What would your life be like if you had no debt? Would you live in a different place? Change your career to something more fulfilling? Spend more time on the beach and less time at the office?
Have you ever stopped to figure out how much of your income goes towards debt repayment? What would you do with that money instead if those payments were gone?
There has been a lot of buzz in the media about how much debt Canadians and Americans hold and how these levels are reaching a crisis point. Many of us realize that we should reduce our debt, but the magnitude of the task can seem insurmountable and we’re not always sure where to start or how to do things differently.
Over the next 4 weeks, we are going to work through a 4 step plan to get out of debt. Each week, there will be one assignment to do if you choose to complete it. In October when we are finished, you will have a plan and system in place that you can carry on until your debt is gone. Once the plan is set up, it will be easy to continue. The steps that we are going to take each week will be small. The chances of real change sticking grow exponentially when we take things slowly, giving ourselves a chance to adjust. A quick 180 degree turn can be disorienting and discouraging if it feels like there is just too much to do all at once. However, if we take it one small step at a time, then an enormous task suddenly seems manageable.
That being said, there are times when radical 180 degree turns are necessary. If you’re reading this and you’re behind on your mortgage payments or your electricity is about to be shut off because you haven’t paid your bill, then you need help right away. Feel free to read on to get some ideas that will help you, but bring in professional help today.
For the rest of us, let’s dive right in with step 1 of the SACK plan.
S is for take Stock
When I get back from a vacation, the last thing that I want to do is get on the scale because the number will show that I ate too much and moved too little. I would rather pretend that I didn’t eat the funnel cake at the theme park and that I exercised beyond the trek from the car to the beach. However, that isn’t usually what has transpired. Facing the music by getting on the scale is tough, but I know that if I don’t do it, I’ll keep going with the same habits that I began on vacation and it will be a lot harder to change course later. I could just start eating better and exercising more, but if I think I’ve only gained 2 pounds on holidays and I’ve really gained 10, I may not adjust my habits enough to make any impact. I need to see where I’m at so that in order to make an effective plan to do things differently.
The same holds true with debt – especially credit card debt. It’s usually generated by a little extra here and there during a financial “vacation”. We could just try to rein ourselves in by cutting back, but how will we know if what we’re doing is sufficient? If debt isn’t repaid fast enough, it could still be around at retirement. Is trying to make credit card payments while on a pension income how you’d like to spend your post-employment years? Me neither. Taking stock now will serve as a foundation for our plan to ensure that our debt is gone by retirement at the very least – and preferably much earlier.
Perhaps the idea of taking stock is a bit scary for you and you’re worried that if you stop your financial “vacation” and face your reality, your life may never be the same again. Please take a deep breath and keep going. If you can’t do it alone, get your spouse or a friend to help you dig through your stacks of paper. Even though it’s difficult to do, facing the “scale” now at your current debt level is going to be easier than facing it in a year or two when the amounts will be much higher.
Make a list
Taking stock essentially means making a list – of all your credit cards, loans, and other debt. The information you need is the balance (what you owe), the interest rate, and what the minimum payment is for each debt.
If you know this information already, then making this list should be quick and easy for you. If you don’t, then you have some digging to do. Open those envelopes that have been piling up on your desk, go online and get the information or call each company directly.
What you want to be able to complete by the end of this week is a chart that looks like this hypothetical example:
|Card/loan||Balance||Minimum payment||Interest rate|
|Used car loan||$1,772.29||$126.00||9.6%|
|Credit line||$15,264.36||Interest only – $38.16 this month||Prime + 3% (currently 6%)|
|Student loan||$12,360.00||$134.14||Prime + 2.5% (currently 5.5%)|
|Department store credit card||$2,500.00||$85.42||28.8%|
For a downloadable spreadsheet of this table, please click here. Save it to your computer and fill in the details as they apply to you. Or use your own template. The important thing is to have the information easily accessible.
That’s it for this week – just make your list. We’re not going to do anything with it yet beyond whatever payments you’ve been making already. Once you have your numbers tallied, please try not to let your list discourage you. Instead, use it as a tool to motivate you. It does not have to be this way, and we’re going to come up with a plan to change it – one step at a time!
Coming up next Monday… A is for Allocate…