This blog is usually seen as an investing/financial independence blog. We rarely talk about people who have problems accumulating money, let alone drowning in debt.
So this episode is here to change that. Debbie, one of our close friends, agreed to tell her story about how she repaid more than £20,000 of credit card debt in just 9 months.
I think that’s an amazing achievement. It’s not just the monetary amount. More importantly, getting out of debt requires a change of mindset which is much harder to do if you’re stuck in the consumerism treadmill.
I can also see how Debbie’s story can apply to those who are not necessarily in debt but cannot save for say a house deposit, or for generating passive income. The effort is the same, although, in my opinion, the mental shift from being indebted to having savings is bigger than going from small to big savings. If I have to describe it after speaking to Debbie, it’s just like you’re trapped and you see no way out.
So hopefully the conversation around debt was useful to you. Forward it to someone who’s in trouble lately!
Michael: Debbie, time to tell me about your debt
Well, I don’t have any! 🙂
How much debt did you have before?
£20,000! I think it was slightly more but I round it down to £20,000. To break it down it was:
Credit cards = £12,600 + £3,000 + £3,000
Bank overdraft = £3,000
Total = £21,600
How did your debt start?
It all started from a bad investment I made back in my place. I bought a flat for my future but had not made the right calculations. It took a long time to start renting it out. I was paying full price for the flat for a long time without having any rental income. I was paying £900 every month on the mortgage plus my rent in the UK. Before moving in with Emma, I was paying £1,300 on rent to live on my own.
As if that’s not enough, my rental income from the investment was only £600 out of £900 when I managed to rent it out. Which means I was subsidizing my tenants for living there.
My lifestyle was higher than what my salary could support. As a midwife, I make £3000 every month. I used to spend most of my salary on clothes, going out, buying things and hosting dinner parties for friends while travelling. When my investment went bad, I started taking on debt to support my lifestyle. Until it was just, too much…
Michael: But how come you were so much way off? It’s £21,000 not £2,000 or £3,000.
If it wasn’t for the bad investment, the rent would’ve been £900 or so. So according to my calculations, I would break even and have a flat to live in later on in life.
I know it’s better to make some money rather than break even from an investment. But to be fair, I was thinking of buying something anyway, to secure a place for my future. I was also in a bit of pressure from my family. It seemed like a good investment to me. I’ll be fine, I have a salary was my thought.
When I realised what a mistake this was, I tried to sell it. But because of the market sell-off, it was impossible. I’m still trying to sell it!
How did you decide you wanted to pay down debt? What did you do?
I had a friend who said enough, time to take action. One day we were talking, and I don’t know why he asked me. He said tell me how much you owe, I’ll pay it down for you and you pay me back when you can.
I said £20,000! And he started telling me off. I was scared!!! He thought I’d say something between £2,000 – £3,000. Then he sat me down and created a spreadsheet.
We agreed that I had to cut down my expenses such as things I pay but never used. I stopped my cinema subscription, my expensive monthly phone plan (got one for £10/month), stopped buying clothes and other things I cannot remember now. I didn’t buy any new clothes for almost a year.
Also, I was going to my country quite a lot (£2,000 minimum flight cost per trip) plus buying everyone gifts, spending lots of money on dinners, renting a car, etc.
When going home, I used to host dinner parties out. I didn’t let anyone pay. I don’t do this anymore. Small things add up.
So the total cost of going away travelling was a minimum of £3,000 each time.
Michael: Did your plan to save money and pay down your debt affect your happiness?
Nooo! I was very happy I’m paying the debt! I was happier actually that I’m now in control of my finances. It was a sad situation before knowing I owe so much.
Michael: How come you didn’t get rid of the debt before it gets too big? Didn’t you try anything by yourself before your friend suggested you tackle this RIGHT NOW?
Oh yes, I tried. But I didn’t know how. Every time I got my salary I’d pay down little bits here and there in credit card debt. But I kept using them so it didn’t work.
My friend suggested I borrow some money from some close friends. This is to avoid the high-interest my credit cards are charging.
So I asked 2 of my closest friends and they happily agreed to help me pay it down. One gave me £3,000, the other one £5,000. I immediately paid down 2 of my credit cards and took charge of the bank overdraft (£3,000) I had accumulated.
Michael: You didn’t use one of the debt consolidation services?
No, what’s that?
What would you tell a person who’s drowning in debt right now? Give me your top tips.
- Cut down your expenses
I’d say first try to cut down your expenses. Find a balance. Don’t stop going out but don’t go out for rubbish things just for the sake of doing it. Stop buying expensive things like clothes, contracts. I was buying so many clothes I didn’t need.
I had the benefit of becoming flatmates with a close friend. As a result, my rent went from £1,300 down to £700. I understand not everyone can do that. But most of the expenses came from other things.
- Find someone to hold you accountable
Find someone to hold you accountable to your goal. He was keeping a close eye on my expenses every month. If I did something out of the agreed plan, oh my god, he wouldn’t talk to me for 2 days! I’m not joking, he wouldn’t answer my calls, nor my texts.
After a few months of good behaviour, he said I’m not helping you anymore, you know now what to do. So I carried on doing it myself because I knew what to do. And paid it off in 9 months or so.
Michael: Congratulations. That took a lot of courage, Debbie! What about future Debbie – after paying down the debt? What are the plans on the money side?
I’m now saving £1,500 a month. That’s a lot of money. For now, I’m just helping my parents. In November, they have to pay $7,000 in house insurance. But the long-term plan is to buy a house for me here in the UK.
I’m proud of myself for saving £1,500 a month and I’m not depriving myself. I’m going out, doing some shopping, but nothing excessive – within reason. Knowing what your expenses are and controlling them is much more important than you think.
Michael: Debbie this was so nice, thank you!
Debbie is 46yo makes about £3,000 per month and works as a midwife in London.
Michael’s note: I’m on TalkMobile (which piggybacks on Vodafone) and pay £10 a month for a sim-only unlimited mins/texts and 8GB of data. Not sure why on their website it’s 4GB for the same.
There’s hope to those in debt
This is Michael speaking. After editing Debbie’s transcript I realised how stressful such situations can be. I mean, it’s really like a trap with no way out. For a person who’s drowning in debt, I believe it’s quite hard to zoom out and see the bigger picture.
It only takes a few days of categorising expenses and action planning to prioritise what you need to do in order to get out of debt. But it takes a much bigger effort to think about that and actually do it in the first place.
Also, (no offense Debbie), people who are trapped in debt are not good with personal finance which is part of the problem. What is a debt consolidation plan? They cannot see clearly how to get out. Things like paying the highest-interest first in one go are not second nature to them.
So asking for help like Debbie did from others should not be shameful but actually rewarded!
This story also reminded me that people do things to make them look good and keep up with the Joneses. Often though, the Joneses are not even looking, so who are we trying to convince anyway. Peer pressure, sometimes coming from the family too, to buy a house because that’s what you’re supposed to do can lead to much bigger troubles if you cannot afford the payments long-term.
I find it very strange that here in the UK the mentality is that you should get the biggest mortgage possible (unfortunately “only” 5x your annual salary) to buy the biggest house possible. This scary thing has worked well in the past but who knows how it will play out in the future. In the end you’ll be the one paying the price if it doesn’t.
Also, often the environment and the society we live in is so geared towards consuming and constantly upgrading our life. We throw stuff away often in working order just to buy the next thing. Lots of houses are filled up with stuff we don’t need. Sometimes we even rent storage space to keep stuff we don’t need! The financial, not to mention the environmental harm is enormous. Anyway…
The first Foxy Monkey meetup was great
On a more positive note, the first Foxy Monkey meetup was so good! 25 people showed up!!! We had such a great time and people seemed to like the discussions around contracting, investing, property and generally life in London.
I plan to repeat it at some point in the next 2-3 months.
I wanted to post the group photo that we took, but then some people may not want their face on the internet so I decided not to. I’ll make sure I ask next time.
Also, a few people mentioned the idea of a ‘themed’ meetup. We could have a short 20-30 min presentation on a topic (say p2p lending) and then discuss over drinks. I’m considering this. We will need a small venue -probably not a pub- so if any of you knows a person or is a person with a venue please let me know 🙂