When it comes to getting in and out of debt, I've been there, done that and come away with more than just a T-shirt.
When I was a young guy just starting out in the working world, I made my fair share of mistakes which have taken me a long time to correct. I remember the day when my pre-approved credit card landed on my doorstep and my eyes lit up, but oh boy didn’t that get me into some trouble.
Firstly, your mind-set is so important:
Your attitude is integral. I like to think about the things that I do as “beating the system'. To overcome this you need to always think of yourself as a winner, not a loser.
I defined what 'better of'' meant to me and found ways to try and improve the amount of disposable income that I have left at the end of the month. The ultimate goal was to reduce my debts, so I could start thinking about my saving and investment options for the future.
I figured that the more disposable income I had, the more I could put towards a fund for 'preventative measures' – and ultimately, the better off you’ll be.
Constantly keep in mind this mantra: beat the system, be a winner.
Secondly, I’m not going to preach at you:
I’m a person who knows that bringing my lunch to work every day will save me money, yet I continue not to do it - why?
Well, I like to go out and get something because I don’t plan my meal rota and you know what, that’s OK, because I’m thinking about other ways to save money. I’m the person who wants to consume roughly the same things each day, week, month and so on, as I don’t want to radically change that aspect of my life. So what can I do about it?
One way is to set yourself a simple savings goal: find ways of consuming the same, but for less. There are discounts, offers, 2-for-1, loyalty-type-stuff out there in buckets. You can even download apps to your smartphone to explore how you can save.
Some practice examples of how to win:
I’m going to focus on travel, as it’s something most of us have got to do in order to get to work – be it by car, van or public transport. This is the stuff we generally pay a monthly amount towards because it feels more manageable.
For the first time about 4 years ago, I started paying for things like insurance annually because it not only saves money, but it also builds on the''preventative measures' that I was talking about earlier. In the long-term, it helps to prevent future debt that could end up severely hurting my pocket.
Insurance firms like to charge you 20~25% APR for the pleasure of giving them a monthly payment
Perhaps you already know this, but you’re in a situation where these kinds of rates are considered 'cheap' – or you have no other choice.
I travel to work in London using public transport, and have a 1-4 zone oyster card that costs £178.60 a month or an eye watering, £1,860 for an annual pass. Now, if I were to keep paying this on their monthly terms I’d be paying £2,143.20 a year, which is £283.20 extra!
Even with, let’s say, an average of 35 days worth of holiday (including bank holidays) it still works out better value going for the year all in.
My car insurance also just came up for renewal at a yearly cost of £574.50. If I had opted to pay this monthly it would have been £53.05 a month, which would total £636.60 and cost me an extra £62.10 a year – real nice of them!
So how do I begin to weigh-up my options when it comes to my travel expenditure and insurance costs?
First I worked out costs and possible savings:
If I choose to pay each month, it will cost me £2,779.80 in total and I will pay back £231.65 a month.
If I choose to pay each year, it will cost me £2,434.80 in total and I will save £345.00 for the year.
No', here is the dilemma: I don’t have the cash flow to take a hit of £2,434.80 in one go, so I decided to get a loan.
It was important that I only took a 1-year option for the loan because I needed to try and build up a 'war chest'. This would allow me to be more financially resilient, enabling me to reduce the amount I needed next time around as, evidently, I still may need to consider another loan the next time my bills come up for renewal.
Some numbers to consider:
A 1-year loan of £2,500.00, at a representative rate of 6.9%, will cost me £215.96 a month in repayments, which is still less than I would have been paying if I had carried on making payments to TFL and my regular car insurance provider.
In total, I’ll pay back £2,591.52 with the loan, and if I consider the savings of paying the two bills annually, I’m £188.28 better off.
The thoughts expressed here are my own, taken from my own experience and, therefore, should not be treated as advice. You should not do this with a debt consolidation loan. If you have existing debts, you need to sort those out and put the money that you save towards a “war chest” to pay off bills annually.
Now, if you are in a situation where your debt is unmanageable, please do seek advice. I know that it’s easy to say, but don't let it consume you. Remember this rule; the people you owe money to are obligated to help you sort things out and there are charities and government bodies that will help.