Friday, December 31, 2010

Life and Debt Management - Part I

If you've read the other articles on this website, you've probably picked up on the idea that producing a net positive income produces the ability to save money and hence have more control over your life as well as your money. But for many people, getting to the point where the cash flow is positive is a very hard thing. In this article, I'm going to throw out some ideas for Life and Debt Management that should help you get the ball rolling and/or redirected.

Part I - Life Management
Our lives are complex. We have so many things in our sphere of influence that can distract us and demand our attention. Life management is the art of first discerning which things are distractions and which things are non-negotiable and then developing and enacting a plan for eliminating the distractions and getting a grip on the necessities. By simplifying your life, you have at your disposal the means to simplify your obligations. There are a couple of basic ways to approach reorganizing your life: cutting and restructuring.

1. Cutting
I've talked in the past about status payments. These are the payments we make on things we think we need. It is sometimes very hard to know when we are falling for this deception. Do we really need a fancy car? Do we really need the latest smart phone? Do we really need one more _______ (insert money gobbling collectible here)? Let me put it in terms that should make it a black and white question and answer. Is it something that directly and positively contributes to your ability to keep food on the table and a roof over your head? I didn't ask if it made you feel good or better or accepted... does it really have anything to do with the most basic of needs? If not, you don't need it.

Many will read that and scoff. Some will read it and wonder if they really have anything they can get rid of that might be costing them money on a regular basis. A few will read it and act on it. Can I encourage you to be one of the few and proud? If you're making huge payments on a car and have more than a year to go, get rid of it. Drive it to a dealer that sells good used cars and has a good reputation. Tell them you want to totally walk away from what you still owe on the car and try to buy down a modest and serviceable vehicle. If you've really over-done it and have already put a lot into an expensive car, you might be able to trade it and the remaining debt in for a 2k - 3k point A to point B ride. Even if you still have a car payment after the transaction - getting it from $500 a month down to $150 a month would be a huge improvement, would it not?

So that is but one example of cutting something out that is actively costing you money. But you can cut in other ways. Do you have a lot of something around the house that you just can't seem to get enough of?

ad·dic·tion noun

: the quality or state of being addicted
: compulsive need for and use of a habit-forming substance (as heroin, nicotine, or alcohol) characterized by tolerance and by well-defined physiological symptoms upon withdrawal; broadly : persistent compulsive use of a substance known by the user to be harmful

It doesn't have to be illegal to be an addiction. Video games, guns, motor bikes, tools, books, DVDs... collecting anything is a form of addiction. If you are in debt and have an inventory of something you could legally sell and generate some cash from, it would be money better spent getting you out of debt. Cutting excess in this case means selling off your excess possessions.

Now I know that isn't easy. I have a couple of small but dear collections that you would have to pry from my cold dead fingers. But I waited till I had my debt under control before I started investing in these things. Yes - I do understand that collecting collectibles is an investment, and in many cases it can be a good one when well advised. But we make investments for a reason - because we want to make a profit at a later date. Can I suggest that if you are in debt, the cost to service your debt is eroding those future returns? Selling off a couple of items in your collection, even at a less than optimal return, is better that hanging on to it while debt expenses (interest) eats your cake. In most cases, you can always buy the item back in the future when you have your debt out of the way and are realizing a net positive cash flow.

2. Restructuring

Restructuring your life is a bit along the lines of cutting the excess above, but at a much more radical level. You know you always wanted to be able to lay claim to the title of "radical". Well here's your chance.

Every day, week and month, we have a routine. We go to work (hopefully), we go to the store, we go to church, we go to family events, we go to social events and so on. All of this going has a cost associated with it in terms of time and money. It is easy to just go with the flow (or not so easy) and take it as it comes. That's fine and that's normal. But if you want to get a handle on your debt, you have to be vigilant, ever on the look out for a way to reduce the money you spend so you can survive while eliminating your debt. Restructuring your life a bit can achieve this.

Let's look at your average week. If you live within 15 miles of the grocery store, it's likely you visit 2 or more times a week to get what you need. So your spending the time in the check-out lane, the time wandering the aisles and the time walking to and from your car (not to mention looking for a parking space) each and every time you make a run to the store. With a little planning, you can cut this down to 1 trip a week, reclaim some sanity, family or "me" time and help yourself control your spending.

Start with a grocery list. It's a simple tool that can help you keep from over spending or impulse buying and is another area where you can ask yourself how much you need something. We keep a notepad on the fridge. When we run out of something, someone says "add it to the list" and we try to do that right away. We then combine our trip to the grocery store with our trip to church. This saves time and gas and hence sanity and money. Then we use a little discretion as we shop. Someone scrawled "marshmallows" in crayon on the list. *wink-wink*. Probably not a real necessary staple. Or someone says "cookies!" while you're cruising down the isle. It's easy to gently and warmly say "hmm... I don't see that on the list!" and save $3.

Now don't think I'm a scrooge - I try to keep one box of cookies on hand for when someone gets the sweet-tooth munchies! :-)

Combining as many trips as possible is a great way to save time and money as well as wear and tear on your car. It may be awkward at first, but you'll soon establish a new routine and will enjoy the marginal savings in time and money -- and these will add up over time. After a while you'll be loathe to give them up!

How about something more radical? Do you have more house than you need? Still paying on a mortgage for a 4 bedroom home but the kids have moved out? Sell that sucker and down-size! You'll be paying less for a cheaper home on a like mortgage and you'll save time and money on upkeep on a smaller floor plan as well as in heating and cooling costs. Smaller spaces are cheaper to furnish, heat, cool and generally repair given like quality. Yes - this is a radical step. But do you want to tackle your debt on your terms or on the terms the collection agents set? (hint - answer b ain't no fun at all).

So take a long hard look at your life and its trappings. Do you really need or use all of the stuff you have accumulated? Really? Think about it. I bet there are some areas you can cut and restructure that will go a long ways towards helping eliminate your debt through life changes. Remember - every incremental decrease in expense can be redirected to eliminating debt or into your savings - and that's the name of the game.

In Part II, we'll talk about some novel ways to manage your debt.

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