Learning the hard way

Despite the interest rate cuts many are finding it hard to make ends meet. At least seven million people have fallen behind in repaying their debt. This means more than 40% of people who have debt are struggling to repay it.

A few years ago our household found itself in a similar situation. Within the space of a year both my husband and I lost our jobs and we had just had our second child.

Although we both managed to find work, there was a gap of several months that we had to fund and, before we knew it, we had amassed a sizeable debt on our credit cards and overdraft facilities. But we got out of the situation and today the only debt we have is our mortgage.

There were four steps we took which helped us to turn our situation around: budgeting, using cash, cutting up credit cards and negotiation.

We learned quickly that one cannot even begin to try to get out of debt without having a budget — it is the cornerstone of any financially healthy household.

We started a monthly budget using Microsoft Money and we still do our budget at the beginning of every month so that we have a clear idea of what our expenses will be. There are always luxury items we can cut back on if we see that it is going to be a tough month.

It also helps us to prioritise our spending. If we know we have to service the car one month we postpone fixing up something in the house. I have noticed over the years that if we do not do our budget for one month we always land up overspending. Knowing what we have in the bank and what we can spend keeps us on track.

Spending with cash
Once we had worked out our budget we would physically draw the money to pay for our day-to-day expenses. We had separate envelopes of cash for food, petrol, entertainment, clothes and so on. The discipline was that once that envelope was empty there was no more money.

It made us think about every purchase and there were several months in which we ate baked beans for a few days before month end. It also taught us how to plan better and spread our money over the month. We did that until we were living comfortably within our means and out of debt.

Cutting up credit cards
We realised that one of the reasons we had so easily fallen into debt was because of our overdraft facility. We would just spend and the card would be accepted at the shops. We were not informed about when it was “our” cash or the bank’s money we were using. So we closed down our credit facility on our current accounts.

If we go into debt again, I want to know exactly when and by how much. One of the problems in paying debt is that you still have the debt facility. In our case, we settled the debt with our mortgage and increased our monthly mortgage payments so that the debt was paid off in six months, which allowed us to cancel the overdraft. But you can also ask the bank to reduce the facility as you pay it off so that there is no credit available.

We had quite a few medical bills that we just couldn’t pay. We contacted the service providers and asked if we could pay them off over six months. It wasn’t an easy thing to do because we had to swallow our pride, but we were amazed by how accommodating people can be. In every situation they agreed.

The fact that we had contacted them before they had to spend money on debt collection gave us credibility.

What I learned was that deciding to get your finances in order is a state of mind. Strangely enough, there is a perverse enjoyment in going without so that you can become financially healthy.

We loved those nights opening the last can in the cupboard because we knew we were in control and getting out of debt. I think, as humans, we derive more pleasure from some form of discipline and a set of rules to guide us than we do from just living for today.

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