever earned as an employee. (That's probably more a reflection of my age than anything else.)
 
So, here goes for a rollercoaster ride that can take you out of debt and into what many in modern society think is poverty - how weird is that and how deluded are they? I call it a good life!Poverty, to me, suggests starvation and deprivation with no escape!
 

GETTING OUT OF DEBT ONCE AND FOR ALL - SOME SIMPLE CHOICES
  1. Stop spending on anything that is not needed. 
  2. Pour a cuppa and sit down with a notebook and pen, then count up exactly what you have coming in each week/month/year
  3. Count up every penny you are spending each week/month/year
  4. Take a deep breath and pour another cuppa
  5. Make a start on a statement of your financial affairs.
  6. Set yourself a budget and stick to it
  7. Let your bank/building society/creditors know your full financial situation if there are any arrears involved 
  8. Liquidate any assets you may have that could pay off any arrears. Declutter and sell your surplus, for example.
  9. Start tackling the debts, highest interest rates are best to be cleared first.
  10. If it makes you feel better (keeps you sane), clear off the smallest debt as soon as you possibly can so you can experience achievement as quickly as possible. 


Be realistic about your situation.  Be honest in setting your priorities and talking with your creditors.
Be kind to yourself, you are where you are, so there is no point in beating yourself up over it. (Thanks for this addition, Tad)

 
You have now made a good start by looking at the possibility of calling a halt to more debt and turning your situation around once and for all.
 
Now we will take a closer look at these simple steps, starting with number 1 - stop spending on anything that is not needed.
 
Basically, this means call a halt to everything, even if it's only for an hour to take the time to assess the situation. Determining your needs from your wants is a massive step to take for some, so the easiest way to do this is to look at everything you have bought or spent on since your last payday. Needs are the absolute basics to sustaining life itself - food, warmth, shelter, essential medications. Make a list, it's good to look back at it now and again to see how life changes on an almost daily basis without your noticing.
 
Now try to list everything else, and I do mean absolutely everything, right down to how many miles you drove and every bill payment, debt repayment, bank charge and interest charge. I know, it's already getting scary just thinking about it, let alone looking at the figure on the paper or screen in front of you, so here are a couple of examples from previous years. We all need to start somewhere and, in the beginning, we all make mistakes. But we all need to set our own budget and stick to it.
 
WHAT  IS A BUDGET?
 
In very simple terms, it is a calculation of all the money you expect in, from which you need to pay everything. Your overall annual household income is what your annual budget is based upon and from this, all spending must come.  Only by knowing exactly how much you are spending can you begin to take stock and calculate or estimate how much money you need to pay your way throughout the year.

For the purposes of frugal living, we are aiming to spend less than we earn at all times or, at the very least, afford to pay everything on what income we have, even if this means making some drastic changes to future spending and earning plans.

However, many people (and companies, banks and Governments) end up spending more than they actually have, which results in debt.

Here are a couple of examples from 2007 (taxes, interest rates and benefits have changed since then):

Lifestyle 1

Couple with 2 of a family, husband works full time on a salary of £30,000 and wife is a full time mother/homemaker (not sure what the politically correct term for this category is any more!) Total income is approximately £452 per week including Child Benefit.

Mortgage & Buildings insurance - £740 per month = £170 per week
Council Tax/Water - £125 per month = £24 per week
2 cars, both on HP - £300 per month = £70 week
2 x road tax, insurance, servicing, petrol/diesel etc = £270 per month = £62 week
Credit cards - £100 per month = £23 week
Loans - £100 per month = £23 week
Total expenditure before actual living expenses - £372 per week
Balance remaining = £80 for everything else
Equivalent to £4,171.00 for a full year
 
The annual household budget for lifestyle 1 is £4,171.00

Lifestyle 2

Couple with 2 of a family, husband works full time, wife part time, joint salary of £18,000 plus Child Benefit, total income approximately £300 per week

Mortgage & Buildings insurance - £303 per month = £70 week
Council Tax/Water - £100 per month = £23 week
Home Improvement loan - £266 per month = £61 week
Credit Cards - £100 per month = £23 week
Other debts - £100 per month = £23 week
Car - road tax, insurance, servicing, fuel etc - £100 per month = £23 week
Total expenditure before actual living expenses - £223
Balance remaining = £77.00 for everything else
Equivalent to £4,015.00 for a full year 
 
The annual household budget for lifestyle 2 is £4,015.00

It didn't really matter what the annual income was, there always seemed to be a significant difference in the way that income got spent. Attitude to debt differs from person to person, depending on how easy they can access it and then pay it all back.

As another example, a single professional person earning £52,000 a year may well only have a household budget of £4,000 after paying commuting costs, the mortgage and upkeep of a grander house in a more expensive area, a sportier car, regular entertaining, foreign holidays, the gym and other luxuries they think are affordable, such as beauty treatments, designer clothing, a gardener and/or cleaner.

No matter what your income bracket, we could all be in the exact same boat. Fortunately, we each have the freedom to choose how we stay afloat. The £4,000 is a figure that has stuck with me for many years and seems as relevant now as then.

No matter what you do or how you do it, you are always going to have to pay the cost of living. If you can reduce the cost of living and clear off ALL debts, then think of the fun you can have from thereon in - that is the good life.

Budget to within an inch of your life and see just how much it costs you to live. You can see by the above how I arrived at £4,000 and hopefully this will make things a little clearer for our newest readers and challengers on the www.frugalforums.co.uk, rather than having to search through years' worth of posts and pages only to find themselves in even older archives.
 
Part 2 is coming right up, so don't wander far - I hope you filled a flask rather than repeatedly boiling the kettle? :)

Edited in - Part 2 can be found HERE


10 comments:

  1. Fabulous post! Very poignant for those who are suffering with debt. I only have a mortgage but debt is debt. You said it best with this quote:

    "No matter what you do or how you do it, you are always going to have to pay the cost of living. If you can reduce the cost of living and clear off ALL debts, then think of the fun you can have from thereon in - that is the good life."

    That's my goal! And that's what I am working towards :-)

    Pru

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    Replies
    1. Good luck, I wish you a speedy journey there and the health and longevity to enjoy it. :) I am very fortunate in getting past the mortgage stage, just need to fix up the fixy-up now. :)

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  2. Interesting post and helpful to boot. Although I do wish our costs were as low as some of them noted here (and 2007 doesn't feel that long ago!) Ever since I first read about your £4000 budget I've been meaning to break down our budget in this way to see how much we do actually have for our 'lifestyle'. I suspect you're right and would be around £4000.

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    1. Sara I can't really explain it but the 'magic' number always turned out to be around the £4,000 mark, so I set the challenge of making it £4,000 exactly so anything extra was just that - extra. I'd been using the figure since the 90's and it has never changed other than the fact that people seem to be able to take out phenomenally huge mortgages and despite the interest rates being at all-time historic lows, many of the mortgage rates are higher now than they were over 10 years ago. I think the best deal I ever had on mortgage was 3.5% but now they seem to think they can rob mortgage payers of up to ten plus times the base rate. I can't use the language on here that I use to describe these financial institutions, it's just sickening what's going on in that department alone.

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  3. Interesting I need to sit down and redo our budget now that we are mortgage free.

    Gill

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  4. All replies linking to debt consolidation loans (or loans of any description, for that matter) will be deleted. I apologise for the numbskulls who have no interest in our topics other than to spam us with unwanted links. I delete them as soon as spotted to ensure they don't get paid for posting them.

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  5. The post is great.atlast I find some relevency of the work over here. Thank you so much. I will be stay in touch.
    Debt help

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  6. Replies
    1. Thank you. I will be starting the frugal living challenge for 2014 and, once again, I am using the figure of £4,000 as my personal budget - not to reflect on my pittance of an income (although it is) but to share my path throughout the year with others who may be in a similar situation.

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