Aha! Time to give ‘future-me’ a chance
Getting out of the debt spiral.
You know those ‘aha’ moments when you realise that enough-is-enough; it’s time to sort this mess out and move on to brighter things?
We all have them - these ‘aha’ moments - at various stages of life, and for various reasons.
For me, it was my finances. I had what felt like a boulder the size of an angry asteroid weighing my life down. Its name: debt.
It can be a tricky thing debt, unless kept under guard with a watchful eye. And if you treat it like a collectable, like I did, it doesn’t take long before it’s running your life.
Where it all began…
Unfortunately, my story isn’t extra special; there’s plenty of us out there who take on a string of debts for various things, each time chipping away at the future potential of our income. Mine started with needing a few things for a new flat – the usual: a new bed; a couch etc.
Looking back, I’ve found myself saying to past-me: “Come on now, did you really need the posh couch? A simpler more cost-appropriate option (with a couple of colourful throws to satisfy my inner-home-maker) would have sufficed.”
But tempted by the store card interest-free offers, I wasn’t paying enough attention to the price tag, and I definitely wasn’t thinking hard enough about paying it off before the end of the interest-free period. Massive mistake number one.
Shortly after, my car gave up the ghost so it was time to get some new wheels. Now, this time I was thinking a little clearer about the cost of finance and how long I’d have it for. And after all, getting from A to B is less of a luxury than splurging on a posh couch, right?
But while this debt decision was certainly smarter than my unhealthy relationship with store cards, it wasn’t something I had planned to spend and meant money coming out of my income for a good long period of time. Money that would be tied up with a label on it that reads: “This is not yours for another four years.”
Once again, looking back perhaps I could have taken the loan over a shorter period of time or, even though my wheels aren’t overly flash, perhaps I could have opted for something slightly cheaper. Hindsight is an exasperating teacher.
Still, time passed and when the ‘need’ struck, I continued to ‘pop’ a purchase on the store card; add a ‘small’ limit to the credit card – you know, for those months that the budget is getting a bit of a ‘squeeze’. And boy, it really adds up. And unless you’re watching it, it adds up quietly in the background – a bit there, a bit here, payment on that date, payment on this date…
So my blind-debt behaviour carried on for a while, but then some time down the track I was confronted with one of those life lessons that really should have been pretty obvious to me: You just don’t know what’s around the corner.
You don’t need to know the details, but life threw one of those lovely little curve balls that it does; a curveball that resulted in a price tag that meant, you got it, collecting more debt.
By this stage, I would have given a seasoned circus clown a run for their money with my debt-juggling skills. Pay that then; pay this on that date. But I was also collecting late fees and accumulating interest charges by not paying more than the minimum, and basically operating my debt right out of the “How not to operate your debt” playbook. And of course, with all this juggling going on, there was scant room left for saving or thinking about the future.
Now, don’t get me wrong: Debt itself is not a bad thing. It’s a tool and it’s a necessary part of life. Most of the big purchases, events and milestones in life – buying a home, buying a car etc – come with debt. And even when it’s debt for an unexpected need, debt itself is still just a tool.
No, it takes two to Tango. And as I realised, it was my relationship with debt that had changed it from being a tool, into being trouble.
Re-evaluating my relationship with debt
So, that ‘aha’ moment struck – sometime on a Sunday morning after waking up with visions of payment dates swirling in my mind. Because that’s the other thing about having a rubbish relationship with debt – it plays on your mind when you’re supposed to be getting 80 winks and that’s just plain stressful: Stressful not only because of the financial implications, but because it can feel like a never-ending spiral. Simply put: having money worries and figuring out that your future is on hold, is not an awesome head space to be in.
The first thing I realised, and perhaps the most important thing, was that I needed to be honest with me, myself and I about how well I manage and understand money.
Basically, I needed to have a good frank chat with myself about how I got where I did, and what I was going to do about it. No excuses; no self-justification, but also no self-flogging (seriously, beating yourself up in these situations just doesn’t help). What I needed was a nice honest chat with myself about the facts and my debt behaviour, so that my future-self could reap the benefit.
So, with a cup of tea, notebook and an open mind, I started to build a picture of my relationship with debt…
I figured out that my personality of ‘immediacy’ meant that I had been making a lot of decisions based only on what I thought I needed right now; rather than thinking about my future. Take that posh couch as an example… I finally learnt that life is a marathon, not a sprint, and you need to have some ‘energy’ in the tank for what’s around the bend.
I realised that I was definitely a “glance over the detail” type of person: I hadn’t sat down and run the numbers to properly understand the total cost of debt; I essentially looked at a repayment figure and would think ‘yes, that works’ without really giving it any thought or talking to experts about how I could reduce that amount – every bit counts as they say.
And I hadn’t paid any attention to how I could structure my debt repayments – particularly for things like store cards and credit cards. I didn’t think to work out a monthly repayment amount – as opposed to the minimum amount asked for – that would put me in the clear as fast as possible. The result? Debt that I took on yonks ago sitting around gathering dust and barely being chipped away at due to high interest rate charges eating up an unbelievable amount of the monthly repayment. Money down the gurgler…
Getting clarity
Now that I realised I had a huge opportunity to make a difference just by paying more attention and by better understanding my own money ‘personality’, the next step was to get a firm grasp on what I owed and the mechanics of my debt so I could work out an action plan.
It’s not an overly complicated exercise when you get into it, and in my experience gave me a real sense of empowerment: Once I had all the facts to hand, I knew what I was dealing with and that in itself made finding a solution clearer.
For me, it was as simple as creating a spreadsheet that listed all of my debt relationships and their specifics. It included the lender, the loan or finance reason, the interest rate, how much I was paying each month, the outstanding balance for each, and how long each would take to pay off at the current rate.
That gave me a total debt position – i.e. “you owe this much, and at this rate, it will cost you this much to pay off”. At that point, I thought I had the whole picture, but a quick call to my mate also highlighted something else I needed to consider – early repayment fees, i.e. how much it would cost to pay off individual loans if I had all the money to do so right then. And also, that I needed to think about what debt was more expensive than others and what a reduction in interest rate would achieve.
So, to complete the picture, I called all my lenders and asked for a pay-out figure, added that to the spreadsheet, and then I had my total. Ouch.
Ouch in reference to the amount, but perhaps a more painful ouch when I looked how much it would take me to pay off my debt using my current ‘How not to operate your debt’ approach.
Making the plan
Transparency was my best friend – there really is little else more powerful than having all the facts together when working through debt and your options. And for me, it highlighted that investigating debt consolidation would be a smart option.
You’ve probably seen articles about debt consolidation in your travels so will know that a couple of the key benefits are – firstly as the name suggests – consolidating all debt into one loan with one regular repayment, and reducing the total cost of debt.
For some people, simply taking the hassle out of multiple debt management is the goal, whereas for others, getting rid of debt faster or paying less for debt is the goal.
And that’s where knowing your debt intimately comes in handy when researching your debt consolidation options.
I was in the group that wanted to get rid of it faster and pay less for it. So armed with the variety of interest rates (28% for that store card, 17.5% for a personal loan etc) and what my debt was costing me in dollar terms, I was able to work out what I wanted out of debt consolidation before approaching lenders. Namely, I wanted to pay it all off in 24 months, and I wanted to reduce the total cost of my debt in the process.
And this is where time plays a big role. In my example, if I had consolidated my debt but taken a new loan out for it over 4 years (instead of 2), it would have cost around the same amount to pay it off. Sure, it would have been easier to manage as one lower repayment, but it would have cost me the same as my previous “How not to operate” debt approach. By setting the new loan for 2 years, and at a repayment amount that with some discipline I could afford, I significantly reduced how much my debt cost, and gave myself a short term horizon for sorting it.
As I said, everyone is different and we all have different reasons for consolidating debt. For some, it is an opportunity for simplification, for others an opportunity to say goodbye to high interest rates after missing that ‘interest free’ window. But whatever the reason, if I could impart one lesson I learned through all of this, it would be: know your debt inside and out, and decide for yourself what you want to achieve first.
There are some great lenders that are expert at helping those of us who have fallen into an unhealthy relationship with debt. Rather than just using debt consolidating as a lending solution, think about it as an opportunity to take back the reins of your relationship with debt: Take the time to give future-you a look-in and try to find a balance between what you need today, and what you want for your future.
Unintended upsides
They say the best lessons are the ones we learn ourselves. My brush with the debt spiral certainly has had wider benefits that just getting me back on the road to being in the black. These days, I’m much more aware of what I am spending and why; I pause to consider what might be around the next corner and where possible, plan for that; and I guess in a nutshell, I’m a little more considerate of future-me when making financial decisions.
I’m not going to say I’ve got it all sorted – life is a journey after all - but that ‘aha’ moment that forced me to take a good look at my relationship with debt has built much needed skills in my money-management-tool-box; skills that I am sure future-me will thank me for in time.
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