Debts (Spending Category Part 5)

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Overview
“Debts” is part 5 of my writing series. To see full complete spending categories, read my February 2016 newsletter at www.PrudentMoneyCoach.com.

There are so many things I can write about debts. This time I’m going to write about types of debts, the importance of understanding why you are in debt, and ways to get out of debts.


Types of Debts
There are secured and unsecured debts. Secured debt uses an item as a guarantee for your loan, such as a house, a car, or a piece of jewellery. Unsecured debt, on the other hand, has nothing tied up to your loan. Examples of unsecured debts are credit cards or personal loans.

Regardless of whether your loans are secured or unsecured, you should diligently pay them off. Don’t pay off your mortgage only to take it out again via line of credit. If you do that, you are rotating your debts and making others rich through interest rates (both on the mortgage and the line of credit).


Why This Debt?
Many people have debts and can’t remember exactly why they get into such deep trouble. If you are one with debts, and want to get out of debts completely, I recommend that you look back at your debt statements and find out why you have debts. By the way, “I just don’t have enough money; if only I have $…….” is not a valid reason. Why? Because if you can’t manage a small amount of money, most likely you will have trouble managing a larger amount of money. Rich people (or even rich countries) are not immune to money problems. Have you heard about rich and famous people or celebrities filing for bankruptcy? There are a lot of them.

Please don’t expect winning a lottery will solve your problems. Oh, and don’t waste your money buying lottery tickets – use the money to pay off your debts.

By understanding the root problem(s), you can avoid it (them). Otherwise, you’d be in a circle – accumulating debts, paying them off, accumulating new debts, paying them off, accumulating the next new debts, etc. You get the idea.

For many people, the root of the problem is spending beyond their income. If this is you, work hard on spending less than your income. A budget may help you plan your spending. An accountable partner will keep you in check. This partner can be your spouse, or if you are single, your parent, close friend, or a family member. Alternatively, I can serve as your accountability partner too. Send me an email ([email protected]) and we can chat.

Here are some tips to avoid going further into debt.

• If you have family members or close friends, ask if they can help you.
• If you belong to a church or an organization, see if they can help you.
• If you are ever in need of basic needs such as food, do not use your credit cards to buy food. Visit Food Bank, churches, or other non-profit organizations.
• Do not use your credit card to pay for tax owed to Canada Revenue Agency (CRA). Credit card companies charge compounding interest, CRA does not. Call CRA to arrange your tax payments.
• Don’t use cash advance from your credit card, or payday loans. They charge huge interest rate.
• Brainstorm ideas with your spouse, family and friends. Think outside the box. Here are some ideas.

               - Look around your home, are there any unused items that you can sell?
               - Could you turn your hobby into money? For example, if you love to bake and you are good at it, you could accept baking orders.
               - Can you ask for more work hours from your employer?
               - Can you get a side job?


How to Get Out of Debt?
Desperate times call for desperate measures. If you are in a lot of debt, you need to take actions NOW to get out of it.
1.      First, stop accumulating new debts. For example, if you have credit card debts, stop using the credit cards. If you have line of credit, stop withdrawing the money. Use cash from now on.

2.      If you have multiple debts, start with writing down all your debts, include the total debt amount, interest rate, and minimum monthly payment. Do include loans from family members. Although your family members may not charge interest, you still need to pay them back, preferably soon. Their money is losing buying power because of inflation and because they do not charge you interest.

3.      Next, set up your budget. Start with listing down all your income. Prioritize paying off your debts over entertainment and other non-essential items such as cable subscription. Budget for at least your minimum monthly payment in your budget. Then budget for your basic necessities such as food, clothing and shelter. Use left-over money for others such as transportation, cell phone, internet, etc. If you don’t have enough money left for non-essential items, you either have to reduce your essential expenses, or find additional income such as working a side job. If you have a spouse, you should do the budget together so you will be tackling your debts together.

4.      If you would like to pay off your debts faster, dedicate the extra income from your side job just to pay for your debts. Start putting extra payment towards your debt with the highest interest rate, that is, your most expensive debt. When that debt is paid off, use the money to pay off the debt with second highest interest rate. Continue doing this until you pay off all your debts.

If it takes you a few years to accumulate your debts, it is reasonable to expect that it will take you a few years to pay them all off. There is no magic bullet solution, even if you go through debt consolidation, debt settlement, consumer proposal, or bankruptcy. All these options involve risks and fees (out of your pocket). Do the right thing – pay off your debts, even if it takes a long time.

Build an emergency fund (rainy-day fund) while you are paying down your debts. Why? Because emergency happens, and you don’t want to borrow money again in an emergency when you have paid the debt off or in the middle of paying it off. Remember, loans – whatever the name may be (overdraft, credit card, personal loan, home equity loan, line of credit, pawn loan, etc.) – are loans, debts to be paid back. Loans are NOT emergency fund. Establish a savings account for your emergency fund, and when you need to use the cash for your emergency, replenish the emergency fund as soon as you can.

Once you have paid off your debts, do not go back to your old way. Live within your means, spend less than your income and enjoy your financial freedom. Remember that a borrower is a slave to the lender (Proverbs 22:7 – The rich rule over the poor, and the borrower is slave to the lender).

Conclusion
In conclusion, when you have debts, understand why you have accumulated them and work towards tackling the source of the problem while paying them off. When you recognize mistakes you have made, try to avoid the same mistakes in the future. Pay off your debts, diligently.
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For more help with ways to pay off your debts, setting up your personalized and sustainable budget, or any other money matters, contact me Effie[at]PrudentMoneyCoach[dot]com or (six zero four) 728-5139. Take advantage of my free first assessment meeting to see if we are a good fit.