Liam Croke: How to get out of debt - and stay out of debt

Last week I was asked to appear on RTE’s The Today Show, to talk about money issues and what people should be looking out for/what they want to achieve in the year ahead.

Last week I was asked to appear on RTE’s The Today Show, to talk about money issues and what people should be looking out for/what they want to achieve in the year ahead.

Before going on the show, they were telling me that some weeks they carry out fashion and hair makeovers on viewers who nominate themselves or are nominated by friends of theirs – they asked me could they apply the same principles to someone’s finances and would I give a viewer a money makeover?

I agreed to do this for them, so they gave a shout out to viewers on the show last Monday. And the response was very big – lots of people contacted them looking for help, and what was interesting for me in the emails people sent in looking to be picked, was the overwhelming theme of wanting to get out of debt. So I am going to share with you in this week’s article and next week’s one, what strategies I will be using. They are going to be ones that are proven to work if followed. But before I do, let me first point out a couple of obvious reasons why carrying debt is very bad for your finances and why you should avoid it at all costs if you don’t have any and work on getting rid of it, if you do.

First off, debt is a savings killer.

Paying off debt each month makes it very difficult to save and every time you borrow money, you are eroding your future income.

Secondly, when you borrow money, you reduce your net worth, so debt is the enemy of wealth.

If I was to ask you how much interest you will pay in your lifetime, what do you think the figure is? Think about it for a moment and have a guess – I will tell you shortly.

If you can avoid debt, the chances are good that you can avoid the poverty debt puts people into.

I see this all the time, especially with people earning good incomes; you would think they should be financially comfortable, and they would be if they didn’t pay so much out each month in debt repayments.

Some people try to convince themselves by thinking that carrying debt is something they must do, until they meet someone like me, who points out to them how much it is undermining their financial security.

And look, I understand there are things we can’t have without getting into debt – borrowing money puts the roof over our heads, it’s the car that gets us back and forth to work, it’s the money that can be used to put ourselves and our children through college.

But it doesn’t mean that we should leave this debt alone either.

We should try to repay it as fast as we can.

It is the “short term” or what I call “poor debt” however, that we incur on things we don’t necessarily need and can’t afford, that we should concentrate all our energy on to begin with.

Here’s a good exercise for you to carry out to see if the debt you are carrying is too high for the amount of income you earn.

Add up all of your monthly debt repayments and divide that number into your net monthly income.

So, let’s say your monthly loan repayments are €1,400 and your net monthly income is €4,000, then your debt to income ratio is 35% (€1,400/€4,000)

Ideally you want this number to be as low as possible because the less debt you have the better off you are financially since you have extra money to apply towards other areas of your finances.

I was working with a client of mine recently and I worked out that his debt to income ratio was 42%.

Now that meant very little to him and it is one thing knowing what interest rate you are paying on your loans, but it does take on an entirely different meaning when you see how much money you are actually paying, especially in interest each month.

So I applied the amount of interest and repayments he was making each day to the amount he earned every hour. What I found was that every day of the week, the amount he earned between 9am and 10.47am was only going towards servicing the interest payments on his debts.

This obviously shocked him, because he was effectively working for his bank/credit card company for nearly two hours every day and that had to change.

It made him spring into action to develop a plan to repay his debt faster. And he did, and although he still pays a lot in interest payments every day, the amount his salary goes towards his debt is down from 107 minutes every day to 43 minutes and his goal is that will be 33 minutes by the end of June.

And this is the first step in getting out of debt, recognising how much you are paying each month.

So, list all of your debts, beginning with the debt that is costing you the most i.e. the loan with the highest interest rate down to the loan that is costing you the least. Now I don’t want you to get overwhelmed if the news isn’t good. Getting out of debt is like I said before, a bit like losing weight, you’ve got to break your debt down into manageable parts.

If you wanted to lose two stone, trying to achieve that in a month is a big ask but if you think about losing 4lbs per month, it’s less scary.

Getting out of debt is the same thing - break it down with goals like repaying an extra €10 off your credit card every week, and trying to find that extra €10 is less of a challenge.

The minimum amount, of interest you will pay back by the way over your lifetime is €207,631 and that is based on an average mortgage/changing your car every five years and carrying a credit card balance of €2,000.

If that isn’t motivation enough to get cracking on getting out of debt, I don’t know what is.

So next week, seven strategies that will get you out of debt – for good.