Thursday, March 12, 2009

Get Out Of Bad Debt

I briefly touched on how to reduce bad debt in a case study about a middle income guy.  And most of us are the Average Joe, so no doubt the questions of How to Get Out Of Debt persist.  Furthermore, there is a book saying that 21st century is all about Debt.

Ok, lets start with the boring, "You shouldn't have got into bad debt at the first place !"

Sorry but Honestly, personal bad debt is a pure mistake on greed and ignorance.  Bad debt is not a personal finance problem.  Its the opposite of personal finance.  As mentioned before, the only thing you MUST do in Personal Finance is to setup an automated saving system right after your income.  Bad debt is the reverse !  By using up more than your income even before the income comes in.

That would be the FIRST thing one must understand, realize and FEEL it !  Else it is not going to be any helps in reducing bad debt.  It will just come back again and again.

Secondly ofcourse we can blame it on the education we received.  Off the 12 long years of FREE and compulsory education, we didn't learn a single thing about bad debt, not to mention automated saving.  Although its not a personal finance problem, it is a global trend and it becomes a national problem where it affects our daily social life.  Crimes rate increase.  You lose job, I die.

Ok, now that we take responsibility of the problem and we get someone to share the burden, we can now look at it face to face.

The problem originates from Income, so the real solution is within income as well.  But before that, lets review some of the common advices :

1.  categorize debt by different interest rates
12-18%  Credit Card or Ah Long debt
5-7%  House Loan
2.  work on the highest interest rates category first
including transfer all the high interest rate loan to lower rate like using house loan to pay for credit card debt
3.  within the same category, pay off the smallest amount first !
4.  call up banks and ask for waiver or reduction

other than that, there are some uncommon methods and services offered by private agency.  Basically they work around these methods:

1.  Pay a little more monthly, cut down total number of years to save on total sum
2.  Instead of paying 18% to credit card, borrow from them and you pay only 16% etc.
3.  Changing interest calculation method from daily rest to monthly rest etc.

It is possible to have some businesses out there sincerely come up with plans to help people reduce debt.  Afterall, the ultimate benchmark for world best stock investors is only 15%.  So it makes more sense to run a Ah Long business than starting a company like Warren Buffect's  BERKSHIRE HATHAWAY

However there are more businesses out there taking opportunity out of these ignorant debtors and further exploit them to the limit by squeezing every penny out.  So my advice is approach these agencies with care, only work with those who can provide you clear figures / numbers how the system works and then you send the figures to me for verification.

Most countries have also setup proper agency to provide similar helps like above private ones.  That is a must know for poor debtors.  In Malaysia, you must go to AKPK personally and ask them to help you face to face.

Ok, lets get back to this blog.  Just a reminder that all above are the common methods debt adviser would have shared with you.  They are effective ... to contain the problem, not really solving it.  This blog stresses that personal bad debt is NOT a personal finance problem.  Its problem is from income and the solution is to work on income.

So what you really need is to focus on Getting More Income to pay off the debt.

No one can go back and change a BAD beginning 
but everyone CAN create a successful ending !

And you bet double the effort is needed to correct a small mistake.

Some may curse by now what a stupid recommendation. 

"If I could earn more money, I wouldn't be in this debt at the first place !!"

Well, thats why and how this article is written.  You must first admit and take resposbility for your own mistake, then you can also blame someone for it and now you should face it to solve it yourself.  Including thinking positively how every single suggestion comes in, despite how stupid some of them may sound.

Fortunately, there are proven methods on how to increase income to solve debt.  All you need is as mentioned above, expect double extra effort to come.

Statistically 3-5% of people who started a business end with great finance success.  The unique difference in this 3-5% of people is their smartness and ability to adapt to changes.  Lets face it, how smart we are is something imprinted within us.  Its not something we can change overnight.  By the time we are as smart as we should be, debt rate has already compounded to sky level.  Afterall, if we have the smartness in us, we wouldn't have reach this bad debt situation anyway, would we ?

On the other hand, people who 'join' a human network business has 20-30% success rate.  Off the other 70% who didn't make it even though they are in the same human network business as those who make it, is because they didn't spend enough effort on it.

A Human network business that you can 'join' includes multi level marketing, insurance and mutual fund agents.

If you are serious about solving your bad debt which you admit was a mistake on your part.  Then you better focus on increasing your income.  And if you don't know how to increase income on your own.  You better temporary forget about all your preception on MLM and insurance agents.  Join them and really spend a good amount of effort on it for 2-3 years.  I guarantee you will solve your current debt problems.

Forget about morale, forget the right thing to do, forget about helping others, you have to even forget about finance planning as a matter of fact.  Your focus should be on solving your debt and you are just 'working' toward it.  You don't have to 'like' your work in this case as long as it can get you off this bad debt which is killing you.  You probably don't like your current job anyway.  And since you are already in bad debt, you probably been brain wash by some incorrect ideas.  So what's wrong being brain wash by this MLM and insurance ?  While your brain is already filled with get into bad debt procedures.

After all, both income and bad debt is NOT a part of personal finance planning.  One is the pre-requsite and another is the oppositive.

Among the 3 choices above, insurance is the safest and best choice if you don't know which to pick.  

Although MLM is  perfect in concept but in practical world, MLM is still new and there are still a lot of bad apples in MLM industry.  Since insurance industry is older and better regulated, there are really no BAD insurance companies out there, there are only less good choices.  Mutual fund is more toward finance planning or investment ideas, immediate and short term reward on mutual fund sales are less encouraging.  So to sum all up, insurance industry is the most suitable human network business for people to join to reduce their debt.

Take an example to solve a $20,000 bad debt.  You probably need to make a total sales of $60,000.  Assuming each sale is $2,000 then you will need to make 30 sales.  In order to make 30 sales, you may need to make 150 attempts.  Assuming each attemp needs 4 follow ups, then you need to prepare for 600 sessions of work.  Assuming each session is 2 hours, you will need to spend 1,200 hours in order to solve your $20,000 debt.  Now, if you spend 3 hours a day, 7 days a week, your debt can be settled slightly after a year

If above example is not acceptable, then you will need to have the smart in you to entrepreneur about how to get the extra income you need.  But just to beware, the 'smart' you think you have in you may be is the 'smart' that gets you into bad debt at the first place.  Just beware ... but don't let any wild imagination stop you when pursuing income.

Lastly, if you setup an automated saving system, then you are more likely to solve your bad debt problem too.  Exactly why would probably require another long topic on human psychology.  But in short, setting up such a saving system implies you already solve the 2 most original fault in bad debt, greed and ignorance.

Good luck all, I know this is a tough topic and not many people will agree but nevertheless its already proven solving many bad debts again and again.  Although these people never come back and help me propagate the right finance planning ideas, but they did get their debts solved.