Posted on January 7, 2016
Debt is something we all encounter at one point in our lives. Be it credit card debt or student debt. Most of us will need to get a mortgage at some point & most will rely on credit to buy a car.
I’ve had debt for a long time, first I was given a credit card at 18 when I first applied for a student account. At that point I was also given an £1800 interest free overdraft. I didn’t apply for this overdraft, or require it but I kept it simply because at that age I didn’t know any better.
Roll on a few more years and I have a few more credit cards, a maxed out student overdraft and lots of Student Loans. That is a lot of unsecured debt for someone in their mid twenties & recently graduated. I lived with it for a few years, paying minimum payments & juggling here and there.
Then came the sting in the tail. My student overdraft was converted to a standard overdraft at 29.9% apr & all of my credit cards came out of their interest free/low interest introductory periods. The interest alone now cost more per month than I was previously paying in minimum payments. This meant my repayment amounts shot up and the balance wasn’t actually coming down. I barely covered the interest. This became a cycle for years. Add to that a real quiet year in our business, a terrible few years personally with a major family illness, car troubles (expensive, posh cars) and generally a complete lack of common sense & things got very interesting indeed.
This was a low point for me & also a major turning point. I sold a lot of stuff, including my car, gave up my house & moved back in with family to pay down the debt. My wife & I gave up everything to start again & I’m so glad we did.
Our debts are by no means cleared, but they are much more manageable, all at 0% and we are paying large chunks off each month. We no longer have any overdrafts and only have one credit card each with 0% apr.
At this point in my life I would say that there is no such thing as good debt. There are necessary debts such as a mortgage and student loans, but I would advise anyone to stay away from the others.
Car finance is not a good debt. Even if you get a good APR on your car loan, you take on all the risk in owning the car & you take the depreciation hit. I run a 12 year old small city car (Fiat Panda) which I paid £2000 cash for. I saved up the cash to buy it and I maintain, service & repair it as much as I can. Your best investment when buying a car would be a Haynes manual and a set of tools. I’ve saved many £££ in car costs in the 18 months or so that I’ve owned this car. Before I had big flash cars, now I have a cheap and cheerful used car.
I do around 12,000 miles a year in this little car, regularly driving the length of the UK and I don’t have any problems. I don’t owe anyone for this car & if the worst thing happened I can cut my losses and pick up another cheap car. No commitments and no payments.
Credit card debt is an awful debt. There isn’t an end point with credit card debt. You clear a bit and then you put something else on them. We use them like a crutch to support us when we need a little cash, but if we never pay that back the only winner is the credit card company. Also, if you are maxed & overcommitted you can’t play the companies off against each other & bounce the debt around. Steer clear of Credit Cards.
Overdrafts are handy if you don’t count them as your own money. If you are nearing zero in your current account, live like you are. An overdraft is an emergency buffer, but useless if you live in it.
Store cards, insurance paid monthly with APR and anything else with an interest rate that costs you should be avoided. I know it’s hard to claw your way out of debt, I really do, but until you start you will always be at the mercy of the banks. Also if you have no debt and little money you are much better off than the person with all the latest stuff & a mountain of debt. You can’t take risks in life & career if you owe a monthly payment. It’s an ongoing commitment and a drain on your finances. Payments always need to be met or the costs can spiral.
My first secret to living a simple life is to pay of your debt. Sell whatever you don’t need or want, once you clear a balance, focus all of your attention on the next balance and don’t spend on any debt. If you owe nothing, you aren’t trapped. You are free to give up your lease or sell your house and pursue something entirely new. Quit your job, go back to college, start a business, spend some time travelling. It’s all so much easier when you are starting from zero, or even better from savings.
A big part of this will be controlling your spending. I no longer buy anything on a whim. I consider every purchase & never make impulse purchases. I cancelled all of my TV subscription services (Sky/Netflix/Amazon Prime etc.), and make sure everything I buy is paid for with my own money. It’s so much harder to spend when it’s your cash. I’ll go more in depth with this too in my next post
I will go deeper into my own story in later posts. In these initial posts I want to give a brief outline of the things I’ve learned since starting simplifying. I’m sure some people will disagree with these points & I’m no finance expert, just someone who has learned hard lessons from personal experience.