How overspending by a small amount on a regular basis spiralled into serious debt

I first posted this on the excellent Irish financial website, askaboutmoney. In case anyone is curious, my username over there is Janet, and no, that isn't my real name. I was mostly using Misty Moon or Moonwaves for my online presence when I first joined AAM but felt that since it was a "serious" website, I should have a "proper" name. So I plucked one out of thin air, more or less, and decided it might be fun to see what other side of my personality I might discover hiding in a "Janet". :-)

Posted on 24 February 2012:

On another thread someone asked:

How could it possibly take 11 years to pay off that level of debt?

in response to my post saying 

About two years of being careless when I was younger led to eleven years of debt (and I'm not talking about having gone wild buying designer gear every week, more like spending an extra fifty quid in the supermarket every few weeks).

Since my answer became somewhat long, I decided to split it into this new topic in order to not let that thread get too off-topic. Hope that's okay with everyone.

It's actually very easy. And obviously that's something of an oversimplification but it went something like this: starts off with just a few hundred on a credit card (being 'sensible' when I first got a credit card I set the limit at 500 pounds, which was about what I earned per fortnightly paycheck at that time) because you haven't really figured out the whole budgeting thing yet and since everyone is throwing money around like mad you must surely be able to at least go to the supermarket without having to worry about what anything costs. But then you can't pay it off so just make the minimum payments for a while and then the bank ups your limit (they were still allowed to do that at that time) and you think great, pressure is off. But you still can't/don't pay off the balance and over time it creeps up more and more. 

So you think well, I'll get a loan to pay it off ('cos interest is lower and that's what 'sensible' people do but unlike said sensible people you don't chop up the card). So now you're paying a loan with payments that are too high but instead of doing a proper budget and cutting down on expenditure you're finding yourself using the credit card to buy all your groceries. No money left over at all for things like clothes so although you only buy them when absolutely necessary, you end up doing something like going shopping as soon as you get paid just so you can buy a new suit for a job interview and between that and making a loan repayment and making a maybe slightly more than minimum payment on the credit card as well as potentially having cleared any overdraft you might have run up on your current account, there's not a whole lot left over for the rest of the month. So credit card and overdraft come into play again. And then after a year or so of that you decide to consolidate your debts because that's what sensible people do. 

So you get a big loan to cover remaining loan balance, credit card and overdraft and the bank says well why don't we round it up to [nearest thousand] so you have a bit of leeway and a chance to sort yourself out. So you do that, maybe go away for a week to relax but still don't cut up the credit card or cancel the overdraft facility and for a while everything's going according to plan but then you have to move house unexpectedly so there's the cost of deposit, double rent because you have to start paying for the new place before you've finished paying for the old one, hiring a van and buying a fridge because you've moved into an unfurnished place (with second hand furniture donated by a family member). So all of a sudden there's a couple of hundred on the credit card again. But your loan repayments are taking all your spare cash so now that you're also trying to pay off a credit card again you're struggling every month and end up dragging out the card or using the overdraft to pay for a bit here and a bit there. And you feel like you're constantly paying off debt but never getting anywhere. Don't forget that all the time interest is building up as well.

And then you decide it's all getting too stressful and it would be just better to get a bigger loan and have one payment so you again go to your nice helpful bank and consolidate your debts, again taking the slightly more than you need that's offered because it'll take the pressure off. And this time the loan is to be paid off over three years. And things go well for a while. But then something else happens and because you have no savings and the loan repayments are taking up most of your spare cash (because you still haven't quite gotten the budgeting thing down, although you're trying a bit at least) it's back to using your money as soon as you get paid and then having to use credit card and overdraft (neither of which have been cancelled) to pay for the basics. 

So it was perhaps two years of careless spending, followed by three or four of trying to get out of debt but not really having a clue, still doing silly things and sort of thinking that it wasn't a big deal anyway because sure everyone else you know is in the same boat. And now six years of properly dealing with my debt and getting a handle on finances (but still by no means perfect).

When I finally started to really get a handle on finances it was because I was also in a terrible job situation and badly depressed and decided, many years overdue, to go for counselling. That cost 70 euro per session and I needed to make sure I had the money every week - that was for the first few months, after that I changed to a different job with lower pay and could only go every second week but the key difference was that I knew that and made changes to what I was doing with my money based on what I was earning rather than trying to carry on doing the same things with less money. I had been using an excel spreadsheet to 'manage' my budget since the laser card had been introduced as I had ended up in trouble a few times because of transactions not appearing for a few days and me forgetting about them. But it was a really eye-opener to sit down and start properly managing my money. My previous model had relied on checking my bank account to make sure there was enough money in it whenever a standing order was due to come out and hoping bills wouldn't be too high to pay when I receive them. Now I actually wrote down what my fixed expenses were, including things like rent, bus ticket, an amount for phone and esb and the 70 a week for counselling. And realised that once I'd done all that plus left a bit for making some payments to debt, I only really had, say fifty euro a week leftover to spend on everything else (food, going out, presents, clothes). Plenty to live on perhaps but if you're eating lunch out every day, you'd have already spent more than that, even if it's just a sandwich, packet of crisps and bottle of water. It took me a while but I finally got to the point where I consolidated for a final time and took out a loan for what was by then a very large amount of money, fixed rate this time and no delusions that I would pay it off earlier than the five year term. I never did cut up the credit card but reduced the limit to a small amount and paid it off in full every month. 

All went well, and I even managed to finance a move to Germany. Unfortunately four thousand euro worth of dental work has left me a year behind with being debt free. My loan was cleared late last year and I expect to have cleared the final debt from the dental work by May. 

And that is how spending a small amount more than you earn every week can spiral into more debt than you would have thought possible. A bit of carelessness, a pinch of stupid behaviour, a touch of depression, (not to mention a fervent desire, regardless of how irrational, that the millennium bug will wipe it all out) and, it must be admitted, a smidge of what can only be called an unjustified sense of entitlement (every else goes out to eat every week so I will too, etc.) and all of a sudden the girl who at fourteen was earning five pounds a week working for the family business and still always had money to loan her elder siblings is the one up to her eyes in debt.


Edited to add: Link to follow-up post 1
Edited to add: Link to follow-up post 2