Debt Secrets

Yes the food prices really have crashed at your local supermarket folks! It’s unbelievable! Here’s the result of following the advice given in this article Money saving tips on grocery shopping Tesco bargains

Take a look at some of the incredible bargains bagged here. I mean just feast your eyeballs on these! First up we got a light & creamy mandarin cheesecake at only 20p! As Marie Antoinette would say: “let them eat cheese cake, tons of it!”

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For those who are in debt in Britain here are some of the basic debt related terms that you need to know:

Statement of Affairs (SOA)
A document that lays out all the details of your financial situation. It includes your monthly income and expenses; liabilities such as loans/mortgages; and assets such as your home.

Secured Debt
A secured debt is a debt secured against an asset that you own. Examples of secured debts are: a mortgage (secured on a property), a car loan (secured on a car). Usually, failure to pay a secured debt results in repossession of the asset.

Unsecured Debt
Unsecured debt is made up of loans not secured on an asset. For example, bank overdrafts, personal loans, credit card debt, store card debt, etc.

Default Notice
That nasty little letter from your creditors telling you that you have defaulted on your original credit agreement.

Solvent
Can you pay your debts? If not, if you sold everything you own could you then pay them? If the answer is yes then you are still solvent. Solvency is basically the ability to meet maturing obligations as they come due. You are not solvent if you can’t pay your monthly debt payments and, if you liquidated all your assets, the money raised would not be sufficient to pay off all your debts.

Insolvency
The opposite of solvent. The definition of Insolvency is that you are unable to service your debts and you have insufficient assets to pay your debts.

Formal Arrangement/Agreement
An arrangement/agreement that is formally recognised by the law. An IVA, for example.

Informal Arrangement
An arrangement that is an informal (i.e. does not follow formal legal rules) agreement between you and your creditors.

Individual Voluntary Arrangement (IVA)
A Legal procedure which allows companies or individuals to make a formal arrangement with their creditors to pay their debts over a period of five years. The agreement can offer a write off of some of the debt at the end of the five year period.

Insolvency Practitioner (IP)
A licensed professional who acts as a nominee or supervisor for an IVA.

Certificate of discharge / Certificate of Satisfaction / Statement of Completion
A certificate received on discharge from bankruptcy or on successful completion of your IVA. You send it to the credit reference agencies to update your file.

Bankruptcy
Bankruptcy is a legal proceeding made on behalf of someone who is insolvent. You can be made bankrupt by your creditors or you can petition for it yourself in court. Most of your debt is written off after a period of about one year.

Bankruptcy Order
A court order declaring you bankrupt.

Bankruptcy Restriction Order
An order applied to lengthen the term of the bankruptcy. It is usually imposed where the bankrupt was dishonest or especially blameworthy for the bankruptcy.

Income Payments Order / Income Payments Agreement
An order or agreement between you and the trustee governing how much you pay back monthly while you are in bankruptcy.

Official Receiver
A public servant who deals with your bankruptcy.

Trustee
A professional, appointed when you are made bankrupt, in order to control and sell your assets to raise money to pay your creditors.

Certificate of Summary Administration
If you go bankrupt with debts less than 20,000, you can obtain a summary administration. The discharge period is shorter and the Official Receiver acts as the trustee to administer your debts.

Discharged
Released from the legal restrictions imposed on you by Bankruptc

How does one build wealth?
For the majority of us, at its most fundamental the answer is simple: increase income, decrease outgoings. But there is a little more complexity to the “Earn more and Save more” rule than appears.

Saving money might cost you more than you think
There are lots of ways to save. You can save money by bargain hunting at the supermarket, searching for more optimum interest rates on your savings, better terms on your credit card and even by switching phone operator. The problem is that working out how to save money costs time and often the time invested yields less than what one would have earned had one spent the time working.

Measuring the return on investment of the time spent working versus the time spent saving, an example
For example, a forklift truck driver offered £35 per hour overtime is much better off working than spending an hour at the supermarket saving £5 on discount chickens. However, if he can save £300 on his annual house insurance by spending 5 hours searching for lower quotes he’d be better off skipping the overtime. (I know someone who achieved such a saving.) Of course he could do both but most people would choose not to, such an excessive time cost having negative consequences for their personal lives.

Your savings strategy, the two important lessons
There are two somewhat obvious lessons here:

The first is that a good savings strategy concentrates first where the biggest savings are likely to be made, usually by cutting costs on the big ticket items.

The second is that saving money as a wealth building strategy only makes sense where the savings achieved exceed the amount that would have been earned over the same time period. (Of course, the calculation is complicated by taxes. A more precise calculation would take this into account and compare savings versus net earnings. For example, an hour invested that achieves a return of £10 on a reduced price product or service is far superior to the £11 you might earn for the same hour in a low paid teaching job. This is because the hour spent working is hit with a further tax deduction of anywhere from 20 -40% depending on your tax bracket.)

But the important point is that those who pursue a savings strategy can fail to calculate and notice the poor return on the time they have invested trying to save money. And the problems with the saving strategy do not end here.

So next time, as you feel the primal excitement come on when you see that bargain, and before you conceive a new life for yourself as a bargain hunter, just pause. Let your rational mind take over and make the right decision computing the ROTI (return on time investment) then you can snap up the free food.

(Image from Mike Dewitt’s Spooky Action blog) more on how to make important decisions here

Frugality and Wealth attraction - a warning
As well as not reaping rewards commensurate with the efforts expended, the obsessive saver is in danger of falling into extreme frugality. Much frugal living can be healthy especially if motivated by higher order (spiritual) reasons. But excessive frugality is a disease called “meanness” the result of an unhealthy idolization of money. Its fruits are destroyed relationships and the elimination of the joy of abundance. In fact, such people can become so fixated on downsizing that an altered psychology results with a reduced capacity for perceiving expansion. They urgently need a wealth attraction warning:

Wealth Attraction Warning

Extreme frugality as a savings strategy is not the optimum route to wealth not least because obsessive saving causes your unconscious to become fixated on downsizing instead of wealth creation.

Notwithstanding the above wealth attraction warning, we have to be realistic and there are circumstances in which even excessive frugality is recommended. Anything even excessive saving is preferable to the slavery of being in debt. So, if you are in a tight spot with very low income but you are time rich then frugality is an option for you.

Otherwise you’re better off earning and spending the time more productively building businesses, an entrepreneurial mindset and your earning potential.

A caution regarding extreme frugality
Before you read this post and become a happy bargain hunter, I would like to sound a note of caution to those readers who pursue an extreme version of the “savings strategy”. Please first read my articles on building wealth: How to build wealth and why saving but not frugality belongs in the picture and, remind yourself now of the wealth attraction warning message that I posted in that article:

Wealth Attraction Warning

Extreme frugality as a savings strategy is not the optimum route to wealth not least because obsessive saving causes your unconscious to become fixated on downsizing instead of wealth creation.

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This article is part of the coping with debt series. The objective is to help people reframe their debt problem as an opportunity. The article pitches your debt problem as a turning point in your life - a chance to spiral upwards rather than further downwards. The readers who find themselves in a debt situation are urged to change mindsets, explore new ideas and set new goals.

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