THE fact that figures released at the end of last year show the level of personal debt in Ireland has fallen to a 10-year low (€157bn, the equivalent of each household owing €34,069, excluding mortgage) is cold comfort for the thousands of people whose debt levels continue to overwhelm them.
Welcome as those figures are, if we benchmark ourselves against European neighbours, only Denmark and Holland have a higher household debt relative to their disposable income, so we still have a massive problem.
Of all the debt we have, high interest debt of course is the worst of all and this typically comes in the form of credit cards where rates of interest can be as high as 23%.
There are about 1.5m cards in use in Ireland at the moment and the balance outstanding on them collectively is c. €1.7bn.
When you consider how much extra it costs to pay just the interest on this debt (over one year the interest payments would amount to c. €340m alone assuming an average rate of 20%) is it any wonder so many people are still experiencing serious financial difficulty and the stress that goes along with it?
To reinforce this point, in October last year 51,000 people exceeded their credit card limit and as bad as that is, they also had late and over their limit fees applied to their balance which piled an additional €714,000 on to the amount they owe in that month alone.
Whether you are already deep in debt, or feel your debt is in the early stages of getting out of control, there are steps you can take that will help you take back control of your finances and get you back on track.
I have found that listing, for example, 20 different ways of how you can get out of debt, is largely ineffective because people find this approach too overwhelming and they don’t know where to begin, so I am going to give you a solution that has only two steps.
I know those that have reduced their debt levels will tell you it comes down to spending less than they earn and using the surplus to pay down their debt – it’s as simple as that.
If there is more going out each month than coming in, you have a serious problem and your debt levels will increase. If the amount coming in is the same as the amount going out, your debt levels will remain constant, they are going nowhere. If there is more in than out each month, then you have an opportunity to pay off your debt.
Most people mistakenly believe the secret to paying off debt is if their income increases.
But ask anyone who ever got a pay increase, if they saved any more money, and they will probably say no, because the more we earn the more we tend to spend. You have got to immediately use that additional money and put it to use in other areas, because if you don’t, soon after it will get consumed by things you are later unable to identify.
The key to saving and paying off debt isn’t how much you earn each year it is how much you are able to keep.
But how can you create that situation where you have a surplus in your account each month? I think there are two areas you can achieve this:
Increase the amount you earn
Can you become more valuable to your existing employer so they will want to pay you more? Do you have an opportunity to increase your sales and earn more commission? Can you work overtime? Could you take on a second job?
Warren Buffet said that one of the best ways you can earn money is to develop a marketable skill. What you learn and how you develop your own skills will ultimately have the biggest impact on the amount you earn each year. The amount you earn each year isn’t what your company pays everyone else. They will pay you a salary based on how important and valuable you are to them – so how can you become more valuable?
Cut back on your expenses
This for me is the big one; how can you bring down your monthly expenses? Because if you think earning more and spending less are equal then think again.
If you earn more money and you are at the higher rate of tax, then for every €1 you earn you will have only c. €0.49c left over that can be applied to paying down your debt, but if you can save that €1 from outgoings, the full amount can be allied to your debt repayments.
You have to know what you are up against and know what you are spending your money on and whether you can cut back on your variable expenses and or get better value on those fixed outgoings. Yes this is a pain in the ass, and yes you will have to make some sacrifices but remember it isn’t going to last forever either.
When it comes to spending, there are three types that can get us into trouble and they are:
Compensatory consumption which is spending to gain significance
Conspicuous consumption which is spending to gain status
Confused consumption which is impulsive and not knowing how much you can afford to spend
What category do you fall into? On average people are spending €400 each month using their credit cards. How much of the amount you spend each month using your debit and credit cards is going into the categories I just referred to? How much are you possibly wasting each month that could be used to pay down debt or save each month instead?
So, start off by making a monthly budget that lists all of your expenses, and include absolutely everything.
When you have done this exercise, highlight the areas you know you could do without and look at the cost of things you need, but might get better value on. Once you have identified all possible savings, what you're left with is your monthly budget that hopefully includes a surplus that can be used to pay down your debt.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie