Your debt is not normal!

When it comes to debt, something is very wrong with all of us. We accept significant debt levels as normal, leaving us worse off for the rest of our lives!

The average unsecured household debt (that's most of our debt that isn't a mortgage or a secured loan, so it includes overdrafts, personal loans, credit cards and more) is around £6,000, according to a Bank of England report.%VIRTUAL-SkimlinksPromo%
Not many of you will gasp at that. You might even be surprised how low it is, with all the billions and trillions you read about in the papers, and when you compare it to mortgage debt, which is obviously a lot bigger.

According to Bright Grey last year, you don't consider such debts to be a problem until they reach £14,500. Despite this research, most households who have unsecured debts are still saying they find it troublesome. So they don't link "problem" debt with the debts that they have, even though they describe those same debts as a "burden" or perhaps a "severe burden", according to a Bank of England report.

Amazingly, a very similar number of borrowers said the same ten years ago. Even more astoundingly, our unsecured debt has only risen at roughly the same speed as our incomes over the past decade. Apparently our situation is not really getting any worse.

So what's the fuss about?

It's a big, cultural problem, that's what
I hope that at least some of you can see it. This is a problem buried deep within our culture. According to Ben Broadbent of the Bank of England, our personal debt is the highest of any nation in the world. The fact that our unsecured borrowings haven't risen dramatically in ten years just shows that we have been a nation of extreme borrowers for a very long time.

Borrowing on a credit card straight out of school, buying a car with a loan even though you didn't really have to in your circumstances, and borrowing for holidays – it's all normal in the UK.

But it's not normal in the sense that it's an essential part of life for everyone, like brushing your teeth , going to work, or having time with family and friends.

A self-inflicted burden
That so many never do budgets is simply moronic and the incredible way we convince ourselves that things like foreign holidays are "essential" reveals how completely out-of-kilter our thinking is with reality. This debt burden is, for most people, completely unnecessary and self-inflicted, driven by hyperconsumerism and peer pressure.

It shows how we're brainwashed by businesses into buying more than we can afford. It reveals our emotional insecurities, with millions of people feeling they need to buy more shoes, the latest phones, a brand new car – all so they can look good to friends and strangers alike; to "fit in", be part of the crowd.

Why you shouldn't borrow for fun
£6,000 might sound small, but it's is an awful lot of unsecured debt that is guaranteed to hold you back forever. I hope you'll understand why shortly.

Consider firstly that most borrowers won't have got the cheapest advertised loan rates of around 5% – or anything like it. Most will have been rejected at those levels for not having exceptional financial profiles and they'll have been forced to accept a much higher rate or go to more expensive lenders. Many of these people will also have several cards and loans, along with a regular overdraft debt.

Even before factoring in payday loans, the majority are probably paying 15% to 30% APR, in my experience.

Assuming they're lucky and they don't need to extend their debt repayments, restructure or consolidate their debts, or miss payments, they could end up paying £3,000 to £4,000 in interest payments. Anyone who doesn't think that's a huge amount of money is too rich to be reading this article.

But borrowers will never get that money back. Regardless of any future promotions or inheritances, they will be thousands of pounds poorer for the rest of their lives. Ironically, it also means that, over the course of their lives, they will be able to buy fewer luxury items. £4,000-worth fewer.

Even if they borrow far less than £6,000, or pay just 5% and seem good to clear the debt ahead of schedule, they're at high risk of disaster for years, which would result in paying more interest, higher interest rates, penalty fines, and possibly even defaulting on debt.

It's standard, and reasonable, guidance to have three to six months' salary in savings. Instead of having that, they have debts. They have to pay off all that debt, plus interest, before they can begin to build a decent savings buffer.

What if you've kicked interest into the long grass with a 0% credit card? You might well have done the right thing, but you're still at high risk of something going wrong while you have more debt than savings.

It doesn't even take losing your job to get you into trouble. We all tend to underestimate emergencies and unforeseen costs. We forget about the number of times we've had to pay £20 for losing some money, £200 for breaking something useful, or £500 for emergency car repairs.

I try to write down my own disasters when I remember, so I can mention them in articles like this one. Although I'm a cautious and non-accident prone person, my family and I still had unforeseen expenses this year (already) of £800, last year of £500 and in 2011 of at least £1,500. And we don't even have a car.

There are thousands of things that can go wrong each year, but if you have debts, rather than savings, your ability to cope is greatly reduced, and you'll need to borrow more, or borrow for longer, which decreases your lifetime wealth further, and the amount of luxuries you can buy in your lifetime.

The costs of not borrowing
This willingness to borrow and decrease our security, decrease our lifetime wealth, decrease the amount of things we can buy before we die, decrease the amount we can save in our lifetimes: it all palpably affects our happiness and stress levels. These are the costs of borrowing

The only cost of not borrowing is you wait a little bit longer to buy even more luxuries, but I guarantee you'll be happier and less stressed once you've learned that discipline.

If you've already got unsecured debts, pay them down more quickly and cheaply to reduce their negative effects. Think lower interest rates, shorter loans, more overpayments and 0% deals.

Tax tricks to improve your wealth
See Gallery
Your debt is not normal!

If you wear a uniform of any kind to work and have to wash, repair or replace it yourself, you may be able to reclaim tax paid over the last four years. For some people, this could mean a windfall worth hundreds of pounds

The interest you receive on savings accounts (with the exception of cash Isas) is automatically taxed at a rate of 20%.

Higher-rate taxpayers therefore tend to owe money on the interest they are paid throughout the year. If, however, you are on a low income or not earning at all, you should be able to claim all or some of the tax deducted back

You can apply for a refund of vehicle tax if you are the current registered keeper or were the last registered keeper of your vehicle that no longer needs a tax disc

If you pay tax on a company, personal or State Pension through PAYE (the system employers use to deduct tax from your wages), you may well end up overpaying

There is a limit to the amount you need to pay in NI, whether or not you work for an employer.

Instances in which you may find that you have overpaid include if you work two or more jobs and earn more than £817 a week and if you move from self-employment to employment, but continue to pay Class 2 National Insurance contributions


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