Managing Money & Dealing with Debt
Dennis Harhalakis founded Cambridge Money Coaching to help people change the way they think about money. He helps them tackle their financial issues to reduce the stress and enable them to make better decisions for themselves. Dennis gives us some key pointers around managing money, including how to avoid getting trapped in poor financial decisions, and dealing with debt.
Photo: Dealing with debt – Zurich
How can we make better financial decisions, or fewer financial mistakes?
It’s not necessarily about making fantastic decisions, it’s about avoiding bad ones. If you look at some of the most successful investors in the world, they make some good decisions, but more significantly, they don’t get trapped in bad decisions.
There are some important core principles:
Don’t get trapped in high interest debt
One is good debt vs. bad debt: Try not to get stuck in high interest debt, like overdrafts or credit card debt. And avoid expensive payday loans or loan sharks. It can be really hard to improve your financial situation if you’re paying 30-40% interest. If you are in that situation, don’t feel shame, just get some help. Negotiate with your bank or relevant lender to reduce your interest rate or agree a plan to make your debt more manageable. Or try to transfer your credit balance to a cheaper account. Or seek help from a debt support group.
Avoid unnecessary charges
Set yourself up for success: avoid paying unnecessary banking charges for going over limits on your overdraft or credit. Get set up so if you are approaching your overdraft limit, you get an alert from your bank. If you’re nearing your credit limit, you get an alert from your credit card provider. Because then you have the chance to make some adjustments, to transfer some money in, or reduce your spending. Learn how the system works and engage with it.
Know where your money is going
Try to reduce your debt. Work out whether you have an income problem or a spending problem. And that comes down to understanding exactly where your money is going, and budgeting for it. Most banks have budgeting apps that can help you track your income and outgoings. Or if you have a Monzo or Revolut card, all your spending is broken down and you can see clearly where your money goes.
Look for ways to boost your income: find a temporary job, sell things you no longer need, and make sure you check out everything that is available to you, such as state benefits.
Could you explain the difference between good & bad debt?
At certain stages of life, you are highly likely to need some form of borrowing. And managed well, debt can be a useful aid in helping you to achieve some important things.
Good debt means ‘good’ from a financial perspective, rather than a judgemental one. This is debt that leaves you better off in the long term by building wealth or increasing income, so it pays for itself over time. There’s a clear and specific reason for taking it on, and a realistic plan for paying it back. And it’s usually the result of shopping around for the cheapest funding. So, as you can see, good debt is a conscious cognitive process: how do I fund it, how does it pay for itself over time, how will it produce more wealth than my initial investment?
Your student loan is an example of good debt – funding extra qualifications to improve your career prospects and earnings potential. Investing in yourself is one of the most powerful things you can do. A mortgage to buy a home is considered good debt, because over time, the housing market does go up; also, mortgage rates are usually one of the cheapest forms of debt, there’s a proper repayment plan and it provides you with somewhere to live. Another example would be a loan to grow a business.
Bad debt, on the other hand, drains wealth. It’s not affordable (i.e. you don’t have the cash to pay for it); it has no prospect of paying for itself in the future; there’s no realistic payment plan; it is often decided in a hurry and is usually financed through expensive credit. Bad debt is the holiday you can’t afford, the car you don’t need, or borrowing money to pay your bills. Borrowing to pay for anything that massively depreciates in value as soon as you pick it up, e.g. clothes – that’s not worth getting into debt over.
You should never borrow to fund a lifestyle you can’t really afford. That sort of excess spending could become a financial burden for years to come, incurring escalating interest costs, and penalty charges if you fail to make repayments on time. For example, if you’ve got a £2,000 balance on your credit card and you pay back 2% per month with a minimum of £5, it’s going to take you over 25 years to clear it. And that £2,000 of debt over 25 years will have cost you £3,500 interest.
To summarise, from a financial perspective bad debt will make the future more difficult for you, and good debt will make the future easier – good debt is an investment in your future self.
What should you do if you’re getting into financial trouble? What are the signs?
There will be various indicators if you’re struggling to get through the month – you’ll go overdrawn or you’ll start to pay fees: credit card charges because you can’t clear the minimum monthly amount, or overdraft fees because you have exceeded your limit. The signs are not necessarily hard to spot, it’s engaging with it that most people struggle with. That’s because they feel bad about the situation they have got into, about money management generally, and about themselves. And it’s hard to engage with something that makes you feel bad about yourself.
The first step involves a little self-compassion. There are many reasons why managing money is difficult. Historically our brains are not wired for it, they are wired for instant gratification. We’re constantly bombarded by messages telling us we’re not good enough if we don’t buy this, wear this, drive that. And it can be hard to stand back and think no, I don’t need that in my life. But it’s important to recognise the danger signs and really understand where your money goes.
Recognise the situation you are in and learn how to engage with your discomfort. That’s actually good life advice, whether it’s finance or anything else that makes you feel bad; your brain is signalling important information about things that are not going well for you. So, you need to engage with it, not run away from it. Think what you need to do now to make the future better, even if that’s tough to address. Some decisions can be reframed as ‘what shouldn’t I do? What is obviously going to make the situation worse for me?’ For example, taking on high interest debt or buying pizzas on Klarna are clearly bad ideas.
Accept that this isn’t easy. Although money is central to our lives, nobody shows us how to manage it, we kind of stumble through it. Prudent financial management is becoming increasingly difficult. People with debt aren’t alone. In this current cost-of-living crisis, bills are rocketing, more people will struggle, and it’s not their fault. So, whatever your situation, don’t feel guilt and don’t be ashamed to ask for help.
If you are getting into difficulty, it’s important to act quickly to prevent the situation from becoming worse. Find someone who can help, someone who will not judge you. Talk to your bank or relevant lenders, or contact a debt support group for free, confidential advice.
For free help with debt:
Helpline: 0808 808 4000
StepChange Debt Charity
Helpline: 0800 138 1111
Debt Advice Locator – MoneyHelper
How to save money & avoid costs spiralling out of control. Where to get help if you need it.
To contact Dennis about money coaching:
Cambridge Money Coaching
LinkedIn – Dennis Harhalakis
More from Dennis:
Grad Bites: Money & Me – Understanding our Relationship with Money