Lesson 7: Reducing debt
In this lesson we look at what to do with the money we're saving, specifically on how to reduce or get out of debt. We'll look first at the smaller debts, such as credit cards and how to reduce debt on them, and then we look at the biggest purchases. We will look at how interest is usually money thrown away.
There are several kinds of debt, and not all debts are necessarily bad. If you have taken out a loan in order to invest money, then this can be a financial benefit if you can afford the payments. The debts we are talking about in this lesson are the debts that take your money rather than make money for you. Disastrous debts are those you take on to pay off other debts, and these are especially important to get rid of.
A good general reference book for getting out of debt is How to be Debt free' by Paul Clitheroe, but there are many other books available. Also, see the website Get out of debt.
Reducing loans and credit card debt
Interest for personal loans and credit card purchases is money down the drain. If you are paying interest on a loan for an investment, then this may be a different matter (if you can really afford the loan and if the investment is really secure), but if you're paying interest on the latest technological gadget, which you bought on credit on impulse, or if you are buying groceries and everyday items on credit, then you are throwing money away.
The lenders want you to be in debt, which is why they make it so easy these days for people to borrow money and get credit cards. I remember when banks took your hard-earned cash and looked after it for you, lending it to other people, who paid the bank interest. Out of their profits, the banks paid you interest. Now economic rationalism has taken over like a cancerous growth in all business, and banks are just like the rest these days: out to squeeze the maximum profit for shareholders, and to hell with the customers. They invent idiotic stories telling us we're 'buying a savings product' and then go and charge us fees for the priviledge of handing over our hard-earned cash for them to look after.
If you're with a major bank, consider looking for a building society, credit union, or community bank with lower fees and charges (or no fees and charges, if any of those still exist).
Where you make savings following some of the suggestions in this course, put some of those savings into paying off your debts. Pay off any high-interest credit cards and loans first, and then the mortgage.
Think about your use of credit cards. They allow you to get what you want when you want it, which is what the whisperings of our consumer society tell us we should have, and even 'deserve' to have. But the banks are raking in the money - your money.
Consider paying yourself in cash on your pay day, and just don't use the card at all, especially if you have a credit card debt. Credit cards are extremely convenient of course, but that is exactly why you should not use one at all until you have your budget under control. Leave the credit card at home when you go shopping, and then you cannot overspend. And always take a shopping list! If you want to buy something and you cannot afford to buy it with cash, then you should carefully consider whether you need it or can afford it at all.
There are alternatives to credit cards, such as debit cards and charge cards. Debit cards work like a credit card except that you can use only the money you actually have in the bank, so you're not going into debt. A charge card also works like a credit card, except when the bill arrives, you have no option but to pay the entire bill, and so again you are not going into debt. Charge cards have annual fees to pay.
If you want to use a credit card and can control your impulses, then pay the entire balance when the bill arrives, and before your interest-free time is up. If you already have a big credit card debt, then at least pay more than the minimum each month, and chop your card up to stop yourself using it again. If you only pay the minimum, you could take decades to pay off your credit card debt (see the Pay Cards Faster website). )
Study the fine print from your financial institution to make sure you're making the most efficient use of your debit, charge, or credit card. Find out how much each transaction costs, and what fees and charges you are paying, so you can work out how to save money on perhaps reducing your transactions.
If you have a number of personal loans and credit cards and a lot of debt you're having trouble paying off, you may be wise to consolidate them all into a single loan. Having a single payment makes budgeting much easier, and you will probably save in interest.
If you are part of a scheme that gives you frequent flyer points on your transactions, consider how much you have to spend to get a flight. The reason these schemes were invented was not because they generously wanted to give you a free holiday flight somewhere. They wanted you to spend more money than you ordinarily would, because they fool you into thinking you are not only getting what you want, when you want it, you're 'getting something for it'.
