I don't want to be perfect, just better...

Thursday, September 24, 2009

Gail Vaz-Oxlade: Take the Debt Test

I have gushed before on my love of Gail Vaz-Oxlade and her no nonsense approach to debt, life and marriage. Look here, here and here for more on my Gail obsession. I read her blog in marathon sessions every couple of weeks. I found this piece during my marathon GVO session today. What are even better than GVO's blog post are the comments some of her readers leave. Head over to her blog to get your own GVO obsession started.

A lot of the people think that being in debt is part of life. Their parents are living beyond their means. Their sister is always into her line of credit. Their best friend is up to his armpits in credit cards. Hey, man, debt IS.

While the Life Pie makes allowance for the fact that lots of people are in debt – a piece of the pie is all about debt repayment – the reality is that people are carrying far more consumer debt than they can reasonably handle. And the slip into Too Much Debt happens slowly and insidiously so that many people don’t even realize how close they are to Debt Hell until they feel the fire on their faces.

So how much debt is too much debt? From a purist’s perspective, any consumer debt is too much debt. Whenever you have to take money from your cash flow to pay for things you’ve already used up, you’re getting behind the eight-ball. The Life Pie says that if you’re spending more than 15% of your cash flow on debt repayment, you’re in trouble. And that’s not 15% to make your minimums. That’s 15% to get to Debt Free in three years or less

If you do the calculation and you find a larger and larger percentage of your income going to debt repayment, you should wake up and smell the coffee. And if you’re so focused on debt repayment (it’s taking all your resources just to keep up) that you have no safety-net (savings) in place, you need to give your head a shake.

  • Are you at or near your credit limits on your lines and/or credit cards?
  • Can you make only the minimum payments?
  • Are you late with regular bill payments?
  • Are you using credit to buy items you used to pay for with cash?
  • Are you not even sure how much you owe?

If you answer yes to any of these questions, you’re headed for a collision with your creditors. To avoid the crash, you’re going to have to find a way to cut your expenses so you can:

  • Balance your budget, so you no longer need to use credit
  • Stop using credit completely
  • Repay what you owe as quickly as possible.

While my rule of thumb is to make sure you’re getting your debt paid off in three years or less, the OR LESS is important. Three years is the absolutely longest you should take for any consumer debt (give yourself 5 years for any regular student loan debt; for professional student loan debt you may have to go 7 or more years.)

The less time it takes to get out of debt, the less you’ll pay in interest and the faster you can get back to what you want to actually want do with your money: buy a home, raise a family, go on a fabulous vacation, whatever your little heart desires.

To this end it’s important to accept the fact that every purchase we make—excluding the absolute necessities like food, rent, and gas for the car—is a choice. And each time we prioritize spending on a “want” over debt repayment we’re just dragging out the misery.

There are loads of ways to cut expenses. From forgoing pop or coffee on the fly, to saving money on groceries, making even small changes can net big rewards for your debt repayment plan. Some people swear by The Weekly Meal Plan. Others swear by The Shop Only Once a Month plan. Hey, whatever works for you.

The important thing is to find the money you’ll need to get your debt under control and within your goal period achieve debt freedom. Nobody else is going to do this for you. If you really want to be Debt Free Forever, YOU are going to have to make it so.

No comments:

Post a Comment