Hi Guys, Phil McGilvray here from Grandma’s Jars. Thank you so much for joining us today. I am really excited to be starting a new tutorial series: Top 10 tips for paying off debt. Over the years, we have had the joy of working with hundreds and hundreds of couples and individuals helping them take control of their finances and pay off their debt forever.
So we are going to be sharing with you over the next ten tutorials, the tips and techniques we’ve successfully used over 15 years to successfully help our clients take control and get out of debt.
No More Debt
Today we are starting with tutorial one and I know it sounds obvious but tutorial one is “No More Debt”. I know that sounds really obvious, but one thing we have found is that debt has become such a big part of the Australian psyche of the Australian way of managing our finances that we just see it as normal, as the way we got to do things. But the reality is, that it’s not the case. While debt might seem to be the easy way to do things to start with, it always comes back to bite us in the bum, and when it does, often it’s a real struggle to get out.
So what I want to talk you through today is the importance of saying to yourself, drawing that line in the sand, that commitment that – OK we are not taking on any more debt. We can do life without debt. What I want to take you through is just a couple of graphs that we use with our clients when we are sitting down with them and talking through the importance of coming to that commitment. Hopefully, it will make sense to you why debt is such a destructive force when it comes to trying to build a strong financial foundation.
The Above The Line Or Below The Line Scenario
The first thing that we do with clients is take them through what I call the are we living above the line or below the line scenario. Where we want to be ideally, is we want to be living in a situation where before we spend we save and then we spend. The reason we want to do that is so that we have interest working on our side if we do that. One of the things I want you to keep in mind is that whenever we pay interest it’s a penalty; a penalty for impatience, a penalty for buying the things that we want without really being able to afford them at that time. Whereas interest earned is a reward for taking our time, saving the money first, and using cash to pay for things. I know that’s not always easy and I know there situations where people just can’t help but be in debt. It’s not at all judgment. But we want to try to understand through this process is this is where we want to be. We want to be in a situation where interest is working for us and as we get paid, that interest it is increasing our income and as our income increases that capacity to save more increases, which is the complete flipside to what happens when we take on debt.
Today’s Cultural Norm of Taking On Debt
In our culture today it is very much the norm for young people to finish school or finish university and because they haven’t been able to save anything and with that first pay packet, or within the first couple of months of that first pay packet, they are out getting a new car with a car loan to do it because they haven’t been able to save the cash to buy it.
The problem is we go the whole hog, we don’t just go we are going to buy a 5000 dollar car, instead we look at the 10, 15, 20, 25 thousand dollar car. We’ve put ourselves into a hole from day one. Instead of living in a situation where we are paying cash for what we’ve got, we take on debt, which makes it harder to save going forward. Because in paying that car back, we have basically borrowed money from tomorrow to buy the car today. That means that our pay packets every month from here on are going to be that much smaller because we have got these repayments coming up, plus the interest, which means saving for the next item that comes up. Now that might be another car or the car blows up, hopefully not if you have bought a new car, the fridge breaks down, or we get a relative who is sick. Because we’ve got this car loan, our ability to save goes down. We might start paying that off a little bit but as soon as the next thing comes along we’ve got no choice but to put it on the credit card or to redraw from our line of credit, or to get an interest free loan to pay for it. And this spiral, the more debt we take on, the less savings we have and, therefore the harder it is to dig ourselves out of this hole. Now that’s what we specialize here with Grandma’s Jars helping people to go from here, where they’re in a situation where things just seem to be getting worse, to here, where we’re living above the line where we are using cash to pay for things and having interest working in our favour rather than against us.
Interest Rates: Earning and Paying
I know that interest rates right now are at best 2 or 3 percent, but I can tell you that I would rather be earning 2 or 3 percent rather than paying 9, 10 or 11 percent on the car loan or the 8 or 9 percent we pay on credit cards. There’s a 20 percent turnaround there and that makes a significant difference over a period of time.
From No Debt To Cash Situation
So our goal is to help people go from here, to here, and your goal is to fill in this hole first and foremost and the starting point for that is taking on no more debt so this hole is not getting any deeper. Then we can actually start filling it up and moving to a cash situation.
The Debt Spiral
What I also want to talk to you about over here is the second graph which I call the debt spiral. The debt spiral, which flies from here, is very much – on this side we’ve got surplus income, and down here we have deficit income – as our debt goes up so do our repayments, and then for our surplus cash, so the amount we’ve got left over at the end of each month after expenses have been paid for, goes down. So that goes down down down and it’s very hard without a budget you never really know where is that point where suddenly, because I’ve got so much debt and I have taken on so many more repayments, where is that point where my surplus income has evaporated and I’m now in a situation where my expenses are outweighing my income. And often we don’t know where this point is until two or three months later, when all of the sudden those expenses that we used to be able to pay from our paycheck to paycheck living, now we just use next month’s pay to cover that, all of the sudden starts to get stretched because we have all these expenses banking up and our income just doesn’t seem to be covering it. And that can be a scary situation to be in, but again, our goal at Grandma’s Jars is to try to identify where is this point is, where is that point where our income outweighs our expenses.
The No More Debt Commitment
In tutorial three we are going to talk about budgeting and that will help us identify where is that point, where can we find some surplus funds so that we are not getting into this hole here and digging ourselves out of this hole. I hope that makes sense but debt is a very difficult habit to break, but our starting point, if we are serious about getting out of it, needs to be no more debt. So if you are a couple, sit down and make a commitment together. If you are a single person, find someone that cares about you and tell them that your goal is to not use debt anymore, because that is the starting point, that is the foundation of moving forward financially.