Between 1989 and 1990, interest rates doubled from 7% to 15%. The financial strain was excruciating. I was unprepared and mismanaged my finances, which led me to the brink of bankruptcy.

However, I survived, thanks to interest rates falling to 5% over the next two years. The recession of the early ’90s was painful but taught me invaluable lessons about managing debt.

Thirty years later, debt remains a significant worry. On Thursday, the Bank of England held interest rates at a sixteen-year high of 5.25% (reflecting rates of less than 1% between 2009 and 2022).

If you’re reading this, you’re likely a GenX freelancer aged between 45 and 60, possibly still supporting your kids and repaying a mortgage. Over the last two years, interest rates have risen five-fold from under 1% (where they had been since 2009) to over 5%. This situation may feel all too familiar and alarming.

• Are you unhappy about these rising rates? Almost certainly.
• Are you panicking? Hopefully not.
• Are you concerned about your finances? Probably.

It’s natural to feel uneasy, but understanding your financial health can provide peace of mind.

Practical Steps to Alleviate Financial Stress

Understand Your Debt Ratios

First, engage your inner accountant and evaluate the implications of these rising rates on your finances by calculating three key ratios:

1. Debt-to-Asset Ratio: This ratio compares the size of your debt relative to your assets. It should decrease over time. Are you comfortable with your current ratio?
2. Debt Servicing Costs to Income Ratio: This ratio measures your total debt servicing costs (interest and repayment) relative to your expected income. Given your age, family commitments, and aspirations, does this ratio align with your comfort level?
3. Liquidity Ratio determines how many months your liquid assets can cover your debt servicing costs. Are you satisfied with this figure? Does it balance your short-term security with long-term wealth growth, considering that cash loses its real value over time?

We will look at possible ratios next week.

Create a Financial Plan

Next, develop a plan to align these ratios with your financial aspirations. Your plan might include earning more, reducing expenditures, or finding a mortgage provider with better rates. You will need to engage your inner accountant, technician and counsellor for this.

• Reducing Expenditures: While this might be the easiest step, it is often the least effective due to the inherent limit on how much you can cut costs.
• Remortgaging: This could be challenging given your self-employed status, but it’s worth exploring options.
• Increasing Income: This is potentially the most effective strategy. There’s no cap on your earning potential, although you might need assistance and investment in yourself to achieve higher income levels.

Review Assumptions

It’s essential to revisit your financial assumptions periodically. Although base rates have fluctuated between 0.5% and 15% during your working life, the average hovers around 6% (with mortgage rates typically higher).

Carefully consider other assumptions, such as your income and expenditures.

Enhancing your financial clarity – and sleeping at night

Maintaining a set of financial statements and a lifetime cash flow plan can significantly enhance your financial clarity. These tools can help alleviate anxiety and improve your sleep by clearly showing your financial health. Remember, not knowing is a significant source of stress and sleepless nights.

By taking these steps, you can better manage your debt, achieve financial stability, and reduce the emotional strain of financial uncertainty.

Photo attribution

Photo by Centre for Ageing Better on Unsplash

Audio link

https://audio.com/jeremy_deedes/debt/

Taking it further and related posts

https://wordsnotdeeds.co.uk/inner-consultants/

https://wordsnotdeeds.co.uk/financial-ratios/

ABOUT

I work with ambitious, family-oriented professionals transitioning to independent consultants to create a 3 to 5-year holistic plan so that they grow wealthy, make a difference and find meaning.

My clients are aged 35-50. They are in a long-term relationship with family and parents who are supportive but ageing. They wrestle with personal and financial responsibilities and dream of more control, wealth, time and purpose.

If this excites you, you are coachable, willing to change, and want to stop going around in circles, then find out more at jeremydeedes.com

Then, take your next step and explore your way forward with a Mapmaker, a one-off online coaching gig to help you decide your options, assess our compatibility, and determine whether we are the right fit. Mapmaker is excellent value, held in confidence and without further commitment.

What do you think?

Your views are important, and your fellow readers would love to hear your opinion,
so share your thoughts in the comments box below, and thank you for your time and generosity.

What do you think?

Your views are important, and your fellow readers would love to hear your opinion, so share your thoughts in the comments box below, and thank you for your time and generosity.