Since debt is the biggest obstacle to the recovery of our personal, national and global financial balance sheets, it really should be the top priority for everyone – individual consumers, politicians and central bankers.
Until recently, it seemed as if the citizen and tax-payer was the only one to be taking this anvil of debt seriously, paying off our bills and saving our money at the fastest pace since the mid-1990s.
For the past year readers have been telling me that they have been taking steps – some very small, some very large – to get a handle on their personal debts with the goal to eliminating them entirely.
This is still going on with Irish private sector credit outstanding – all the money we owe – declining 1.2 per cent of by €4.7 billion between March and June of this year, according to the Central Bank.
This is a complete reverse of the same position last year when we were adding to our outstanding debt.
Not everyone is tackling their debts in as systematic way as they should, however.
For example, what is the point in using the mortgage interest savings you may have enjoyed this year (as interest rates have fallen) on your 2.5 per cent interest bearing tracker mortgage when you owe €10,000 on a credit card with an 18.9 per cent interest rate?
By the end of this year, we will all hopefully know how much more tax we will be paying
In order to be ahead of the bad news curve in December (and possibly sooner) you might want to consider doing the following in the next couple of months:
* Make a schedule of all your debts in a small ledger or notebook. Mark down each amount you owe and to whom plus the applicable interest rate and repayment rate.
Put the loan with the most expensive interest rate at the top and the others in descending order. At the top will probably be money lending or hire purchase loans, credit cards, overdrafts, personal loans and at the bottom, your mortgage.
* Determine exactly how much money you need for essential spending – rent/mortgage, food, utilities, insurance, transport, and other essential expenditure and how much you spend on discretionary items.
Many people have already cut their discretionary spending, but by shopping around yourself and comparing prices and using the services of a good insurance broker, for example, you should be able to reduce the cost of your essential expenditure as well.
Once you are satisfied you’ve squeezed out every extra euro of savings (mortgage holders have seen big reductions already in their monthly repayments) you should be able to use a portion of this money on debt reduction.
* You can either target a single expensive loan – like the hire purchase contract or an outstanding credit card balance or you can reduce them all on a proportional basis.
Personally, I’d prefer to eliminate my loans one by one, but keep in mind that you might trigger a penalty clause if you try and pay off a fixed contract loan. Check this first.
* To further accelerate the effect of paying off your expensive outstanding debt, you need to vow not to keep adding to it: credit cards should be cut up. No more HP purchases until all the others are paid off; ditto for personal loans. Ideally, aim to pay for future purchases with income or savings, or do without.
* Consider a consolidation loan that pays off all your expensive loans with a new single loan.
Ideally these should be linked to low cost mortgage rates, but this isn’t an easy option anymore: lenders are reluctant to consolidate debts onto mortgages if there is insufficient equity in the (devaluing) property, especially if they did not originate with them.
It can be an expensive solution too unless you are very disciplined about future spending.
* Whether you arrange a cheaper consolidation loan, or slowly but surely chip away at your debts individually you should aim to accelerate the entire process by vowing to also put every possible extra penny of earnings, commissions and bonuses against your outstanding debts for set period of months going forward.
By setting a realistic goal – say the next six months – you are more likely to meet your debt reduction target. At the end of your set time, you can review the progress you’ve made.
Outstanding debt, and the continuing accumulation of debt by the government is a threat to everybody’s future well-being; by tackling your own share, you’re at least part of the solution, not the problem.
Jill Kerby welcomes reader’s letters. Please write to her at The Munster Express, 37, The Quay, Waterford or email jmkerby@indigo.ie
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