Can you live debt free?

debt burdenI was recently interviewed by a magazine who asked if it is possible for a family today to live debt-free. My reply was “absolutely”.

I believe that because of the proliferation of credit cards and easy access to credit, we have forgotten how to live without debt. If I think back to my parents’ generation, for most of them the only short-term debt they had was an account with the local grocer which they settled every month.

Access to credit has allowed us to live well beyond our means. We live with the belief that we can have whatever we want today and will simply pay for it tomorrow. Unfortunately tomorrow has finally arrived which is why we are seeing households struggling under the highest debt levels in history.

While living debt-free is easy to say and much harder to do, I have walked the tough path from struggling to meet my debt payments to finally being debt-free apart from my home loan.  I share my story as it demonstrates that life can be tough and you have to face your situation head on.

About seven years ago both my husband and I lost our jobs within a couple of months of each other and we had just had our second child and had bought a new house.

My husband was fortunate enough to find a new job within a few months but I started my own freelance business which took a while to generate a sufficient income. Before we knew it, we had amassed a sizeable debt on our credit cards and overdraft facilities. One day we sat down and decided enough was enough and we put a plan into action that involved budgeting, spending with cash, cutting out credit and negotiating with our creditors.

Budgeting

We learnt quickly that one cannot even begin to try and get out of debt without having a budget; it is the cornerstone of any financially healthy household. We started a monthly budget using Microsoft Money and still today we do our budget at the beginning of every month so we have a clear idea of what our expenses will be. There are always luxury items that we can cut back on if we see that it is going to be a tough month. It also helps us to prioritise our spending. If we know we have to service the car one month we postpone fixing up something in the house. I have noticed over the years that if we do not do our budget one month, we always land up overspending. Knowing what we have in the bank and what we can spend keeps us on track.

Spending with cash

Once we had worked out our budget we would physically draw the money to pay for our day-to-day expenses. We had separate envelopes of cash for food, petrol, entertainment, clothes etc. The discipline was that once that envelope was empty there was no more money. It made us think about every purchase and there were several months were we ate baked beans for a few days before month end. It also taught us how to plan better and spread our money over the month. We did that until we were comfortably living within our means and we were out of debt.

Cutting out credit

We realised that one of the reasons we had so easily fallen into debt was due to our overdraft facility. We would just spend and the card would be accepted at the shops. We were never informed as to when it was “our” cash or the bank’s money we were using. So we closed down our credit facility on our current accounts. If we go into debt again, I want to know exactly when and by how much. One of the problems in paying down debt over time is that you still have to keep the overdraft facility until it is paid off. In our case we settled the debt by drawing down on our mortgage and increased our monthly mortgage payments, which allowed us to immediately cancel the overdraft. But one can also ask the bank to ratchet down the facility as you pay it off so that there is no credit available.

Negotiation

We had quite a few medical bills that we just couldn’t pay. We contacted the service providers and asked them if we could pay it off over six months. It wasn’t an easy thing to do because you have to swallow your pride, but we were amazed at how accommodating people can be. In every single situation they agreed. The fact that we had contacted them before they had to spend money on debt collection gave us credibility.

What I learnt was that ultimately, deciding to get your finances in order is a state of mind. Strangely enough there is a perverse enjoyment in going without in order to get financially healthy. We loved those nights opening the last can in the cupboard because we knew we were in control and getting out of debt. I think as humans we derive more pleasure from some form of discipline and a set of rules to guide us, than we do from just living for today.

               

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