Your Money Matters

By Caribbean Globe Financial Writer 
Everald MelbourneBSc; ACCA, CPA, CGA; MBA

Topic: Dealing with Debt— Part 1 of 2—Initial Steps 
Many employees assume their job will last indefinitely, so they don’t worry about how much they are spending. However, in many cases they are spending more than they are making, resulting in the buildup of credit card debt. This strategy often leads to major cashflow problems when events such as an unexpected job loss happens. 

Of course, the ideal is to live within your means while you are work­ing, which means spending less than you make so that you can pay off your credit cards every month and still have money left over to save. 

The best time to address your debt issues is beforeyou lose your job. The second-best time is today. 

Tracking Your Spending 
Now that you no longer have a paycheque coming in, it’s time to get serious about where your money is going in order to actively stop your cash drain. 

There are several options. Many credit card companies now do this for you automati­cally. If you have signed up for online banking, you can see where your money went on that card. The problem is that you don’t get a consolidated picture of where all your money went. 

Analyze Your Spending To Save Money 
When you track your spending you’ll be able to see clearly where all your money went, which is the first step to stemming the outflow. If you are like most people, you will find a lot of discretionary spend­ing — items that are not necessities. These are easy targets to cut. Spend time analyzing the data. Where are the big money drains? Many people find that their house and car are draining the most cash. Is there a way to reduce these costs? 

Make this a family discussion. You are all in this together and you need to all be on the same page. If two members are cutting back while one continues to spend, it’ll be tough to make significant progress. Let’s look at some of the discretionary spending items that you may be able to cut back. 

Cash Withdrawals 
How much cash did you withdraw last year? Any idea where it all went? Even if you track your spending you don’t know where all those ATM withdrawals went. And if you don’t know where they went, you won’t know where to cut back. The best thing you could do is to start tracking your use of cash, perhaps using an app on your Smartphone.  Each time you use cash, enter the amount and choose a category. At the end of the month you’ll know where the money went. Once you know that, you will be able to cut back on your spending. 

Many families waste a lot of money on restaurant meals and take-out food, especially during stressful times. If you want to save money here, focus on home cooking. If you don’t know how to cook, resolve to learn. Invest in a good cookbook. Start making detailed grocery lists so you have the ingredients on hand when you need to prepare a meal. The other advantage is that you’ll eat better quality food and that will help your overall health as well as your energy levels.

Is there a member of the family that is always at the mall picking up the latest fashions? That habit is often a large, consistent cash drain for many families and will need some behaviour modification. 

Like many people, you probably cringe when the bill comes in for your home phone, TV, cell phone and internet. Now is the time to have a detailed review of these costs. Do you even need all the ser­vices? At the very least call the “customer retention” department of your provider, explain your situation and see how much you can get them to reduce the bill. 

Assessing Where You Stand 
Once you have looked at your spending, the next step is to figure out where you stand financially. 

First, list all your assets and what they are currently worth. Your assets are the things you own, e.g., bank balances, investments (RRSPs and TFSAs), your house, and other assets such as cars. Add up the total value of your assets. 

Now list all your outstanding debt balances. Start with consumer debt — such as credit cards and lines of credit — then list any secured credit such as car loans and mortgages. Total all your debts. 

The difference between the market value of all your assets and the total balance of all your debts is your net worth. If the total is a negative number, you have negative net worth (your debts exceed your assets). 

Once you calculate your net worth figure, you can begin to explore your options for going forward.

There are four basic alternatives for dealing with your debts: 

Deal with them yourself. 

Seek the help of a credit counseling service and undergo a Debt Management Program (or Plan). 

File a consumer proposal with the help of a Licensed Insolvency Trustee. 

File for bankruptcy using a Licensed Insolvency Trustee. 

The best option for you will be determined by your specific situa­tion. Generally, it makes sense to try the options in the order they are listed to see if the problem can be dealt with before taking more drastic measures. Let’s look at what is involved with each option. 

Dealing With Debt Yourself 
This is the simplest way to address your debt issues, but it is very difficult, if not impossible, if you have no source of income. 

Assuming you do have some income coming in, the next step is to rank the debts from the one charging the highest interest rate to the one charging the lowest. Write the interest rate beside each debt along with the minimum monthly payment required. Do you have enough money coming in to make the minimum payments? If you don’t, you’ll have to choose another option. If you have any excess funds available above the minimum required payments, apply all the excess to the highest rate debt first. 

Credit Card Balance Transfer 
For people with high interest rate credit card debt, there are sev­eral options. You could apply for a balance transfer to another card charging a very low, or even zero, rate of interest for a period of time. 

Debt Consolidation Loan 
If you have equity in your home, meaning the market value exceeds the mortgage on it, you may be able to take out a home equity line of credit (HELOC). This is a line of credit secured by a claim on your house if you were to default on the loan. The interest rate on HELOCs is lower than unsecured loans due to the guarantee. 

With a HELOC, you pay off the balances of any higher rate debt and therefore exchange it with the lower rate debt of the HELOC

Replace Your Mortgage with a Line of Credit 
One solution to significantly ease your cash flow problems is to replace your traditional mortgage with a line of credit. While there is usually minimum monthly deposit amounts required, this could eliminate the requirement to make mortgage payments as the finan­cial institution just adds the interest owing on a monthly basis to the balance outstanding.

Sell Some Assets 
If you own anything that can be sold, now is the time to consider this option. Proceeds can be used to pay debt and there­fore reduce the cash outflows that holding debt entails. However, in the case of a large-scale economic downturn, it is much more difficult to sell assets because potential buyers are likely experiencing financial pressure just like you. That automatically brings down the price as the demand is simply not as high. 

Your Car Strategy 
A car is something that for most people is a large financial drain. Unless you own it outright, there will be loan or lease payments. Even if the loan is completely paid, you’ll still have all the other costs of operating a car — insurance, gas and oil, licence, maintenance, etc. 

It makes sense to try and figure out how to reduce your car costs.

Credit Counselling — Debt Management Program 
Unless you are quite confident that you can handle your debt situa­tion on your own, it makes sense to seek the advice of professionals with experience in this area. 

The first place to consider is a non-profit credit counselling agency. These organizations specialize in dealing with people in excessive debt situations and offer their services free of charge to you. 

Credit Counselling Society 
They have offices in Alberta, British Columbia, Manitoba, Ontario and Saskatchewan. You can chat with a counsellor online, get information about the options for dealing with your debt, find out about free in-person workshops, webinars (online workshops) and follow their blog. They also have a large number of online financial calculators including debt, loan, car payment and credit card calculators, an interest, credit card and loan payment calculator, a debt ratio and loan calculator, a tool for debt repayment strategies to stop debt stress, as well as savings and budget calculators.

Credit Canada Debt Solutions 
They have offices in Alberta, British Columbia, Ontario and Quebec. Their website offers a free online debt assessment tool, detailed information on what credit counselling is and when you should seek it, how to choose a credit counselling service, the pros and cons of debt consolidation loans.

Final Words 
Whatever your situation when dealing with debt, there is likely a viable solution. Don’t be intimidated, help is available. Remember, your money matters!