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Wednesday, 8 February 2012

Getting out of the Debt Trap


Although many people are quite capable of successfully managing their finances, the ease with which many can obtain credit, combined with the pressures of society to conform to certain living standards, leads many of them into the debt trap. Let’s face it, from the time we are first introduced to the schooling system we are taught to conform to standards of accepted behaviour  and to compete with one another. The one who wins gets the praises and the favours from the teacher. Hence, many of us push to be this ‘special one’. We learn to put up our hands quickly if we even think we might know the answer to a question. And we also learn that by providing the correct answer earns us additional praise. At the same time we also learn that if little Betty or little Johnny gets her or his hand up before us and gives the right answer we get a big fat zero. We learn that we need to be ‘better and faster’ than everyone else in order to retain our status in this society and despite our limited financial means we push ourselves past these boundaries even though we know we shouldn’t.

     The classroom lesson we learn is that it pays to answer first even at the expense of others in the classroom and even at the risk of giving the wrong answer. Our fragile ego’s and our pride is at stake. We take this lesson with us into our adult lives even though the rules have changed. Our houses have to be better than the house the Jones’s are living in. Our car needs to be better than theirs or at least be the newer model or have a bigger engine. Guess what? The Jones’s are just as broke as you are and yes you are keeping up with them but you are both going in the wrong direction!  Is this financial immaturity? I would suggest so, because so many of the rules we have been conditioned into believing are just dead wrong!

·       We are conditioned to paying off our mortgages as fast as possible?

·       We are conditioned to buying motor vehicles on hire-purchase, lease arrangements or even worse, on residual buy-backs?

·       We are encouraged to take-up several credit cards and are offered staggering credit limits on these and other retail clothing accounts.

·       We get numerous credit and loan offers in the mail or ‘credit cards’ that we can activate on first usage.



In short, credit is just too easy!



There have been many books written on the subject of credit and of debt. Some authors write extolling the virtues of using credit card debt to avoid signing sureties for your business while other authors write to highlight the advantages of being able to claim your interest payments as a deduction against your income for income tax purposes. These authors are correct in their thinking, but this does not mean that their advice will work for everyone in all circumstances. Consider the reader who is particularly risk averse. He or she does not embrace debt under any circumstances and has to be forced into taking credit due to emergency situations or simply because their money management skills are lacking. For example, they are unable to adjust their monthly expenses to the point where their income will cover these expenses. They opt to use credit to achieve this balance. But this credit must be repaid at some future point. Unfortunately for many, this credit simply builds up until it becomes a seemingly insurmountable task to eliminate. Often there is a final surge of acquiring debt as the individual gives up his attempts at paying off his debt. ‘In for a penny, in for a pound’, appears to be his adopted motto before his reputation and creditworthiness hits a brick wall. This is not a good place to be. Once you lose your creditworthiness and your creditors start to ‘blacklist’ you will find it practically impossible to acquire credit for anything. This blacklisting can last for several years depending on when the first judgement takes place and when the final judgement occurs.

          Some people will opt for liquidation, but you cannot be liquidated if you have no assets to liquidate. Other options might be to hand your financial affairs to a third party to administer in an attempt to derive some ‘breathing space’ away from aggressive debt collectors and irate lenders. Where a creditor takes the debt to the courts, the courts may impose a garnishee order in which your employer is obliged to pay a stated amount to your creditor before your employer can pay you. I have been told by several employers that they have employees who have garnishee orders on their salaries that exceed 50% of what their employee’s are earning.

          How did it get this bad? Surely lenders should be assessing the ability of the borrower to repay his debt? It seems to me that the lenders are so focused on the returns they derive from the high interest rates or administration fees that they charge, that the ability to recover their lent funds is secondary to their greed. These lenders will often take control of the borrower’s bank cards and secret pin codes to secure this debt although this does not guarantee that the debt will get paid. The employee may ask for his salary in cash. He might lose his job. He may even owe his employer money which means no income for that month for the debt collectors to collect on.

          The borrower who gives up his bank card and whose finances I dare say may already be spiralling out of control also loses a fair measure of control over his bank account when this happens. The debt collector might draw funds at inconvenient times, for example, just before his debit order runs resulting in ‘bounced’ insurance premiums or medical aid payments. Despite the bank being fully aware that the borrower does not have the available funds to pay these debit order premiums the bank will be quick to impose a significant fee for ‘bouncing’ these. This just worsens the borrower’s predicament. How did it get so out of control? Simple: debt is too easily given and very readily accepted.

          Next we will take a look at some examples of how we are duped into making bad decisions.

Introduction : Why am I trapped in Debt


A typical family will spend approximately sixty percent of their monthly income servicing debt. This makes debt the number one financial problem for families irrespective of whether they are high or low income earners. The more money we are encouraged to borrow, the more interest we end up paying and the less disposable income we have at the end of each month. By falling into debt, many trivial personal problems can become insurmountable personal problems as the amount of debt begins to escalate. It is not uncommon to see couples divorcing one another because of debt. Tragically, many have also taken their own lives because they couldn’t see their way out of their mounting debt. If we have firsthand knowledge of people who are close to us and who have had their lives affected adversely by debt, we are not likely to be convinced that embracing debt is the pathway to financial riches even if there is other evidence to show that it works very well.

          At various times in our lives many of us may have fallen into the debt trap and many of us may know how difficult it is to get out of debt and to become debt free. In fact, there are so many people who cannot extricate themselves from their debts. These debts just grow larger and larger as their monthly income (their financial means) is exceeded by their monthly expenses. I am constantly asked by my readers “How do I get out of this debt spiral?” This is what this blog is about. But it will not only look at your financial well being, because there are other factors at work that often keep us psychologically trapped in the financial Gridlock. The financial Gridlock is that place that we find a significant portion of the population (around 95% of us) trapped in the so-called ‘rat-race’.  These psychological factors would include our perceptions of our self worth, our expectations, our personal attitude, our passion and many other factors that will be discussed in this book.

Now I understand that not everyone wants to become or is ready to become a business owner or a property magnate which would usually mean that the individual must embrace debt somewhere along the pathway to financial freedom as a means to achieving financial freedom faster. As those of you who may have read my books ‘Financially Free” and ‘Create an Income for Life’ will know, I am big on leverage. Getting yourself into good debt to acquire assets that will produce a higher monthly income than those assets would cost you in monthly expenses is called gearing. This entails using other people’s time and other people’s money to accelerate your wealth far faster than you could by only using your own time and money. You will appreciate that if you have 24 hours in the day and you never sleep, you could only exchange these 24 hours for a fee, a wage or salary or similar. But you only have 24 hours of your time to exchange. Leverage entails you employing other people to assist you by giving up their hours in exchange for a fee, a wage or salary. In this way you can push past only having 24 billable hours in a day depending on how many people you employ. By employing people you would have to become an entrepreneur at some stage which would also entail registering your business as a legal entity, with all the reporting requirements of Pay as you Go (PAYG), GST, etc.

Similarly, with property investments, it is much easier to go to a mortgagor and obtain finance to buy a property for say $500.000 than it would be for you to save up this $500.000 especially if 60% of your salary is being used for debt repayments. Indeed, it might take you several years of major sacrifice to save up $500.000. It is far easier to acquire this $500.000 property through a mortgagor in which case the property could be transferred into your name after a payment of $10.000 is made to have that property transferred into your own name. This $10.000 would represent your ‘once-off’ capital investment amount as the mortgagor would have financed the rest. Provided the rental you receive is covering the monthly bond interest costs and the levies or rates and maintenance that you incur on the property, any growth in the value of the property would be leveraged. Hence, if your property’s value increased by 10% from $500.000 to $550.000 your investment value would have increased by $40.000 from $10.000 to $50.000; in other words by 400%. That’s some return on investment!

Now there are a whole bunch of rules that the investor would need to follow to make all this work and these rules are contained in my books ‘Financially Free” and ‘Create an Income for Life’ so I’m not going to go into these rules now because this blog is not about creating wealth through leverage. No, this blog is about creating wealth without leverage which is harder to do but as some might argue can be done with much less risk. So when we say we want to create wealth with less risk, we are saying we want to create wealth without embracing debt as an entrepreneur or as a property investor.

You may be in debt right now, and I’m assuming you are, otherwise you must have other reasons for acquiring and reading this blog. Your current debts might include your mortgage, your motor vehicle, speed boat, caravan, motor bike, credit cards, bank overdraft, loans from your parents, clothing accounts, personal loans from micro-lenders, medical bills, etc.

Some of the key questions I will cover are:

·       “How do you break this cycle of never ending debt and become debt-free?”

·       “Is it possible to live debt free?”

·       “How do I begin?”

·       “Does this process depend on my monthly income?”

·       “Do I have to compromise and make sacrifices?”

·       “Will it hurt?”

·       “Will it improve my marriage?”

·       “Can I do it on my own or do I need help?”

·       “How long will it take to become debt free?”



I have good and bad news. First the bad news; it’s going to hurt. You may have some classical ‘lemons’ that are stopping you from getting out of debt. Some of these items appear on your ‘list of assets’ and you probably will not like my advice in respect of these ‘assets’.  But you might also need to face up to the fact that YOU, YOURSELF are likely to be the major problem in this equation. After all, who keeps getting YOU into debt?  I accept your spouse may be partly to blame. I’ll get to this later.

          The really good news is that you can live debt-free if you follow the plan I have set out for you in this blog. You could significantly improve your life in the very near future if you are willing to break free from debt and only buy what you can afford to pay cash for. Forget trying to impress your neighbours and family. The truth is they are probably among the 95% who are destined to be broke at retirement age anyway. Some may never be able to retire, ever.

          For many of you the challenge will be to ‘grow up’ and accept responsibility for your own actions, especially for some of your poor past financial decisions that threaten to keep you financially gridlocked and hence financially poor. Your solution might mean that you have to forego the current human desire of instant gratification that we have come to expect. This ‘instant gratification’ condition has been encouraged by the advertisers in all forms of media. You need to remember that this advertising is undertaken to make suppliers of goods and services rich at your expense. Sometimes you need to learn to say no. Sometimes you might only need to delay this gratification until later when it is affordable.  By affordable, I mean that you can pay cash for it rather than brandishing and extending the limits of your credit cards!

          If you take responsibility and commit yourself to the process of living debt free then you will be able to diminish your debt and turn your life around. It’s not your debts that control your life but your creditors to whom you owe money. When you are debt free, you get to take back control of your life!