PART 3: CONQUER THE DEBT DRAGON

In part 1 we explored what stories lure our clients into the debt dragon's den. In part 2, we explored how we support our clients to become aware that the debt dragon has captured them. In part 3, we will explore how we can support our clients in escaping the debt dragon and building a prosperous life.

EXPENSE TRACKER

Clients usually start looking at the most significant expenses when they try to cut their expenditures. This leads them to believe that they cannot cut out any expenses from the budget. However, in most cases, if they start looking at the smaller expenses and create mindfulness around their spending, the shift in cutting expenses will be more natural and less daunting.

The expense tracker also helps to keep track of cash withdrawals from ATMs and card spending. Hopefully, by now, the client only has debit cards, but if they have credit cards, they must be kept out of reach.

Here is an example of how a?daily expense tracker can ?look (your client needs to adapt it to their needs):

I know somebody very successful that carries such a spending tracker in his wallet. He records all his expenses immediately and tracks them to enable him to know precisely what he can spend or not. At the end of each week, he celebrates what he has saved by treating himself to something small, and the rest of the surplus he banks for future growth.

Clients can also use an app on their phones to track these expenses, as shown above. The critical part is that the process creates awareness and encourages mindfulness when spending money. However,?having an app do all the work in the background and you only review the spending weekly or monthly usually does not add as much value. It can even increase the feeling of guilt.

Was the spending essential? Was it part of my planned spending?

What triggered the spending?

What mood did I have before and after buying the item(s)?

Who influenced me to make the purchase?

What did I learn from this incident?

How will it feel if I spend money more intentionally?

The weekly tracker is then consolidated into a monthly tracker, which becomes the base of the client's Spending-Plan.

SPENDING PLAN

Language is powerful, so I prefer the naming convention of a spending -or prosperity plan rather than a budget. I usually encourage clients, who tend to lean towards being spenders and need some guardrails to protect themselves against over-or impulsive spending, to use a spending plan. A spending plan will automatically allow them to allocate funds to ensure they live their best possible life now and in the future. Conversely, a prosperity plan describes how money can flow through clients' lives and will be allocated to grow wealth and prosperity. Prosperity plans typically work well for clients who are natural savers.

Dr Sarah Newcomb, who wrote, Loaded, Money, Psychology and how to get ahead without leaving your values behind, influenced my view of budgeting to a large extent and will integrate my learning from this body of work in the spending plan.

It is essential to include income and expenses when drafting a spending plan. Next, we will explore income and expenses and then, in the context of Conquering the Debt Dragon, I will expand on how we include a repayment plan as part of this exercise.

INCOME

It helps us stand back and think about our client's source of income and how it flows through their life, how they can get the most value from their money, and lastly, how they spend it on themself now and in the future to live the best possible life. Remember, all funds paid to creditors are to the benefit of creditors.

Then, in most cases, income will be from a source where the client gets paid for their labour or intellectual capital that adds value to somebody else and for that, they get paid money.

At this stage of stabilisation and starting to escape the Debt Dragon's Den for a life of financial freedom, the following questions can be asked:

• What are all sources of income that can be taken into consideration for the spending plan?
• How can alternative sources of income be created?
• What assets can be liquidated wisely that are no longer of use? It is essential to remember never to liquidate assets that are a source of income.

Lastly, a higher income usually is not the answer to escaping the debt dragon. A more disciplined and frugal lifestyle is a much better way to ensure long-term financial freedom.

EXPENSES

Before drafting a baseline spending plan, it is essential to reflect on where the client's money flowed over the past three months. However, if the client can analyse all expenses for the last twelve months, it is ideal to include them as annual expenses can derail the whole spending plan when not considered. Here a budget app from the client's bank or one of the apps that aggregate accounts can be used to get a single view of the client's detailed expenses.

All the expenses can now be mapped, including the detailed information from the spending tracker to get an overall view of where money was flowing.

The client is now in a position to have trade-off discussions. Dr Sarah Newcomb argues that all expenses are needs. Expenses address a specific psychological need we have at a point and time. Therefore, it can be helpful for clients to evaluate their spending through this lens and say, 'What are the different needs they want to satisfy?’ 'Do they satisfy them through their spending line?' and 'What alternative strategies can they put into place to fulfil these needs?'. For example, when a client, who spends R 2?000 per month on take-aways evaluates this, they could argue that it creates engagement for them as a family. An alternative could be buying ingredients and starting a family food evening exploring different world food cultures. In the process, ?it cuts on this expense line and probably creates a more profound engagement with the family.

Our clients have now empowered themselves to face the debt dragon and see a way that they can pay their path out of the Debt Dragon's Den.

REPAYMENT PLAN

Before drawing up a repayment plan, we must explore a few crucial questions as general guidelines. There are usually correct answers to these questions from a cognitive and pure financial planning perspective. However, it is essential to note that based on a client's specific circumstances, there can be an answer that is right for the client that differs from the solution of pure numbers.

GOOD AND BAD DEBT

Good debt or secured debt is where an asset is attached to the debt. Examples of ?a secured loan are the bond on your house or a loan on a second property you are letting out. The general distinction between an asset and a liability is that an asset brings in more money than you pay in expenses.

Bad debt is unsecured debt, like personal loans, an overdraft, credit cards, store credit and borrowing money?from family and friends.

?WHAT ABOUT CONSOLIDATING DEBT?

REMEMBER DEBT DECLARATION : "JUST FOR TODAY, ONE DAY, DO NOT INCUR ANY NEW DEBT"

If, for example, you can secure credit or have a current facility where you are not using an entire loan, while the interest rate is lower and the term of the loan is equal or shorter, it will make sense to consolidate the credit in this lower interest rate environment.

Nevertheless, consolidating credit becomes grey when the loan term is longer than the current debt, and the interest rate is lower. For example, the client has credit card debt at prime +4% and a Home Loan at prime -1%. The lower interest rate will reduce what the client needs to pay back. However, the client mustn't take 20 years to pay it back; because then the benefit of the lower the interest rate will be consumed by spreading the credit over a longer period.

WHICH DEBT DO I PAY OFF FIRST?

Interestingly, ?from a pure numbers game, it is better to start with the highest interest rate loans. However, from a small win perspective, it will make more sense to pay small loans off first, as it can psychologically motivate the clients to continue.

Another factor must be considered when some creditors' payments are so long overdue that they want to sue the client. In such a situation, the client must negotiate with the creditors on the best possible terms and, based on this agreement, determine a priority.

HOW MUCH DO I NEED TO PAY?

A general rule for clients is to pay at least the interest part on all their debt so that they do not end up paying interest on interest and effectively incur more credit.

Also, it is essential for the client to keep a reduction and repayment record to celebrate their progress in reducing debt and, ultimately, repaying some of the loans in full.

WHAT ABOUT REPAYMENT SURPLUSES?

What a nice problem to have? So, the logic is to take the monthly instalment the client made towards the debt just paid off and add it as an additional payment to the remainder of their debt.

This is the start of the journey to long-term financial prosperity, and we need to support our clients and let them ponder on the following:

• How and when will they start accumulating a freedom fund of three to six months of their monthly expenses?
• How do they celebrate the small wins of paying back debt and sticking to the plan?

SUPPORT AND COMMUNICATION

Debt does not accumulate in isolation, nor should our clients take on a solo journey to free themselves from the Dragon's Den of Debt.

So who are all the stakeholders our clients need to enrol as part of their financial journey?

• Family,
• Friends,
• Creditors,
• Financial Planner,
• Bankers.

Some questions we as financial coaches could consider when our clients build their support system for this journey:

What request will our client make to the people they want to enrol for support?

What offers will our client make?

What and how regular will the client engage with the stakeholders?

What feedback is expected from who?

How will feedback be logged?

MESSY MIDDLE

Let us not lie to ourselves! The process requires our clients to build a new relationship with money, enrol multiple stakeholders and venture into unchartered waters to escape from the Dragon's Den of Debt to the world of financial freedom. There will be days that our clients want to abandon the process and revert to their old, more familiar ways. During these events, we must guide our clients to learn from the process, their moods and journey. This will allow them to build a new way of living a life of freedom.

FINANCIAL FREEDOM

CREDIT RECORD AND CREDIT SCORE

An article on debt would not be complete without referring to credit records and credit scores.

A credit score is like a two-edged sword. On the one side, our clients need a good credit score to enable them, for example, to obtain good credit to finance a house. The primary drivers that drive a good credit score and will allow clients to achieve it, are as follows,

• Does the client pay credit on time?
• How much and how often is credit used?
• How does the client use credit across all products?
• Are there any judgements against the client?
• How often does the client apply for credit?
• How long does the client have a specific credit facility in place?

All of the answers to the questions above are accumulated into a combined credit score that can be anything between 300 and 850:

• A low score is considered between 300 and 579,
• A fair score between 580 and 669,
• ?A good score is above 669.

Several service providers provide a free service that gives clients a monthly update on their credit scores and how to improve them. The services also show all judgements, and clients can ensure that their record is correct or address any inaccurate information.

Some of these free services do a great job of empowering clients with information. However, clients should be cautioned as some of these services offer users loans and credits. So, clients using these services could be constantly confronted with the temptation to take up new credit.

FINANCIAL FREEDOM

Your client has now achieved the following:

Build a healthy relationship with money

Learned the skills of:

• Being mindful of their spending and building the awareness of only spending on what is essential for them,
• Being social indifferent to what others think and what they, the world and its consumerism want, as the clients instead focus on what serves them best,
• Building confidence that they can be custodians of their own life and manage their money with prudence,
• Having a plan and executing the plan with discipline,
• Staying focused on what is essential for them.

They continue to build wealth aligned to their values, ensuring that they enjoy life to its fullest now and in the future with the resources they have. They enjoy financial freedom, which means they are free from the Debt Dragons' voice in their head. They follow the declaration "JUST FOR TODAY, ONE DAY, DO NOT INCUR ANY NEW BAD DEBT", and pay off any good debt as fast as possible.

Bibliography

Financial Sector Conduct Authority, 2022. Financial Sector Outlook Study 2022, Pretoria: FSCA.

Grable, J., Heo, W. & Rabbani, A., 2015. Financial Anxiety, Physiological Arousal, and Planning Intention. Financial Therapy Association, 5(2), p. Article 2.

James, D., 2021. Life and Debt: A view from the south. Economy and society, 50(1), pp. 36-56.

Mundis, J., 2012. How to get out of debt, stay out of debt, and live prosperously. 2012 red. New York: Bantam Books.

Newcomb, S., 2016. Loaded, Money, Psychology, and how to get ahead without leaving your values behind. Hoboken: Wiley and Sons.

At this month's Thought Leadership session, we will discuss the impact of Retrenchment on a client and their family. We will have Susan Potgieter, the author of Retrenchment – End of the road or New beginning and Ansa Lange, seasoned life and wellness coach, around the Zoom Round Tablet. We will discuss the transformations that take place when going through a retrenchment.?

So join us on Monday afternoon, 27th of June 2022, at 15H00.

If you are not already part of the Thought Leadership community you can register here.

Regards,

CRAFFIES YOUR CRAZY FINANCIAL COACHING ARTIST.