Life after debt

Take control of your money, finances and loans and you too can well and truly enjoy a 'life after debt!'

In 1943, the psychologist Abraham Maslow suggested that we all meet our needs in a series of levels, sorting out the most important before moving on to tackle the next. He argued that the basic physiological essentials such as food, water, sleep and shelter will be achieved first, before we move on to the next levels, stage by stage. Ultimately, he claimed that we will reach a serene and contemplative state of ‘self-transcendence.’

This theory is not without its critics, and has been (like other psychology based studies) given great exposure and credence in the context of marketing. My own version of this theory is that the flow of money in and out of your household should be similarly divided into five stages.

The ‘financial hierarchy of needs’

In other words, start by getting to grips with your income and expenditure. At the most basic level, you cannot spend more than you earn without storing up a lot of grief for the future. Once the net flow is in the right direction, then concentrate on getting out of debt.

Then you can start saving and investing all that extra money to create your own reserves to buy outright and in full what you need, when you need it. Once you are happy that you’ve built up a sufficiently large enough fund to cope with repairs, large purchases and emergencies you can take a short breath before starting to concentrate on savings that will provide an income.

This does not have to be a massive amount – just enough to know that you can get by without having to touch your capital. At this stage, the world is, as they say, your lobster...you are no longer a wage slave, but can choose a trade or profession that you would enjoy without worrying about the income. I have retired friends who have turned to full, or part time charity work, even voluntary projects in other countries because they can now afford to do so.

1) Live within income

It’s a treasure trove of solid, practical money saving ideas.

This page contains extracts from my first book, which covers a lot of the points here as well as others, but in much greater depth; click here for more details on how to achieve life after debt

Earn more
No job at present?
I know from experience that it is easier to get a job if you have one already. It is also a lot easier to stay in the right frame of mind. Start getting up later, and falling victim to the lures of day time TV and it will become harder to return to the daily grind. It is often better to take anything available, just to keep active.

My friend ‘Pike’ would take temp jobs as a van driver between ‘serious’ jobs; I would also temp, but as a general clerk. We each knew that our skills were being seriously underused, but at least it kept us active with some money coming in. It also acted as an incentive to hurry up and get something better. One job I had was so boring (folding dividend tax certificates and putting them in envelopes) that I had to break the day into 45 minute slots, each with a small reward (a biscuit, or cup of coffee) waiting at the end. But another placement (with the South East Electricity Board) led to me being discovered by the financial big-wig. He arranged for me to be transferred to run a section reporting directly by him. Soon after, I was offered a permanent position.

There is a very powerful sales technique based on ‘reciprocity’. I’ve used this in the past to get a job, and have had it used on me as an employer. Simply put, we are hardwired as social animals to return favours. I can give you the experimental details if you want, but trust me – it works!

When one employer went down the tubes, I knew who had bought all the plant and equipment. Turning up on their doorstep, I offered to work free of charge to help them set up the new company. They accepted, and it was not long at all before they could pay me. Although it wasn’t my ideal job, it did tide me over pretty well until something better came up. I strongly suggest you do the same – take anything you can get for now, learn as much as you can from the experience and keep looking to ratchet up to better jobs, step-by-step.

Already in a job?
For those already with employment there are other options to investigate.

Take on overtime
Look at different shift patterns that may pay more, can you work abroad for a spell as an ex-pat?

Take another job
Especially something you can learn from – aim to temp over a wide range of jobs to pick up skills, jargon and insider knowledge.

Ask your boss
It may seem silly, but are you in a job where you can ask your employer or line manager how you can earn more? Maybe they have a problem that you can solve – your specialist working knowledge may help them save money. One of the first changes made when the Triumph Meridien factory became a co-operative was to stop transporting delicate cast crankcases in an un-padded wheelbarrow over a bumpy concrete floor! The staff knew about the problem, but no-one had bothered to do anything about it before. An opportunity to easily cure a problem had been missed. Ask for a percentage commission on any new income / savings you can make for them.

Can you teach, coach, tutor, make, or repair?
Do remember to declare any income. It may be tempting to ‘trouser’ a bit of extra un-taxed income right now, but it wouldn’t be good to start a new job with a bad previous record! And what better way to gradually learn about keeping records, coping with legislation and other essential business skills? Learn a new part-time skill now, even if it will take time – anything from massage to plumbing, book keeping to bricklaying, and you’ll always have a handy Plan B in case of problems in the future. There are thousands of potential opportunities just waiting for you.

Do you have any other knowledge?
Buy and sell online, through magazines and classified ads, boot fairs, conventions and meetings. Is there anything you’ve always been interested in?

Become an agent, earn commissions
I happily pay finders fees for leads that convert to bookings – look around for any business that you can help in this way.

Look at Tupperware parties and similar home-based part time opportunities where training is given. Again, this is an opportunity to not only earn extra money, but also improve your skills in sales, customer services, advertising and so on.

Spend less
Work out the real essentials that have to be paid for – things you really can’t do without – in contrast with luxury items which although nice to have, cannot be considered strictly necessary at the moment. Yes, there will be time for these later on, and that time is when they can be bought out of spare money, once everything else has been paid for. If you smoke or drink, giving up the 'fags 'n booze' will probably give you an immediate saving, to say nothing of the benefits to your health!

Yes, it means dropping out of the keeping up with the Jones race and admitting that money is tight, but to be honest it can be a real relief to get out of the arms race of constantly buying newer and better ‘things’ to try and establish a social position based on the possession of acquisitions. The correct answer to ‘mine’s bigger than yours’ should be a relaxed and honest ‘so it is, congratulations – I hope you enjoy it!’

Sometimes it is necessary to undergo the short-term pain to achieve long-term results. Following a fall, I’m currently undergoing physiotherapy on a thumb – the bone has healed, but the ligament is really stiff. The instructions were to “push down on the joint until it hurts…a bit more…a bit more…is that painful? Good – now push down harder….” OK, so it may hurt a bit over the next few weeks, but until I go through the process, my hand won’t work properly. And the longer I leave it, the harder and more painful the process will be!

Learn to haggle
I’ve only once ever been thrown out of anywhere for offering a lower price, and it was done very politely (firmly, but politely!); the savings over the years have been huge! My training came at an early age, when my father promised to buy me a moped. We tracked down an ancient Puch MS 50 and went off to inspect it. After running his experienced horse trader eyes over it, Dad valued it at £15 rather that the asking price of £25. He gave me the £15 and drove off. I had the simple choice of either haggling the price down or walking home. Faced with a spotty youth cluttering up his drive and refusing to go away, the seller gave in and I proudly wobbled my way back home.

Gambling
Keep well away from the lottery, cards and all other forms of gambling –

"Hope might be a virtue, but it is rarely a strategy." Richard Parson

Gambling is like so many things in life. Take the easiest path without making preparations, or fail to invest in the necessary work and research and you will probably fail. You have to make the effort to learn the rules and systems, learn how to follow the flow and order of cards – the form of horses. By becoming an expert you create the chance to possibly achieve a satisfactory outcome. Just throw cash at something, whatever it is, and you will rarely hit on a winner.

This is particularly true with the lottery, which is really a straight trade off between hard cash and buying the opportunity to dream. The odds are truly appalling – 1 in 13,983,816 (so about one in fourteen million) as at June 2006. Even if you do win, there are plenty of examples of lives ruined by massive windfalls of un-earned money.

An alternative
If you feel that you simply must have something to give you the hope of an instant solution each month, then you can always consider premium bonds. Although the top prize is only (only!) a million pounds this is surely quite enough to change any life for the better, yet hopefully not enough to really screw it up too badly.

The chances of winning are cumulative as well – keep adding the money that you are no longer spending on the lottery and as your saving grow every month, so do your chances of winning. Your stake has a fresh chance each and every month until you are ready to sell your bonds. The odds of winning any of the prizes are still very poor – ‘Martin’s Money’ has a few things to say about them!

It’s not about winning (although you can still have the dreams about winning a million pounds) – it’s about building up a fund, with the stake money staying in your pocket rather than going down the drain. I’d suggest you switch from the lottery to premium bonds not as a long term strategy, but as a way of shifting your gambling to a format that lets you at least start saving ready to actively change your future the guaranteed way, through passion intelligently directed into effort rather than wishful thinking.

Convert assets into cash
Go through every cupboard and wardrobe – any shed or garage you have. Is there anything that you now neither want nor need? Develop your advertising and copyrighting skills by selling them on. I made over four thousand pounds from eBay by selling on instruments collected over the years, but which were no longer needed – others were then able to enjoy playing them, our insurance premium dropped as well!

Downsize
If you do have to have something, can you get away with a cheaper / smaller model? Perhaps you could run a bike, micro car or scooter for the daily commute, and just hire a car when needed for long journeys and holidays?

Rent out a spare room, holiday cottage, or professional equipment.

Think ‘off the wall’ – can your house be let out as a film or TV location? If you stay with family for a break, can it be let out to others for a holiday? At the very least, look at options for ‘house swaps’ to cut down on holiday costs.

Again, this does not have to be long term, just another way to help you raise some extra cash at this time.

Borrow more
Don’t let any fancy sounding names tempt you. It is all debt, whatever they call it. Not only are you paying out dead money in interest, but committing yourself to the obligation of earning enough in the future to meet all the repayments.

In general, borrow only the minimum sum you can get away with and only when you have to for capital expenditure – things like your house, essential transport, or anything in your business that will earn you a profit. Avoid debt for lifestyle choices – clothes, holidays, holiday homes, non-essential consumer goods and so on. Often the pleasures of ownership, the feel-good emotion of purchasing something fades well before the final payment is made.

Why buy everything brand new? Always check out the second hand options as well – especially if you can buy them outright with existing funds rather than borrowing the money. As a jeweller, it was amusing when customers insisted on buying a brand new diamond solitaire ring, rather than choosing a second hand (‘pre-owned’ if you think it sounds better) one. As the stone itself is probably something like three billion years old, another decade or so is really neither here nor there!

Our grandparents had this sorted out very well – if you can’t afford it, don’t buy it!

Car finance
Ever more inventive systems are found to sell us products that we can’t afford. Have you seen those car ads with some state of the art monster with ridiculously low repayments? Just check out the small print – you’ll find that the balance of the sum due will just sit there, tucked away but racking up interest, until the end of the finance period when it will then become due, a ‘balloon’ payment.

Just think about how it works; you chop in your current car as the deposit, and then enjoy your new pride and joy for three years. Great, wonderful, but then what? You’ve got quite used to having a flash, new car, and like the image, but what about that lump sum now due? If you are lucky, you can cover it by returning the car “Oh dear.... problems..... condition and damage.... no-one wants the old model..... excess mileage.” But then what about the deposit for a new one? Last time you used your old car. Now you’ll either have to go ‘down market,’ or take on more finance.

In both business and private life, a balloon payment agreement is usually a sign that you are buying a better/bigger/newer car than you really should be.

Credit cards
The idea of credit cards in itself is pretty nifty – not only can you split the cost over a couple of months, it provides protection against the selling company going bust or faulty goods, as well as a quick source of ready funds to take advantage of an opportunity.

Just use them as a short term resource only – to be paid off as soon as possible, within a few months at most. If you want to extend the debt longer than that (and assuming you have not got an ‘interest free’ deal on a transfer), then check out the interest rate on a standard bank loan.

It’s getting harder to find really juicy deals, but once again, you can get up to date advice from Martin's Money

Store cards
Don’t. Just don’t! If you don’t believe me on this just look at the A.P.R. rates they charge. If you never look at A.P.R. rates, and don’t know what they are, then give all your cards to a responsible adult to lock up out of harm’s way while you find out about them.

Consolidation loans; getting out of debt
There are some quite good systems advising you how to get out of debt in quite a short time, so I won’t go into too much detail here. In general, they seem to recommend against taking out another to loan to clear off all the others.

Instead, start by using as many of the methods here to save/earn a bit extra each month. Use this to clear off your debts, one at a time and starting with the one with the worst A.P.R. interest rate. Once that has been cleared, add the repayment you are now no longer making to your extra money and tackle the next one, and then so on and so on, until they are all cleared.

Financial Problems
It may be traditional for us Brits to maintain a stiff upper lip at all times and it could well have been a handy survival trait when faced by hordes of uppity foreigners, dastardly minions of the tyrant Bonaparte, or other opponents in the days of the Empire. But letting your money worries go unresolved will almost certainly end up making your life a living hell.

Small problems will grow with time. If you are travelling the wrong way at present, then just blindly charging on will just give you a longer distance to return when (if) you do eventually turn round. If you need help or advice, ask for it – try the Citizen’s Advice Bureau for starters, and your Bank or Building Society may offer a service.

Are there any serious and immediate problems? Take control of the situation as soon as possible – talk to people you owe money to if behind with any payments, and come up with a serious and do-able plan to get back on track. Most creditors are used to having to chase for payments, with little or no contact with their customers. Talk to them in advance if things start to look shaky, and enclose a payment on account when making an offer of payment, just to establish your commitment to action rather than empty promises. Do stick faithfully to any agreed deal and if the worst should happen, do talk to them if it is ever necessary to delay, reduce or skip an instalment.

2) Clear all debt

It is said that ‘If you think you own your house, just try missing a few payments and see what happens!’ Your aim should be to get rid of all of your non-productive debt as soon as you can, and avoid taking out any fresh loans. It’s usually fine to borrow money to buy anything that will bring a profit, and for investment in the future (including education). It is not a good thing however to get into any kind of debt to fund lifestyle purchases. Want a new sports car? Fine! Just save up the money until you can buy it outright.

3) Build up reserve fund

Once the last debt has been paid, you can start saving and investing all that extra money to create your own reserves as a buffer. These will allow you to buy outright what you need, when you need it. Avoid high interest rates by settling insurance bills in one go when they come up. You will also now save all the time needed to juggle income and expenditure each month when things are tight.

And without the need to buy anything or indeed everything on credit, there is much more freedom to haggle cash deals for whatever you need. You can also seize the opportunity to snatch any bargains that come up.

Instead of now just buying stuff with credit, (Other Peoples’ Money), we now only use savings and hard cash – and what a change that has made! Before, it was automatic – every three years, buy another car on another three years credit, regardless. The last time was very different. Although the funds were ready and waiting to buy a new main car, I just couldn’t bring myself to cash in the bonds until it was really necessary to do so. ‘No, it’ll do another year!’

When the time did finally come to replace it, rather than buying new I found a cracking deal on a two year old model – preserving money in the car fund ready for the next time. Now that the money is ours and real, it changes everything. The previous car was with us for seven years, I suspect this one will manage at least ten.

Life will almost certainly improve if you have the security of a nest egg behind you. Your whole attitude to life will change for the better once you become a saver, rather than just a borrower and constant payer of interest. If you have ever dreamed of starting your own enterprise, aim to grow a war chest ready to kick start your new business.

I tend to squirrel away reserve funds not only privately, but also for all of my companies. Not only do I now sleep a lot better at night knowing that there are hedges against any nasty surprises, but the spare cash lets me take advantage of any opportunities that come up to grab real bargains.

4) Have sufficient savings to provide enough income on which to 'get by'

In other words, know that, whatever happens, you don’t have to do another day’s work in your life. But I don’t mean just earn the money so that you can retire as soon as you possibly can! If your greatest wish at present is to wave a finger or two at your boss, then I’d strongly suggest that you start looking for an alternative form of employment as soon as possible.

However, to have reached this stage it is likely that you have already found where your passion lies and turned this into a stream of income. If your life is properly sorted by now, then you’ll love your ‘work’, and be eagerly looking forward to each day. Your ‘job’ will be a pleasure and absolute joy.

But what if something goes wrong? Get that financial safety net in place as soon as possible! Be safe in the knowledge that you could, if necessary, go and sit on a beach for the rest of your life if that appeals to you. You may decide to donate the rest of your time to helping others. An independent income will grant you the freedom to take on poorly paid, or even entirely voluntary work.

5) Enjoy!

Well, why else did you put in all that effort? You cannot take it with you when it is time to pop your clogs – do please take out the time to enjoy the fruits of your labours. The friend of an ex-colleague was very highly driven, and achieved a great deal for her employers before putting herself into an early grave. Her relatives were all most grateful for the inheritance! It’s just a shame that she was unable to enjoy anything like as much of her efforts as they did. And perhaps had she relaxed a bit along the way, her own days would have not been quite as few.

More about how to enjoy a 'life after debt'