I know I have written many times about how finances are not the major issue in retirement but for one group of people, finances are much more serious than others. That group are the people who retire with debts hanging over their heads.
Now over the years I’ve been involved in many organisation and some have been operating well and some have had significant debts. Usually the ones with a debt had one thing that had in common with people who retire with debts. That is they had no plan about how to get out of debt other than wishful thinking. Someone said “to have no plan is to plan to fail.” That’s true for organisations and for individuals.
It probably fair to say some people in debt have same plan – it’s called Lotto. But the possibility of that working is so small it can hardly be called a plan.
Here are the odds of winning:-
|Monday Lotto||1 : 8,145,060|
|Oz Lotto||1 : 45,379,620|
|Wednesday Lotto||1 : 8,145,060|
|Powerball (Australia)||1 : 76,676,600|
|Saturday Lotto||1 : 8,145,060|
Sydney is about 1000 Km from where I live. I’ve driven there many times and it takes me about 12 hours. 1000 Km is 1 million metres. So the odds of winning the best of these, is equivalent to driving past a line of people beside the road for 12 hours, with them standing together – 8 to the metre, for 1000 km, then choosing 1 person from that line. So for most of the 12 hours you would be driving past losers. Every weekday millions of people lose lotto. Things are worse with OZ Lotto and Powerball! That’s why they jackpot so often.
Now the truth is, as you enter retirement you will probably move to a reduced weekly family income of $714 if you are married, or $422 if you are single. That’s not a lot of money so you must be careful with the way you spend in retirement.
What do we do then, if we have debts as we enter retirement? Is there a way we can actually move forward? I actually believe there is. Unfortunately it will require dedication and commitment and maybe for a long time but if you stick to the plan, you will win in the end.
Step 1 – Write Down Your Debts.
You need to discover the real extent of your debts. So write down everything you owe to people. Be honest. Don’t “forget” the loans a friend has given you. You must write everything down. Ignore regular costs like rental costs or food and other regularly recurring costs – we’ll come to that later.
If you have a car loan write that down. If you have gambling debts – write that down. If you are behind on your electricity bill write that down. If you have credit card debts, write them down. If you have a personal loan from a bank, or a friend, or cash converters etc – write that down. If you have unpaid court fines – write that down. If you have child support debts – write that down. Make sure you have written down ALL your debts.
Then you need to add them all up. Use a calculator so you don’t “accidentally” miss some bits. The point of this step is to help you understand the extent of the problem you have.
Step 2 – Work Out Your Gross Income.
If you are already retired, the starting point is to look at the bank account into which your pension is paid. Look at the amount that comes into your account each fortnight. If you aren’t retired yet, it is a little more difficult but not impossible. You can use an income calculator like this one from Noel Whittaker. It requires you to know the amount of income you will have in retirement other than the pension. So if you have a part time job then you write your pay in the income area. It also requires you to estimate your assets. If you own a home, your home is not included but your furniture is. Your estimate should be based on what you might get at a garage sale. In my case, the total of my furniture and household effects is estimated at $5000. You also need to add the value of your car but again its the amount you will get if you put the car on the side of the road with a for sale sign on it. Often $1000 or $2000 less than the trade in price with a floor price of $200.
Step 3 – Work Out Your Real Income.
Don’t skip this step because you need to know your actual situation. I know its a bit difficult but it is worth it.
To figure this out you take the amount you have worked out in step 2 then take away the regular costs you have. This includes things like your fortnightly food costs, rental costs, electricity costs, phone costs and internet costs. You also need to estimate the cost of gifts for birthdays and Christmas and insurances for your car and life. You probably need to allow for some repair costs to your house/ car and maybe eating out costs. There will also be occasional medical costs. My doctor bulk bills me as a pensioner but I still have to pay the dentist. I also have an allowance for clothing though with any luck I can put the word out before my birthday and pick up a shirt or two and some socks. I know it’s a pain but working these things out helps you get a better result.
If you are on the pension, it is paid fortnightly so you need to work these out as fortnightly or monthly costs. My electricity is billed every three months (12 weeks) so I divide what it costs by 6 to get to fortnightly.
Step 4 – Work Out Your Finance Plan.
Now it’s time to look back at the debts list in step 1. If you can, draw up a pie chart with one slice of the pie for each debt you have. Don’t worry which one is bigger or smaller, as long as you have a slice of the pie for each debt that will be enough. You will end up with something like this…
If you have any available income in step 3, work out how to pay something to each one of them. If you have 10 different debts, you could work out that you should pay 10% of your available income to each of the debts. For some debts, this will be sufficient. For those where you owe too much that 10% is not enough to pay the minimum each month, you must ring each person/company you owe money to and ask them to agree to you paying the amount you worked out. They will often agree to receiving something rather than nothing! But you MUST pay them regularly. It may take years to pay some back but it will be worth it. In addition, you must not add more debt! So cut up your credit card and never visit Cash Converters again. You can go back when you have finished paying all the debts off!
When you have paid off one segment, then reward yourself by keeping up payment of that defunct payment and paying it into your normal bank account. If you choose to not spend that money you will find you are painlessly accruing assets.
In the meanwhile do not spend any money you don’t have in the bank. That will only take you back to where you started.
So there is hope for everybody. But it will require some work and it requires you to discipline yourself. It will be worth it.