Tips To Get Out Of Debt (Part 2)

John Vaughan (Financial Advisor) @ Lucid Living

In Part 1 of this article, we offered you 5 powerful steps to immediately STOP your debt splurge. If you implemented those steps, your debt hang-over should be subsiding and you should be feeling far more confident about your prospects of successfully getting out of debt.

Debt-free living is achievable for every one of us, but it does not happen automatically. We need to change our understanding and attitude towards credit and debt. Credit can be ABUSED and the result of that excess, is the financial and emotional situation that many of us are experiencing right now. When credit is used to fuel a lifestyle beyond ones means the result is chronic debt problems. On the other hand, the effective use of credit, leads to wealth creation. Wealth creation is the GOAL!

These next 5 STEPS are designed to keep you on the path to debt-free living and wealth creation, but also to get you to start thinking differently about how you use credit and debt.

6. Spend Less & Save More

Your financial problems stem from the simple fact that you are SPENDING MORE than you earn. In Part 1, we asked you to “Track Your Money” – this allowed you to identify all your expenses. Now that you know WHAT you spend your money on, we want you to cut the unnecessary expenses. To do this, we want you to take the “Happy Meal” Challenge.

We challenge you to cut your expenses by R29.95 (the cost of a Happy Meal at McDonalds) everyday for the next week and to maintain that saving for a year. In one year, you will SAVE R10,901. You can use this saving to pay-down or settle one or more of your debts.

Scrutinize your spending on a daily basis and identify those expenses you can do away with (or initially, cut-down on) like:

• Buying lunch everyday, coffee, cold-drinks, cigarettes etc.

• Unnecessary cell phone calls;

• Petrol/fuel;

• Electricity;

• Insurance premiums, banking charges etc.

7. Cut the Credit & Grow the Income

In most instances people find themselves in debt, because of living beyond their means. This means, buying “stuff” that you CAN’T AFFORD and probably DON’T NEED. Take an honest and objective look at your “stuff” and decide what you really need and what is simply excess. When a ship is sinking, the first thing to do is to lighten the load, by getting rid of all the unnecessary “stuff”. Re-evaluate your lifestyle – apply a corporate attitude: sell unnecessary (non-core) assets to improve your cash-flow. HERE’s HOW:

Return stuff

What household, vehicle, electronic or clothing item have you bought that you haven’t used? If the price tags are still on or the item is still in the packaging, take it back to the store. If you don’t have the receipt, often you can still get a credit at that store.

Rent or sell stuff

• The holiday home, investment property and time-share options. Can you rent them? Even if you only have one home, should you trade-down to something more affordable? Is it time to sell? Remember, it’s not just the credit costs, but also the insurance (building, contents and life etc.), and maintenance (levies, rates & taxes; repair etc.) costs – it all ADDS UP.

• What about the second and third car? If you only have one car, should you be thinking about public transport? Vehicles, like homes, have the added cost of insurance and maintenance.

• Do you need a television/home theater system in every room in the house? Electronic equipment is expensive and adds significantly to the costs of household insurance. Fortunately, it is also in high demand – chat to friends, family or place an ad in the newspaper.

Increase your earnings

If you are in a position to increase your earnings – NOW is the time to do it! Find a way to bring more money in and apply it ALL to the debt. Consider negotiating an increase in your salary, working over-time or even taking on a second or part-time job.

By decreasing your credit exposure and increasing your income, you are left with more money to settle your debts sooner. This will result in lower credit costs, leaving you with money to begin exploring avenues for wealth creation.

8. Change Your Psychology

Use cash rather than credit

This means using only the cash you have (avoid borrowing) and not funding expenses with credit. People spend 30% more when using cards then if they used cash. Have one primary credit card and use it only for emergencies or major necessities. Also, do not accept increases on your credit card limit above an amount you can easily pay off in three months.

Define limits

Have a limit on how much cash you will allow yourself to withdraw each week and month. Avoid overdraft facilities, they are difficult to manage if you are not disciplined and make it too easy to step out of line with your budget.

Become a savvy consumer

Look for deals, bargains, and savings. You’d be surprised at how much you can save if you take the time to shop around. Price comparison websites are useful.

Utilize your windfalls like financial birthday or Christmas gifts, tax refunds, insurance settlements, rebates, bonus, and salary increases for REDUCING DEBT. Avoid the temptation to splurge this extra money.

Pay attention to your spending and be conscious, all the time, of your choices and actions.

9. Get Professional Help

If you have diligently applied all the steps, but still find yourself unable to significantly change your debt situation – its time to GET HELP. You still have options, but you need to be pro-active and act NOW. If you do nothing your situation will deteriorate and your alternatives will disappear.

Speak to a Debt Counsellor

You may have to consider debt review. A debt counsellor will assess your financial situation and advise whether you qualify.

Speak to a Lawyer

You may have to consider administration or sequestration. An attorney will advise you of the process and implications.

LUCID has a team of professionals (including attorneys, credit managers, debt counsellors and financial advisors) that can help you. Contact them NOW on 010 590 5617.

10. Build a Wealth Creation Plan

If you have successfully implemented steps 1-8, then:

• You will know what your income, living expenses and debt repayments are;

• You will have negotiated the best possible terms on your credit facilities;

• You will have prioritized your debts and created an optimal debt re-payment system;

• With the “Happy Meal” Challenge you will have cut unnecessary expenses; and

• By re-evaluating your lifestyle, you will have reduced your debt and increased your disposable income.

You are now in the perfect position to construct a FINANCIAL PLAN that will not only keep you DEBT-FREE, but will start growing your wealth. Think about this as an “emergency fund” or “nest egg”. The money you save and accumulate, through your financial plan, will ensure that you never have to get into DEBT AGAIN – use this CASH to pay for emergency expenses and in the long-term allow it to grow into your retirement nest egg.

If you have not already approached a financial advisor, now would be a good time. You will need expert guidance to construct your wealth creation plan.