Debt & Danger Rocks

Navigating the jagged coastline of debt!

Our ship is taking on water, battered by the weight of mounting debt, and our sails hang in tatters, unable to propel us forward with any meaningful speed. To mend our vessel and regain momentum, we must set a course for the perilous shores of Debt & Danger Rocks—a rugged isle where repairs can finally begin.

 

Equipped with insights gained from our voyage to Budget Island, we now understand the full scope of the damage.
On this treacherous island, the tools and knowledge needed to restore our ship await. Navigating through its stormy challenges requires Your Treasure Compass, the only guide capable of steering us safely past the swirling maelstrom of debt that threatens to drag us to the depths.

 

With determination, we can weather the trials of Debt & Danger Rocks, patch the gaping leaks in our hull, and raise new sails for the journey ahead—charting a course toward financial freedom.

Getting Out of Debt

Debt is a four-letter word and in this section, we’re going to work out a plan for getting out of it. We can’t get ourselves ahead if we’re constantly fighting a head wind. The most important piece of the puzzle is to make sure our relationship with debt is sound.

A mortgage is a mixed bag in how good or bad you could say it is. Buying vs renting is not as clear cut a decision as it may appear. We will perhaps explore this further in another section.

Personal debt such as car payments or short-term payday loans and the evil “buy now, pay later” scams are bad. Full stop. Bad.

Student loans are a grey area as there is a potential to pay for themselves through a better paying job but they can just as easily end up being a useless albatross around your neck for years to come, or never earning you the return for the years of non-earnings and debt accumulation it sometimes requires. It’s a whole topic in itself.

Since we are starting from where we are right now and I am assuming that debt is only taking money out of your pocket at this stage, then we need a plan.
Using what we learned on Budget Island, we can work on monitoring our costs and stripping them right back to the bone. This will be the tough part of the process but if we’re serious about plugging these leaks then it has to be done.

The next stage is using any savings we can identify in our budget to build up a cash buffer. This will be held aside untouched unless there is an emergency. This is to be used if an unexpected cost is incurred such as a leak in the roof or a hospital bill etc. Ideally, we will eventually want this to be at least 6 to 12 months’ worth of expenses. You will know what that magic number is because you have been tracking it! Initially though you will be looking at $2,000 – $3,000. It’s enough to provide a little breathing room while you get your other debts/expenses under control. Don’t expect miracles to begin with, this is a marathon, not a sprint so don’t get disheartened. Each step builds on the last and it won’t be solved overnight. Over time we will add bit by bit to that emergency fund.
The next phase of our project is to start nailing down debts.
There are several effective methods for getting out of debt, each with its own approach and benefits. 

You’ll hear the theory about good debt vs bad debt. Personal debt is never good debt. Good debt is when you are running a business and need extra funds to buy a new machine for example. The premise being that it will generate income beyond what the overall debt will ultimately cost. If it doesn’t – watch out for the rocks!

This is also how the debt-based ponzi scheme of the world operates by the way. Using debt to buy income producing assets to use as collateral for more debt in order to buy more income producing assets. I say ponzi- scheme because if the sails slacken the ship veers straight into Debt & Danger’s hull-shredding shoreline. As a prudent captain we’re more concerned with getting out of debt for now. If the global trade winds stop blowing you’ll be glad you did!

1. Scraping the Barnacles

Small barnacles (debts) are easier to remove than larger ones. With this method you will put your debts in order from smallest to largest and begin the task of removing them in that order. You will pay off your smallest debt as quickly as you can while making minimum payments on your larger ones. Once a small debt is paid off, move to the next smallest.

ADVANTAGES:

  • Provides psychological wins and motivation

DISADVANTAGES:

  • You may have other debts with larger interest costs, so it may not be the most efficient method.

If your self-discipline is an issue then this one would be the way to go as the feeling of getting one of the monkeys off your back can spur you on to the next level. Also, if the smallest debt also has the most burdensome interest rate, then it is a win-win.

2. The Tidal Wave

Prioritize paying off debts with the highest waves (interest rates) first while making minimum payments on others. Once the highest interest debt is paid off, move to the next highest.

ADVANTAGES:

  • Saves money on interest over time which has a longer-term advantage to you. Interest is the cost of money and we’re all about reducing costs!

DISADVANTAGES:

  • It can seem like a real slog as you are not getting the quicker motivational rewards.

If you have the ability to work towards long term goals without getting fazed by the lack of instant feedback then this is better than the barnacle method.

3. The Kraken (Debt Consolidation)

Many tentacles reaching out and grabbing all the different debts and combining them into one.

This is known as “debt consolidation” and combines multiple debts into a single loan with a lower interest rate. This can be done through a personal loan, balance transfer credit card, or home equity loan.

ADVANTAGES:

  • Simplifies payments and can reduce interest costs which is what we want long term.

  • Having just one loan to concentrate on gives us a more targeted approach of focus.

  • Clearer Timeline. With one loan, you have a fixed repayment schedule, making it easier to plan and know when you’ll be debt-free

DISADVANTAGES:

  • Your loan looks bigger when combined into one which can make it look more daunting.

  • Extended Repayment Period. Consolidating loans often means extending the repayment term, which can lead to paying more interest over time

  • Risk of Accruing More Debt. If you consolidate and then continue using credit irresponsibly, you might end up with even more debt

  • Fees and Costs. Some consolidation loans come with origination fees or other costs that add to the financial burden

This is a great method for those of you able to get a better deal with your interest rates and you are the type of person who can “eat an elephant one bite at a time”
If you are unable to consolidate the debt then the other methods mentioned may be necessary.

4. The Sage of the Deep

Otherwise known  as a “Debt Management Plan (DMP)”

Work with a credit counselling agency to create a repayment plan. The agency negotiates with creditors to lower interest rates and fees.

ADVANTAGES:

  • Provides professional assistance and structured repayment.

  • They can negotiate lower interest on your behalf.

  • They can provide financial literacy tools to help you in the future.

  • Stress reduction by handling communications with creditors on your behalf.

  • Many of these organizations are nonprofit meaning their advice is in your interests

DISADVANTAGES:

  • Primarily focussed on credit card debt.

  • While often free, some may charge fees for managing your debt management plan.

  • Need to make sure you’re dealing with a reputable agency.

A good option for those of you who want that little bit of extra help and resources when stuck in rough seas.

5. Parley of the scallywags (Debt Settlement)

Negotiation: You or a debt settlement company contacts your creditors to propose a reduced lump-sum payment as full settlement of the debt. Creditors may agree if they believe it’s better than risking non-payment.

Lump-Sum Payment: Once an agreement is reached, you pay the negotiated amount, often in a single payment or over a short period.
Debt Relief: After payment, the creditor considers the debt settled, and you no longer owe the remaining balance.

ADVANTAGES:

  • You may pay less than the full amount owed.

  • It can help avoid bankruptcy.

  • It provides a clear path to resolving debt.

DISADVANTAGES:

  • It can negatively impact your credit score.

  • Creditors are not obligated to agree to a settlement.

6. Flakes of gold

Make small, frequent payments towards your debt whenever you have extra money, such as from a side gig or cutting back on expenses.

ADVANTAGES:

  • Flexibility: You can make payments whenever you have spare cash, such as from skipping a coffee run or selling unused items.

  • Faster Debt Reduction: These extra payments reduce the principal balance, which can lower the total interest paid over time.

  • Psychological Boost: Seeing even small progress can be motivating and help you stay committed to your debt repayment plan.

  • No Major Lifestyle Changes: It allows you to chip away at debt without requiring drastic budget overhauls.

DISADVANTAGES:

  • It eats into savings or investment options.

  • Requires Discipline: It can be easy to forget or skip making these small payments, reducing its effectiveness.

  • Minimal Impact on Large Debts: For significant debts, the small payments might feel like they’re barely making a dent, which could be discouraging.

  • Tracking Challenges: Keeping track of frequent, small payments can become cumbersome without a good system in place.

Not a Standalone Strategy: It works best when combined with a broader debt repayment plan, like the Barnacle scraping or Tidal Wave methods above.

7. Trimming the Sails (aka balance transfers)

We will catch more favourable winds by transferring any credit card debt to one with an introductory 0% balance transfer rate.

Once approved, you transfer your balance from your old card to the new one. Then get to work paying it off before the promotional period ends. The interest free period will only apply to the old balance and there will be transfer fees too.

You must at least make the minimum payment but of course the goal here is to get rid of it so minimum payments are not enough. After the promotional period ends then the regular APR (Annual Percentage Rate) applies

ADVANTAGES:

  • If you can trust yourself to pay it off before the promotional period then this method can give you some breathing space with regard to paying interest but NOT breathing space to carry on as you have in the past.

  • It gives you time to focus on reducing your debt without the pressure of accumulating interest.

  • You can consolidate your credit card debt into one. Once the balance on the old card/s is zero get rid and never use those cards again.

  • Paying down your balance during the 0% period can positively impact your credit score.

DISADVANTAGES:

  • You must be extremely careful and disciplined with this approach. Credit cards are an absolute disaster for people with poor financial discipline as they charge extraordinary levels of interest.

  • People can get confused and think that by paying the minimum payment each month that they’re getting ahead.

  • Credit cards are a scam. They are one of the largest and sharpest rocks we must avoid on this journey of ours! The interest charged on outstanding balances can be crippling.

  • Transfer and other fees may apply, so read the fine print carefully and shop around for the best deal.

  • You typically need good to excellent credit to qualify for the best offers.

  • Risk of new debt: If you continue to use your old card or overspend, you might end up with more debt instead of less.

Do not muck around with this one and end up getting yourself into even more debt. I cannot stress enough how bad credit card debt is. The interest rates are an absolute rort. They have their place and actually can be useful if you are extremely diligent with them. We’ll cover as its own topic, but since you are reading this and are still navigating then I say steer clear of credit cards.

8. Keelhauling the Debt (aka debt refinancing)

Refinance mortgage debts for example to lower interest rates.

You can either talk directly to your bank and ask for a lower interest rate or shop around to transfer your mortgage to a cheaper lender which reduces monthly payments and total interest paid over time.

The other option is to go to a mortgage broker. They are free to you and get their money from the banks. They can help you shop around in one visit and they have all the latest deals to hand which can be extremely useful.

Advantages and Disadvantages of using a mortgage broker:

ADVANTAGES:

  • Expert Guidance: Brokers are knowledgeable professionals who can help you navigate the complex mortgage process, offering tailored advice.

  • Access to Multiple Lenders: They have connections with a wide range of lenders, including some that may not be directly accessible to you.

  • Time-Saving: Brokers handle paperwork and negotiations, streamlining the process and reducing stress.

  • Negotiating Power: Due to their relationships with lenders, brokers may secure better rates or terms than you could on your own

DISADVANTAGES:

  • Potential Conflicts of Interest: Brokers earn commissions from lenders, which might influence their recommendations

  • Limited Lender Options: Not all lenders work with brokers, which could restrict your choices.

  • Variable Quality: The level of service and expertise can vary between brokers

If you’re considering working with a mortgage broker, it’s essential to research their reputation and ensure they act in your best interest.

9. The Whirlpool of the Maelstrom

A combination of the scraping the barnacles and gold-flake methods, making both regular and small, frequent payments which maximizes debt reduction efforts by combining strategies

10. Rigging the Mast (A debt ladder method)

Similar to the tidal wave method, but focuses on paying off debts in order of their remaining balance, regardless of interest rate. It provides a structured approach to debt repayments

11. Scuttle the ship (Bankruptcy)

Bankruptcy in Australia is a legal process designed to help individuals who are unable to repay their debts.

How Bankruptcy is Declared:

Voluntary Bankruptcy: You can apply for bankruptcy by submitting a Bankruptcy Form to the Australian Financial Security Authority (AFSA). This is a personal decision when you recognize you can’t pay your debts.

Creditor’s Petition: If you owe $10,000 or more and fail to meet payment obligations, a creditor can apply to the court to make you bankrupt.

What Happens During Bankruptcy

Trustee Appointment: A trustee is assigned to manage your bankruptcy. They handle your assets, debts, and communication with creditors.

Asset Management: Certain assets may be sold to repay creditors. However, essential items like basic household goods and a car (up to a certain value) are usually protected.

Income Contributions: If your income exceeds a set threshold, you may need to make payments to your trustee to help repay debts.

Debt Relief: Bankruptcy can release you from most debts, providing a fresh start. However, some debts, like child support or court fines, are not covered.

Duration and Consequences
Bankruptcy typically lasts for 3 years and 1 day, but it can be extended in certain cases.

It impacts your credit rating and may affect your ability to obtain credit, travel overseas, or work in certain professions.

ADVANTAGES:

  • Debt Relief: Most unsecured debts are wiped out, giving you a fresh financial start.

  • Protection from Creditors: Creditors must stop pursuing you for payments, including legal actions and harassment.

  • No Minimum Debt Requirement: You can declare bankruptcy regardless of the amount you owe.

  • Retention of Essentials: You can usually keep basic household items, tools of trade (up to a certain value), and a modest car.

  • Superannuation Protection: Your superannuation is generally protected and cannot be accessed by creditors.

DISADVANTAGES:

  • Credit Impact: Bankruptcy stays on your credit file for five years (or longer in some cases), making it difficult to obtain loans or credit.
  • Loss of Assets: Valuable assets, such as property or vehicles above a certain value, may be sold to repay creditors.
  • Income Contributions: If your income exceeds a set threshold, you may need to make payments to your trustee.
  • Public Record: Your bankruptcy is listed on the National Personal Insolvency Index (NPII), which is publicly accessible.
  • Professional Restrictions: You may face limitations on certain jobs or business roles, such as being a company director.

Before declaring bankruptcy, you might consider other options like:

Personal Insolvency Agreements: A formal agreement to settle debts without declaring bankruptcy.

Temporary Debt Protection: A 21-day reprieve from creditor enforcement to explore your options.

If you’re considering bankruptcy, it’s wise to consult a financial counselor or legal professional to understand the full implications

12. Car loans (The Coach & Anchor)

Getting into debt for a car is the worst of all worlds. You’re buying something that continually costs you money AND depreciates in value the moment you drive it out of the dealership AND keeps depreciating after that! You can buy a fancy car when you can afford to. For now, you might think about downgrading to a basic car that gets you from A to B. Not something that will break down every five minutes but something boring and reliable that you own outright.

Driving a fancy car to impress other people is stupid. Don’t get sucked in to that mentality. Besides, it’s more likely they will not be thinking what you want them to think anyway.

If you can get away without a car at all then that’s even better. Buying a car using debt means you’re overpaying. Avoid it.

Leasing a car is no good either for the following reasons:

No Ownership: At the end of the lease, you don’t own the vehicle—you must either return it or buy it at a potentially higher price.

Mileage Restrictions: Leases often come with annual mileage limits, and exceeding them can lead to costly penalties.

Wear and Tear Fees: You may be charged for excessive wear and tear beyond what’s considered “normal use.”

Long-Term Cost: While monthly payments might be lower than financing a purchase, the cumulative cost of leasing repeatedly can exceed that of owning a car.

Customization Limitations: Lease agreements typically restrict modifications or personalizations to the vehicle.

Early Termination Penalties: Breaking a lease before the term ends can result in significant fees

13. Subscriptions

Recurring costs such as subscriptions are a hidden hole in your ship and  people are often surprised at how much money they has been leaking from their accounts each month when they actually take a look (another major advantage of tracking every penny).

People spend hundreds of dollars per year on things like Netflix, Spotify, Amazon etc. You will discover that these things are extremely easy to sign up to and difficult to opt out of. These companies will give you one-month free trials in the hope you will forget to unsubscribe when the trial period is over.

If you wish to take advantage of free subscription trials my advice is to make sure you note down the website, the username you used and the password. Make it a rule to unsubscribe straight away. Usually, you will get to keep the remaining free trial and you will not be charged automatically. Avoid automatic payments as much as you can. They are a trap.

Another trap with subscriptions such as computer antivirus protection for example is that with many of them, they will automatically roll over your subscription at the full rate while offering new customers 50% discounts. It’s known as the lazy tax. To be honest it should be criminal, but it’s not so they keep getting away with it. Make sure they have to work to keep you as a customer by offering you what you want at the best price. The money is better in your pocket than theirs.

Unfortunately, many companies have worked out that buying something once is not as profitable as charging you over and over for the same thing. They are trying to get us all on a ‘life by subscription’ model and it should be resisted as much as possible in my humble opinion. Another evil we will avoid from now on is  “buy now and pay later” scams that could easily scuttle our ship.

There are two sides to getting out of debt and getting ahead. There is the reduction of debt AND increasing the income with which to pay it off.

14. Privateering (side hustle)

Take on extra voyages (side gigs) to bring in more treasure for debt repayment.
Increase your income through part-time jobs or freelance work, and use the extra earnings accelerate debt repayment.

15. The Captain's Share

If you’ve been putting in the work then asking for a pay raise is the easiest way to increase your earnings. Looking for a better paying job is also an option. Overtime is great if that is an option for you. Work-life balance can be sought once you get rid of debts.
Be careful choosing work that is infrequent or fluctuates. Getting out of debt requires a steady continuous course. This isn’t always in our control obviously. If your pay fluctuates from week to week then you must be even more studious in your captaincy of the ship and perhaps give yourself a larger buffer in your emergency account while times are good to cover you when they are lean. Diversifying your income streams is most beneficial in these circumstances.

Another dangerous rock to avoid: increasing your lifestyle as your income increases. The goal is to minimise your costs while maximising your earnings at this stage.
Again, this will require a mindset shift. You need to be your own best ally here. If you sabotage yourself by increasing your spending then you can only blame yourself for any future problems. You must get your ship together!

Finally, make sure you review your bills annually. Many companies will assume that people will stay with them and treat them worse than potential new customers they wish to acquire. Review bills at least annually and you’ll be surprised how much you can save. We will cover this later as its own topic.