Consumer borrowing is at an all time high. Government deregulation of the finance industry in Australia back in the early 1980's lead to a large amount of new financial institutions all determined to win your business. Our strong economy combined with low interest rates in the past 10 years has seen small numbers of loan arrears. The rise in property values has enabled consumers to refinance elsewhere if they were having problems meeting their financial commitments. The concern is this doesn't provide a reason for borrowers to review their financial position and possibly poor spending habits. In many cases this refinancing will just delay the hurt which will be greater than it may have been.

Our interest rates remain low compared to the late 1980's. Back then home loans reached 18% which now seems like ancient history. For those in their 20's and early 30's it is exactly that. It is almost impossible to convince this group that interest rates could rise to a level that would see mortgagee auctions a common occurrence. Unfortunately our greater level of consumer debt in the past 10 years means we won't have to wait for interest rates to hit 15% for a recession to be with us.

By December 2008 the situation in Australia and many other countries had changed dramatically. The interest rates in Australia had reduced by just under 3% in that 6 months period and the standard variable rate is 6.84%. It is interesting to see that our concerns when this article was first written back in 2005 was well justified.

What does all this mean? Well we can't predict what will happen in the future in regard to the economic climate. What we do know is when the economy starts to deteriorate and it will at some time the people who generally cope the best are the ones with a satisfactory debt level. The best time to start on this is now! Don't wait!

You might say we have tried in the past but always come unstuck. There is no quick solution but there is a way to make it easier. The Debtonator is money100's system to take control of your borrowings.

How to use The Debtonator

It works by inputting all your loans & credit card details into the Debtonator spreadsheet. Have a look at the example spreadsheet to the left. Then go to the spreadsheet section and key in your own Debtonator. Key in the lender, amount owed and monthly payment. It will then calculate the pay-off ratio. Then the debt with the lowest pay-off ratio, key number 1 in the pay off priority. The debt with the next lowest pay off ratio, key in number 2 in the pay off priority for that as well. Once you have completed them all study the information.

The plan is to commit all your  energy into the debt with the lowest pay off ratio.

The key is to use the information learnt from the budgeting section and increase the repayments on the chosen debt. The goal is for this amount to be in the vicinity of 10% of your net monthly income. This extra amount goes straight off the principal.

Once this particular debt is repaid we then take the amount that was being repaid and pay it off the next debt with the lowest pay off ratio. The advantage with this scenario is we start winning quick which provides confidence and incentive to keep going.

Remember with credit cards, It is crucial that you contact the bank and have those cards closed. Cutting up those cards just means they will send you a new card when the previous card was due to expire!

Print out your own Debtonator and review it every 3 months. This will enable you to stay focused on your plan. Once a year print out the Debtonator. Remember to keep these and compare with previous years. If you have been quite successful, you will possibly be shocked at your previous debt problems and more motivated to continue on.

The main cause of this system to fail is further borrowing for that car, that holiday, that _____! At Money 100 we can't run your lives, all we can do is provide guidance and the tools to assist. The rest is up to you. Reassess your reasons for getting further into debt and undoing all the good work you have already achieved. Ask yourself these questions:

1. Will my existing car meet my needs?
2. Do I need to go on that holiday?
3. Do I need to spend that much for birthdays, clothing etc?

The key to making the Debtonator work for you is once completed, print it out and pin it up at a spot that will ensure you will see it many times a day. You may be comfortable for visitors to see it or maybe not. It is up to you. Suggested places that may work are:

• On the fridge
• On the bathroom mirror
• On the wall/mirror in your bedroom
• On the inside door of your wardrobe

If the debts are in 2 names, it is the responsibility of both parties to ensure you stay focused and review your performance.

Good Luck

 Example Debtonator (21.5 kB)