Debt Management: Babylon style

[payb.tc]

From the book: Richest Man in Babylon

I've mentioned this book a couple of times before but I really like it and think a lot of people here could get some good ideas / inspiration from it.

This is explained in much more detail in the book but from what I remember the basic course of action for those drowning in debt should be as follows.


Step 1. Go to each of your lenders and get a total of the debt owed, and negotiate with each one to try for either an interest free period or maybe even a reduced total.


Step 2. Make a list of all your debts and calculate the percentage that each debt represents of your total debts.

eg. If you owe:

• $900
• $80
• $20

Then write next to each debt: 90%, 8%, and 2% respectively.


Step 3. Work out how much out of your total income you can afford to pay on your debts. Try to make this at least 10% of your income, but be careful to keep it realistic, so that it's easier to stay consistent.

eg. If you earn $500 per week, aim to spend at least $50 per week on repaying your debts.


Step 4. Of your budgeted debt-repayment amount, split it up in direct proportion to your debts owed.

eg. If you are committing to pay $50 a week on the above debts, then pay:

90% = $45 to creditor 1.
8% = $4 to creditor 2.
2% = $1 to creditor 3.


There are very, very few people that can not scrape by on 90% of their current income. Even if this is a struggle for you and you decide you need 95% of your current income to survive, you should still split the budgeted 5% amount in direct proportion to your debts.

With dollars, this may be impractical to pay small amounts like $1 per week on a $20 debt, however with bitcoin, you can still pay very small amounts economically.

You may feel like the amounts are so small that you should just wait until you have a more substantial amount to repay and pay it all in one go. I believe this kind of thinking is the downfall of most people's repayment plans. I'm sure there would be very few creditors that would not rather see small amounts repaid regularly, rather than not know when the next payment is coming, if at all.

Anyway, if you've read the book, or even if you haven't, I'd be interested to hear from others who've tried this strategy or would like to try it.

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[notme]

Good overview.

In practice, it is rare to get 0 interest from all your creditors.  In this case, it's usually best to pay off the highest interest debt first.

The advice about paying every week is particularly good if you have interest.  Interest is usually calculated based on average daily balance, so you're paying more by letting the money accumulate in your checking account and making larger payments.  Pay down any interest-bearing debt each time you take in funds.

[payb.tc]

good point about interest-bearing debts.

although even with non-interest-bearing bitcoin loans, the potential increase in value might be thought of as 'interest'.

eg. if you owe 1000 bitcoins to someone interest free, it's probably better to pay them off when they're worth $6.20, instead of when they go up to $100 each

also, i suppose i should add a little disclaimer, that i am a fairly large creditor (of shakaru) and i might be biased towards whatever gets my debt repaid the fastest.

[ineededausername]

[joke]

Here's a more modern, American way to deal with debt:

Larry Livingston was a speculator.  At one point, he ran into a serious problem with debt... how unfortunate!

Of course as time went on and I could not pay I began to feel less philosophical about my debts. I'll explain: I owed over a million dollars—all of it stock-market losses, remember. Most of my creditors were very nice and didn't bother me; but there were two who did bedevil me. They used to follow me around. Every time I made a winning each of them was Johnny-on-the-spot, wanting to know all about it and insisting on getting theirs right off. One of them, to whom I owed eight hundred dollars, threatened to sue me, seize my furniture, and so forth. I can't conceive why he thought I was concealing assets, unless it was that I didn't quite look like a stage hobo about to die of destitution.

Mr. Livingston immediately took the wise and easy way out:

I explained the situation quite frankly to them. I said: "I am not going to take this step because I don't wish to pay you but because, in justice to both myself and you, I must put myself in a position to make money. I have been thinking of this solution off and on for over two years, but I simply didn't have the nerve to come out and say so frankly to you. It would have been infinitely better for all of us if I had. It all simmers down to this: I positively cannot be my old self while I am harassed or upset by these debts. I have decided to do now what I should have done a year ago. I have no other reason than the one I have just given you."
What the first man said was to all intents and purposes what all of them said. He spoke for his firm.
"Livingston," he said, "we understand. We realise your position perfectly. I'll tell you what we'll do: we'll just give you a release. Have your lawyer prepare any kind of paper you wish, and we'll sign it."
That was in substance what all my big creditors said. That is one side of Wall Street for you. It wasn't merely careless good nature or sportsmanship. It was also a mighty intelligent decision, for it was clearly good business. I appreciated both the good will and the business gumption.
These creditors gave me a release on debts amounting to over a million dollars.

He defaulted, of course!

End of lesson.