Category: Debt

DeCluttering My Routine

I wish all of you a very Happy New Year and a belated Merry Christmas. I apologize for being gone for some time now. I was on a work related trip for the past few days and was now back again with a concept that I hope you would like.

Focus! This is what I lack sometimes and which obviously throws me out of competition most of the times. Due to lack of focus I am not able to address my priorities. My priority today is to reduce my debt and to have an initial financial plan for myself for the next five years.

Focus as per the wordweb online dictionary is defined as

The concentration of attention or energy on something.
Maximum clarity or distinctness of an idea.

I tried to frame my own definition as

Remove all the clutter around something (your priorities) and you are automatically focused or in other words finding the correct answer by eliminating the all the wrong answers.

Lacking focus and purposely avoiding a situation are two different things. When it comes to debt, at times I try to avoid the matter. This you can say as loosing focus on purpose. Take an example, I have host of interests; reading, playing chess, playing video games, photography, watching movies. Now when it comes to ponder upon my debt situation I tend to resort to any one of the interest that I have.

If I can quantify these interests then I can say that photography requires skill, not only for shooting but also for editing the photos etc. this means some investment of time in acquiring other skills and it’s an expensive hobby. Playing chess, games are addictive and it’s a shear waste of time but when you make the high score then it gives you a high.

Now if I think of my priority and the first thing come to my mind is my debt, financial planning and money matters. So what I do to address them, I generally tend to occupy my mind with other things like a movie, or the interest that I have mentioned. This is primarily because I don’t want to think about debt, same is with financial planning or any other matter of high importance. The bottom-line, I am forwarding the problem, running away from it but sooner or later I have to face it. This running away is one of the reasons that I find one day trapped and cornered by debt and I was not in position to handle it.

If we can work upon the problem this could be avoided. There are various methods to do it, considering money as my priority I can do budgeting, keeping a list of purchases, controlling my impulse buying behavior etc.

The method I am suggesting here is an alternative process that can be used to focus on your priority. If you have difficulties in having a direct focus or you are purposely avoiding it then remove the elements that make you lose focus from your routine to force yourself to stay focus. For example you can just stay away from watching a movie or a video game etc. for sometime, then you’ll have nothing to do and you’ll be forced to think of the priority which is your debt or financial planning.

This process I have termed as De-cluttering My Routine. By doing this I am not only focused but I can find out finer things in my behavior which has similar clutter and in the long run it will surely pay off at least I hope so.

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Debt Reduction Through Procrastinaton

I have never come across procrastination as a positive term till date. Procrastination as I define it, is nothing but not sticking to your commitment made to yourself. As per Wikipedia it is defined as:

Procrastination is a type of avoidance behaviour which is characterised by deferment of actions or tasks to a later time.

I committed to myself that I ll go for a morning walk to keep myself healthy. My behavior in the morning, May be tomorrow or, let me sleep half and hour or so. Same is with other commitments like avoiding high calorie food etc. It can be work related like, I have to complete X job after 3 days why not start tomorrow, anyways its just a days work.

Finally from any angle I look at it, procrastination is a negative term. I found debt is a kind of procrastination, well procrastinating your payments, but in this case there is a cost attached to it, ‘the interest cost’! The more you procrastinate the more expensive your debt becomes.

But I feel that we can use the very nature of procrastination to our benefit. Why not procrastinate our purchases? Say I will buy that tomorrow and pay tomorrow to avoid the cost. Sounds like postponing the purchase. One can say it is similar to postponing things, but I want you to put this as a behavioral change. Procrastinate purchase of things indefinitely unless the sword is on your head to buy that thing.

This is a shift in attitude to purchase things. For example, what I have read many a times on blogs, that prepare a list while going for shopping, in this way you will avoid any extra purchase. But look it at the other way round. Prepare an exhaustive list to purchase and the remove the not so necessary things from the list or set a later date (Procrastination) for those things to purchase. This way you will be using your list to the fullest. If this comes to practice then you are attacking your debt from both sides of your financial management sword.

I want to use procrastination as a tool not to reduce debt but to increase my money management skills or to control my anxiety/impulse to purchase things.

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Side Effects Of Being In Debt

stressed-out.bmpBeing in debt certainly brings its long term side effects and I have my share too. After almost a year my networth is almost the same. I can neither ignore the fact nor get away with my pathetic financial condition. The debt that I took for getting certain things gave me an initial pleasure of owning and flaunting those things. But this pleasure had side effects too that I now realize. The most primary side effect of being in debt is its effect on your mind. I feel that either our mind forgets how to live debt free or it’s too much pre- occupied with the debt.

The primary focus of the mind with debt over your head is debt! The sleepless nights of the questions (in your mind) like, “How to reduce it?”, “What other methods I can apply to reduce it?”, “Should I take more debt?”, “Balance transfers?”, “Where should I cut down on my expenses?” etc. In this situation you are never prompted to think that how did you get into this mess in the first place! Even if you think it over all you will think is, “Where did my money go?” and when you realize the grim situation you will then think, “I was dumb enough to not to keep records of my spending”.

The excitement of buying things that I now realize is ephemeral but the debt; no its not! and its side effects come along.

Continue reading →

Networth Update Oct’07

After a disciplined frugal month, I was able to reduce my credit card debt and my personal/utility loan; I have reduced my cash balances to a minimum with no provisions for contingency/emergency. Currently I am not looking at my students loan as i am planning to get out of it by paying a lumpsum after a few months.

networth-october.bmp

Networth increment is of 2.87% in the past 20 days(see my networth as on 10th October’07 here).
The important thing for me here is that total assets increased and simultaneously my liabilities decreased.

A very tough month ahead for me, as this is the month of festivals and Diwali (Festival of Lights) coming up on 8th of November, my birthday too is on 4th November. My next bike servicing/repair is also scheduled in the next month. I am expecting huge spending in the next month but I shall try as much as possible to remain frugal after all I have to get out of the debt as soon as possible.

The plan for next month

I am planning to remove my complete credit card debt.

I wanted to pre-close my personal/utility loan but I figured out that I shall be paying an amount equivalent to the amount that I shall be paying in installments over the loan tenure. So I dropped the idea.

Now, I am planning to take the interest free advance (which initially I planned to take for loan repayment) from my employer and shall be putting into the stock market. I know that this is a huge risk but my plan is to create more assets for myself and my salary shall service the payments for this advance.

Where Do I Go From Here

Looking at my networth on a regular basis now, I asked myself, where do I go from here now? To answer this I sat down with my finances and took a good hard look at things. I was in approximately Rs.21,000 of credit card debt, and a student loan of Rs. 250,000. Though my equity investments of about Rs. 40,000 give me mental support as I have no money in savings. To make the conditions worse, I have to marry in the next year (Indian marriages are way too expensive) and over that I want to buy a house within the next year, though my finances are screaming at me, “You need to pull a miracle out of nowhere to achieve all this”.
As if I could hear the screams, I made some major changes in my spending and saving habits. I have been following it for the past one month.

The first thing I did is I made a list of every single thing I had to pay out each month using Microsoft Excel. I made separate rows for regular expenses and put provision for 10% contingency. Then I removed those rows which were nonessential services to me.

    1. I removed the news-paper subscription (now I am having a free e-paper from the Times of India and the Economic Times).
    2. I reduced the provision for cell phone bill (I am working consciously to reduce the phone bill).
    3. I have started cooking at home which reduced my expenses on eating out.

In the end, I was able to cut my monthly spending by almost Rs. 2000, money I could use to help myself get out of debt . I am planning to cut down my credit card bill by Rs. 12,000 and after this month, the outstanding against my card shall remain at Rs.8,000.

I then went back to my essential bills and looked at the loans carefully. My goals were to reduce or eliminate these. I went through my service rule book to search for some provisions for money advance from my employer at any lower interest rate. To my amazement I found that I can take an advance upto Rs. 50,000 with 0% interest payable in 10 equal monthly installments.

I plan now to accumulate some 20,000 in the coming months and add these interests free Rs 50,000 from my employer to get rid out of my personal loan. I feel that it will take a few months of dedicated approach towards expense cutting to get out of this bad debt situation. To address the issue of marriage and house purchase I shall plan only after I succeed in getting out of the bad debt that I have accumulated.

Blaiming the debt or my decisions

After reading this post from Ryan Healy I could not completely agree with him regarding his question that is there a really a good debt? so I decided to define it for myself and put my opinion on his post through this post.

Defining debt:
It is an amount owed to a person or organization for funds borrowed. Debt may or may not include borrowing charges called interest charges or financing charges.

Coming over to the idea of a good or a bad debt:

    If the amount owed generates returns more than the interest charges then the debt will act as an income source and in a period of time it will pay off itself.
    If the amount owed is consumed to buy assets say for a bike, car or a refrigerator then you have an asset for the debt.

In both the above cases, I would call the debt as a good debt. I would give an example to prove my point.

    I deposit $ 1000 in a savings account of a bank which gives me an annual rate of return as 5% as interest. If you look at the other way round the bank has borrowed an amount of $ 1000 from me at a cost of 5% per annum.
    Similarly if I borrow $ 1000 from banks through a credit card, the bank charges 30% interest per annum and in this case the cost of debt is 30% for me.

Thus the debt in the first case for a bank is a good debt and it is effectively giving a return of 25% per annum.

A debt becomes a bad debt when the borrower abuses the use of money he has borrowed.

Now coming to the post of Ryan Healy: Continue reading →

A Five Stage Process of Getting Debt Free

It’s over a year and a half that I am in a bad debt situation and surprisingly it’s nearly one and a half years that I am into a paid job. If I correlate the two then I can conclude that steady income flow increased my debt taking tendency. In other words I will say that the security of getting my paycheck made me to overspend.

When I gave it a thought so as to find the reason for the above I could come up with only one reason I can pay it later when I get my paycheck. If I talk in time frames then I was spending future money into present but the problem with this concept is that you cannot account for future expenses (always) which come as an emergency e.g. bike/car repairs, health problems and many such unforeseen incidents/events.

So what happens next? I have already spent that money in the past and now I am stuck with a high credit card bill with no money to pay for, the result a bad debt and more importantly a way to a debt trap.

The cause: credit card spending! No, the cause here is trying to afford that you can’t just by assuming valid reasons for buying at that moment, but later in debt trap you feel that you could have deferred your purchase. For example, I need a new car, (mental process: the car I am driving is making sound, the mileage is very less and asks for more maintenance so why not replace it, I am getting a good deal with XX dealer). Next day you are with a new car along with a big debt on your head.

Now you are desperate to get out of it but you can’t as you cannot overclock your debt reduction process due to a simple reason, you don’t have any extra source of income and the debt brings interest and other charges with itself which further enhances it.

In this case my mind stopped thinking constructively for alternatives for reducing the debt as it is already preoccupied by the huge debt. The result, time wastage over trivial things and not be able to devise a plan. So what should I do? Well there is a way, which I am following and trying to get out of debt. Continue reading →