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The trouble with debt, and some ways out

Irish News of the World

Sunday, April 19th, 2009

Diarmuid MacShane

The trouble with debt, and some ways out

With all the talk recently about the plans the government have for helping the property developers and the banks with their debt problems, we could be forgiven for looking on a little jealously that we’re not getting any help ourselves.

Back in 2008, Goodbody Stockbrokers reported that, not including our mortgage debt, we were borrowing €158 for every €100 we earned. As we’re finding now, that could never have continued, and unfortunately some of us are bring brought down to earth with a bang under the weight of unmanageable debts.

Since we don’t have the government and National Asset Management Agency to act as our fairy godmother to magically make the debts disappear, what help is there out there for us?

Who can help?

The first stop for anyone who’s feeling the pressure of mounting debts should be the Money Advice and Budgeting Service (MABS) website, www.mabs.ie. Even if you don’t speak to anyone, as the website says, “You have probably taken the most important and difficult step in recognising that you might have a money problem”.

In their quarterly report, released earlier this month, MABS reported that there was an almost 200% increase in the number of calls to their Helpline (1890 283 438 or 01 8129350).

As a first step for you to assess your situation, their website provides some excellent information on the different stages of dealing with your situation if you’re worried about a debt problem.

What can MABS do?

Firstly, they provide a list of things that you should consider when simply assessing your debt situation. Firstly, obviously, is working out exactly what you owe, and to whom. They suggest you also consider questions such as what priority are the debts and if court proceedings have been taken, or are likely.

Once you work out your debt position, they next recommend that you create a budget to work out how much you spend monthly, and where you spend it. Where necessary, you can investigate how to either maximise your income, or to reduce your outgoings.

Once you’ve completed that task, you will then work out how much you’ll have left over to use to repay your debts.

If the numbers just don’t add up, then you should contact MABS and speak to one of their advisors. There are more than 60 offices around the country, and the service won’t cost you a penny.

The MABS service is confidential and provides you with help in reviewing all your options, and giving you as much information as you’ll need to deal with your debts.

If nothing else, it can be an enormous relief for many to just speak to someone who will hear you out and provide caring and non-judgemental advice. Even this can be a simple way of reducing the burden and pressure you might be feeling.

Snowflake your Debts

A couple of weeks ago, I wrote about the “Downshift Challenge” which could be useful here in reducing your monthly outgoings to provide you with a little extra each month to clear down your debts.

This week, a new idea for you is the concept of repaying paying your debts using the “snowball method” where you gradually reduce your debts according to priority over time. I know, this sounds a bit crazy – and you’re right, it does come from the United States.

However, the snowball method of repaying your debts is very simple and effective and it’s something that can be easily applied here in Ireland when paying down our debts.

How does it work?

Once you understand the priority of your debts, and what you can afford to pay each month, you then decide how much you’re going to pay off on each debt each month.

You then keep paying that amount each month, even as your outstanding debts get smaller and smaller. As you pay off each high priority debt, you then apply those repayments to the next priority debt and so on until the snowballing effect of decreasing debts and increasing repayment amounts applied to each remaining debt eliminates all the debts on your list.

The snowball method of debt repayment is especially suited to repaying credit card debt and Dave Ramsey, who originally came up with the idea, suggests that you pay off the smallest debts first in order to build up the biggest momentum for your “snowball”.

This could be more expensive in the long run, but it can also have the beneficial positive effect for you personally because you’ll see that your debts are being cleared quicker.

So, like a snowball going down the hill, the further it goes, the bigger it gets (your repayments) and the faster it gets (your reducing debts).

Key Requirement

Of course, one of the key things to remember when repaying your debts is to not to put anything in the way of the reducing debt – or blocking the snowball. This means that it is vital that you do not take on other debt while you’re paying down your existing debts.

It could be worth your while setting up a savings account at the same time as repaying your debts so that if any unexpected costs arise, you’ll have a little extra cash on hand to meet the expense, rather than going further into debt.

What’s the bottom line?

If you’re worried about your debts, you have to sit down, work out your complete financial picture, and then begin to address the problem. Set aside part of your monthly budget to gradually pay off your debts – using the snowball method, or whatever way suits you. If things are getting too much for you, then get the help of MABS.

But remember, the worst thing to do when you’re in debt is to ignore it.

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