Becoming debt free is a goal that so many consumers have these days. With debt loads rising faster than incomes, it is an unfortunate fact that debt has become a way of life for so many. With nearly $1.79 in debt for every dollar of income we make, it is clear that times are becoming harder for the average Canadian. Insolvencies have increased by 6.5% compared to last year, which is constant a year-over-year trend we are beginning to notice. We are in a very gloomy time in our society. Topics like Debt Consolidation, Debt Forgiveness and even the Debtor Assistance Program in Nova Scotia have become a hot topic.
Now, what do you do if you have debt but aren’t quite sure where to begin? We always recommend everyone starts with our simple questionnaire we included in our ‘How Does Debt Consolidation Work‘ article. This is a great place to begin as if you are too far gone then many of the items in this article won’t apply to you and you are better off speaking with a debt professional.
Debt can be a symptom of any number of problems and life circumstances. However, it is important to understand that YOU ARE NOT YOUR DEBT.
At 4 Pillars Halifax, we'd love to discuss how we can help you become debt free.
You won’t see your typical ‘Spend less than what you earn’, or ‘Make more than the minimum payments’ on this list as this advice has become mainstream. Instead we are going to talk about practical advice that will truly make a difference in your life.
1. Write down your bad habits and tackle them
Determine what makes you spend money impulsively. Think about the practices that you consider to be bad habits. We first want to address the habits that are easier to kick. The most natural habits to break are the ones we know are a problem. The most common bad habits people outline are generally items like shopping, eating out, smoking, video games, or a host of other reasons. Don’t pick these, unless they apply to you. For example, we have many clients that smoke that also have an eating out problem. However, they may not see smoking as something they are willing to quit. Should they spend their time trying to make themselves stop something they don’t want to or addressing their eating out habit first? We believe it should be the latter.
Start with the easy habit to break, first.
Once you’ve identified the bad habit, we want to understand why we ‘partake’ in the habit. Once you know why you can quickly discover solutions to the problem, and finally, you can make compromises in your life to ween yourself off the bad habit.
Summary of this step
- Identify bad habits
- Determine why you ‘do’ the bad habits
- Come up with suitable compromises.
Let’s pick on eating out for the remainder of this section.
Let’s imagine that you’ve identified that eating out is a bad habit of yours that you want to try and reduce the amount of money you spend on it. Many people have this problem. So now think of the reasons why you eat out. Your list will be different of course but here a few possible underlying causes:
- It’s convenient and fast
- I don’t have a microwave at work
- I can’t cook
- I hate cleaning dishes
- And the list could go on
The most important part isn’t to be perfect. The direction you want to head in is a direction of improvement. So, instead of buying a $15 meal at McDonald’s, perhaps go to the local grocery store and pick up a sandwich and drink from there. Most likely it will cost you half the price and solves every single problem listed above. Is this the perfect long-term solution? Probably not – unless you have a lot of disposable cash flow. However, it certainly gets you heading in the right direction and could quickly free up 50% of your eating out bill.
You can apply this process to any habit you want to cut out.
2. Constantly try and save money
This sounds obvious…. but bear with us!
When was the last time you saw if you are paying as little as possible for your cell phone, your internet, insurances, or any of your other monthly re-occurring bills? Go ahead and review your subscriptions and see which ones you don’t need. Try and see if you can save money. The most common answer is usually “I can’t save any more money, I already have the cheapest *whatever service is*.” If you know you have the lowest price, prove it. Go through the exercise of calling the service/product provider and let them know you are not 100% happy with your current price and that you wanted to give them a chance to see if there is anything they can do.
You would be surprised at how often you will get a discount, a promotion, or even a better offering at a much better price. Try and save money, and you will.
The real point behind this step (and step 1) is to take a pro-active approach to your finances. We have seen it hundreds of times; when people begin caring about their finances, they can save money. By the way, this isn’t a process that ends. We recommend that you review your re-occurring expenses at least twice a year.
3. Review your spending
Pull out your last 12 months of bank statements. The exercise here is to go line by line and tally up all of your expenditures. There is no ‘best’ way of doing this. Just grab some scrap paper and start categorizing your expenses. This process will undoubtedly take a few hours, but it will eye-opening, we promise. Once you have all of the expenses categorized, you will want to add them up and then divide them by 12. This list will give you the monthly average you spend per category.
Make sense? If so, move to the next step.
4. Make a spending plan (the budget!) and track
The problem with budgets is that most people don’t know how much they spend. Hence why Step 3 is so crucial. The reason why most budgets fail is that the numbers used are often inaccurate. For a budget to be effective, it must reflect reality. It is easy for us to say that you should spend no more than $250p/m on grocery items; however, your family might have dietary restrictions, health issues, etc., that cause this expense to be higher for you.
Using your numbers from Step 3, you will want to make sure the numbers make sense for your goals. In the past, you may have spent $300p/m on eating out. However, if your plan moving forward is to try and cut that in half using the techniques above, then you will want to use $150 in your plan.
We suggest that you write out your spending plan on a per-pay basis. Meaning that if you get paid bi-weekly, your plan will be a 14-day plan, if you get paid weekly you will have a 7-day plan, etc. This plan is only to start to develop the habit.
Moving forward – write down all of your expenses as they occur. Please write them down as this will help you remember them.
5. Now decide what debt to tackle first
The average client we help can save anywhere’s from $150-300p/m using steps 1-4. (PS – This would be an excellent time to save up at least $1,000 if you have not already. It is a good starting position for a savings account. Also, there is very little that costs more than $1,000 if you needed the funds immediately.)
With this money, we want to begin targeting the best debt to reduce. There are two main ways to pay off debts. The Debt Snowball and Debt Avalanche method. An explanation of the two methods is below.
This method involves paying off your smallest to largest debt, regardless of the interest rates. This process involves making the minimum interest payment on everything except for the smallest balance. Every additional penny should applied to the smallest balance account. You simply rinse and repeat this until all of the accounts are paid
This method involves paying off your highest interest rate debts first. The balance on the account doesn’t matter. As with the Debt Snowball method, you would make minimum payments on everything except for the debt with the highest interest rate. Mathematically this makes the most sense and will save you the most amount of money.
However, which is the best method? Research has shown that the Debt Snowball is far easier to stick to then the Debt Avalanche. The reason is because you feel good about actually eliminating accounts. However, if you are extremely disciplined the debt avalanche method will save you more money.
Our friends over at 4 Pillars Muskoka & Parry Sound created a wonderful calculator that can go through both of these options.
Putting it all together
Getting out of debt quickly won’t happen because of one thing that you do right. It is the combination of a lot of little things that you do right to make a big difference in your life moving forward. By just budgeting, or just reviewing your expenses, you will get nowhere. To ensure you have the best odds at success, you want to make an effort to be good at everything. We tell our clients – we would rather you be OK at every step listed above than an expert in one of them but neglects to do the other.
Want a quick-glance guide? See the great infographic we’ve made to support this topic!
Click the infographic for the full-size version.
This article was written by David Moffatt. A Senior Debt Relief Specialist with 4 Pillars Halifax. 4 Pillars has assisted in creating plans that have helped save Canadians over $1 Billion dollars of consumer and tax debt since 2002. If you are struggling with debt please reach out. It hurts to continue to suffer financially.