101 Ways to Get Out Of Debt and On the Road to Wealth

By Ashley Ormond

101 Ways to Get Out Of Debt and On the Road to Wealth is the ultimate handbook for anybody who wants to get out of debt and stay out of debt.

This book will provide you with an insider's knowledge of how to beat the lenders at their own game. Inside you will find 101 practical and proven methods that anybody can use to master their debt. Best-selling author Ashley Ormond shows you how to conquer all types of debt, including mortgages, credit cards, car loans, personal loans, investment loans and small business loans.

In this book you will learn how to:

• save a fortune in interest
• get out of debt years earlier
• decide which debts to attack first
• find the best lending deals for your needs
• manage repayment problems.

Ashley Ormond’s common-sense approach will get you debt free and on the road to wealth in no time -- and that means more control over your life, less stress, and greater long-term security for you and your family.

• Language: English
• Publisher: Wiley
• Release date: Jan 27, 2012
• ISBN: 9781118319543

Book preview

Part II

First things first

The first step on any journey is to find out where you stand right now. This means getting a picture of your current debt position and putting together a plan of action to attack the problem.

Chapter 1

Work out how far in the red you are

Most people don’t know how much they owe in total. They usually have some idea about how much they owe on the main loans, such as the mortgage and car loan, but get a nasty surprise when they add up the grand total of all their debts.

The first step is to write down what you think the total amount of all your debts might be. Write down your initial guess on this page — now.

Next, make a list of the actual current balances outstanding on each of your loans and debts. Don’t guess this time. Look up the most recent statements for each loan. These days you can access statements on most types of accounts via the internet. Include the following debts in your list:

home mortgages

investment property loans

amounts still owing on the construction of your house if you are building

lines of credit

credit cards

store cards

personal loans

car loans

boat loans

HECS-HELP (higher education loans)

higher purchase loans on appliances or household goods

rent–buy agreements on appliances, laptops, etc.

store loans (such as ‘pay no interest for two years’ loans on furniture, audio-visual and other household goods)

margin loans (on shares or managed funds)

loans to buy shares in your employer’s company (including employee share purchase plans)

loans to friends and family

any loans or debts you have guaranteed

taxes payable

all bills outstanding (such as phone, electricity and water)

court judgements against you.

Once you have added up the total debt figure, write it down next to your initial guess. How close were you to your guess?

Chapter 2

Compare debts with income

What is even more important than the total amount of your debt is how it compares with the amount of income you earn. For example, consider two families, the Joneses and the Davies. The Jones family owes $200 000 but earns $200 000 per year after tax, whereas the Davies family owes $100 000 but earns only $50 000 per year after tax. Even though the Davies family has less overall debt, they will take a lot longer to get rid of their debts because their income is much lower than the Joneses.

Work out your after-tax income per year. Include all sources of regular income like overtime, part-time or casual work. Use recent pay slips to calculate the total after-tax income for one year. Next, work out how many years of after-tax income your total debts represent by dividing your total debt by your annual after-tax income.

For example, if your total debts are $240 000 and your total annual after-tax income is $85 000, then your debts equal 2.8 times your annual income. This does not mean that it will take 2.8 years to pay off all your debts because it doesn’t include your living expenses and interest on the debts, but it is a good, quick measure of the seriousness of your debt burden.

As a nation, Australian households had a debt-to-income ratio of 1.6 at the end of 2008, but it had risen from just 0.8 over the past 10 years. See table 2.1 to find out how you rate. (Your debt-to-income ratio is your total debts divided by your annual after-tax income.)

Table 2.1: debt-to-income ratios

Chapter 3

Work out your total loan repayment bill

Most people also get a rude shock when they work out what all their debts are costing them in total repayments. Once again, make a quick mental guess as to the total of all loan repayments on all your debts each year. Write your guess down now, then complete the following steps.

Add up the total repayments (including principal and interest) on all your loans (get the actual numbers from recent statements). For lines of credit and credit cards, use the minimum payment amount or the amount you have been paying if it is above the minimum level.

Add all fees on loans, then add these to the total repayments. Include all fees — administration fees, service fees, late-payment fees, statement fees, transaction fees and cash advance fees — they all add up.

Divide the total annual loan payments (including all the above items) by your total annual after-tax income. This will give you your debt-service ratio, which is the percentage of your after-tax income required to service (or repay) your debts.

For example, if your total loan repayments (including principal, interest, fees and charges on all loans) add up to $2100 per month, your annual bill is $25 200 per year. If you earn $70 000 after tax per year, your debt-service ratio is 36 per cent; that is, 36 per cent of your after-tax income is going to pay off debts.

Before the recent lending boom, a debt-service ratio of more than 30 per cent of income was considered excessive and dangerous, and lenders would limit the amount of lending so that 30 per cent would not be exceeded. However, over the past decade, this rule was relaxed and many borrowers have total repayments above 50 per cent of their income, which is extremely dangerous. Table 2.2 shows how you rate.

Table 2.2: debt-service ratios

Chapter 4

Get the facts on all your loans

Before working out a plan to pay off your debts, you need to find out how they all work. Some information may be obtained from loan statements, but usually you need to call the lender to get all the facts. For each loan, find out the following information:

current balance and payout figure (which includes payout fees and charges)

term remaining — get the date of the final payment

whether there is any lump sum due at the end of the term (often called a balloon or bullet payment)

current interest rate

how the interest is calculated; for example, is it calculated on the daily balance, the minimum monthly balance, the maximum monthly balance, the end of month balance or the opening monthly balance.

what ongoing fees are payable, including monthly, annual and statement fees

whether the interest rate is fixed for the term of the loan or floating (variable); if fixed, for how long is it fixed?

whether the payments are principal-and-interest or interest only

what the lender’s security for the loan is

who the borrowers on the loan are, and whether there are any