Credit Debt Consolidation, Financial Planning & Budgeting - Short Articles
By Renu Singh-Joseph
If you’re struggling with debt, it can often cause sleepless nights or feel like you’re carrying an extra person around on your back. The burden of debt can be stressful and many people ask themselves, ‘How can I reduce my debt?” The answer is never simple, but there are some helpful debt reduction strategies that you can take advantage of.
Q: Last week, I found out my wife has spent more than $10,000 in the last year buying “just stuff.” She charged all of the items on her credit card and has only been making minimum payments so I wouldn’t find out. I feel angry and hurt that she’s been doing this and not telling me about it.
A: What you’re describing is called impulse spending, which is making unplanned purchases you probably don’t need. Many people will buy items impulsively when they’re happy, feeling down or as a reward.
Q: My husband may be laid off from his job. I stay at home and look after our kids and now I’m worried about how we’ll manage without his paycheque. What can you suggest?
A: When facing reduced income, many people wait too long to adjust their spending and end up creating a financial disaster. Take steps right away to bring your spending in line with a lower income level. Apply for EI or income assistance as soon as possible.
Consider all of your costs and look for ways to reduce your expenses. Pay your rent/mortgage and food first, then see whether you can reduce housing-related costs — utilities, cable and phone plans — temporarily. Could you take one vehicle off the road or stop investment contributions for now?
Q: I've just graduated from high school and will be going to college in September. I have some money saved up from my summer job and I'm receiving a student loan. Do you have any suggestions on how I can manage my money and not be a "starving student"?
A: Students often begin the year with carefully planned class schedules and armloads of expensive books, but fail to plan their finances as carefully. Your grades will be affected if your thoughts are consumed with worries about money. To make a plan, write down how much money you have for each month of your term. Make another list of all of your expenses, including extra supplies, transportation costs, debt payments, food, housing, bills, etc. If your budget balances, you're off to a great start; however, often you need to make some adjustments.
Q: My 19-year old son has charged his first credit card to its $500 limit and hasn't made even the minimum payment in more than four months. He's getting calls asking for payments. I'm worried about what this will do to him in the future.
A: This is a question we hear often and you're right to be concerned about your son's future. Credit is a privilege, not a right, and he will have some work to do.
Derogatory information on a person's credit report will lower their overall credit score and make it much harder to obtain credit in the future.
Your son should start by creating a budget that allows him to make reasonable payment arrangements to repay his debt. His improved payment history will be reflected on his credit report and his credit score will recover over time.
Q: I owe about $10,000 on my credit cards and I've been making the minimum payments. Why does it seem like it will take forever to get out of debt?
A: Making the minimum payments on your credit cards will keep you in debt for a very long time. Based on a balance of $10,000, an annual interest rate of 18.9 per cent, and only making the minimum payments required (2.5 per cent), it will take you more than 30 years to pay off the debt. Along the way you will pay more than $16,000 in interest.
Q: What is a good way to invest my old-age pension? I am still working and would like to find a place to invest it.
A: Before anyone can effectively answer this question, they need to have a complete understanding of your overall financial picture. Here are some points to consider before you're ready to ask these questions:
Q: I'm going broke keeping my old car running. I need a new one -- should I lease or buy a new car?
A: Before leaving your driveway in search of a new car to lease or buy, determine what you can afford each month.
Start by looking at your income and existing monthly and seasonal expenses. Over and above your loan or lease payment, you need to consider more than just fuel and insurance.
While you won't need to spend money on maintenance each month with a new vehicle, you will need to find out ahead of time what you're obligated to pay and how often. Setting money aside for those expenses on a monthly basis is a lot easier than being hit with a large bill later on.
A few things to keep in mind as you do your shopping:
Q: Mortgage rates are still low and house prices keep going up. Is now the time to buy? And is it better to buy as big as you can?
A: It's best to determine how much house you can afford and if it fits your lifestyle before buying a home. Many home buyers don't fully realize how much it costs to buy and pay for a home. You have to consider all of your costs up front (such as moving, taxes and legal fees), plus the ongoing costs, and the impact these extra expenses will have on your lifestyle.
Q: We started the fall with plans to spend less on convenience items, but now we're so busy we've gone back to our old habits. Our budget is going to burst if we keep this up -- what can you suggest?
A: Many families start September with sweeping changes. But once the reality of everyone's busy schedules sinks in, many households go back to old habits and abandon new plans.
Unfortunately, convenience often costs a lot more than planning ahead. Convenience expenses that can burst a budget include entertainment, transportation, utility bundles -- such as communication packages -- and eating out.
Spending $8 each weekday on lunch and a bottle of water adds up to more than $1,800 a year. If you're also giving kids $10 a day for food at school, your family's annual lunch expenses have just doubled to an amazing $3,600.
Q: My girlfriend and I have been living together for two years. Everything is in both of our names, except our bank accounts, but we rarely ever talk about money without fighting. What can we do so that our relationship doesn't become a financial casualty?
A: Money is one of those topics that can create tremendous stress and tension in a relationship, especially if you have different views on how to spend and save. Our attitudes toward money affect the choices we make. Managing money together is about more than just paying your bills on time.
Q: I'm having trouble keeping on top of all my payments each month. I've heard about consolidations, but don't know what that really means.
A: Consolidating debt means putting what you owe together and having one monthly payment that pays off your debt. There are a couple of different consolidation options to consider. When people first run into difficulty, their financial institution may offer them a consolidation loan, which pays off other outstanding balances -- for example, several credit cards. You end up with one loan and one monthly payment. It's crucial to stop using the other accounts -- otherwise, you may end up further in debt.
Q: I've just moved into a new condo and everything looks great except my old furniture. The store down the street is advertising no interest and no payments for 12 months on new furniture. What's the catch?
A: The catch is that if you do not pay the balance in full before the end of the interest-free period, you may end up paying interest on the whole balance owing from the day you left the store with your new furniture. At an interest rate of 28 per cent or higher, that great deal you got would be completely offset by interest charges and could add 50 per cent or more to the actual purchase price of the furniture.
Q:We are looking at buying a new TV for the family this Christmas and are trying to decide if we should spend the extra money on an extended warranty. Is it really worth it?
A: Like a lot of things in life, this is not a simple yes-or-no answer. With manufacturer warranties shrinking, you need to decide if it makes sense to pay for additional coverage up front or put some funds aside just in case you have to fix the TV later.
Here are some points to consider before handing over your hard-earned money:
Q: Is it better to buy a cell phone and then choose a monthly plan, or get a free phone with a plan?
A: Cell phones aren't really free. A service provider will give you a cell phone provided you sign a contract and commit to monthly payments during your contract, which might be as long as three years. If you want the newest phone and greatest features, be prepared to pay more each month.
When choosing a phone and monthly plan, consider:
- How much am I prepared to spend each month?
- Does this fit my budget?
- What do I need the phone for?
Before signing on the bottom line of a one to three-year contract, do your homework. Look at your budget in detail and see if you can afford the monthly costs. There is no point having a phone you can't afford to use.
Q: We buy a lot of gifts for people in our extended family throughout the year. They seem happy with the gifts we give, but that happiness is short-lived. What other gift choices should we consider?
A: You're right to notice that the happiness from tangible gifts rarely lasts. This is why many families have chosen alternatives to traditional gifts for holidays, birthdays and special times throughout the year.
Consider these alternatives:
Q: I like to be out and about with my family and friends during the summer months. I’ve noticed that I reach for my credit card more and more often and I’m dreading what my credit card bills will look like in the fall. Can you offer any suggestions?
A: Many people find the summer months expensive. Ice cream and a bottle of water while at the beach; extra parking costs; stopping in at a friend’s for a BBQ; drinks on the patio after work — it all adds up and leaves many of us wondering where our money went. Those who also have children to keep busy over the summer break often shudder at what that might cost by the time school starts.
Here are a few suggestions to make summer fun more financially manageable:
Q: My family usually takes a summer vacation, away from home. And while we have a lot of fun, we usually come home broke, exhausted and not ready to go back to work. I’ve heard a little about “stay-cations” and that they’re good for my budget.
A: Vacations away from home can cost a lot of money and energy. Staycations have recently become very popular because of the downturn in the economy and the higher cost of gas during the summer. A staycation is a vacation where you and your family get to relax at home and enjoy daytrips close to home.
Q: I've got three kids going back to school in a month -- how can I manage back-to-school expenses so that I can buy them what they need and want, without going into debt on my credit cards?
A: Start by taking stock of what came home from school in June that can go back in September. Wash their backpacks, clean out pencil cases and geometry sets and buy new batteries for calculators. New stickers can make an old binder look new. Recycling their own things leaves money in the budget not only for new supplies, but also for expenses like class pictures and sports fees due in the fall.
What can your kids do to earn some money to help pay for what they want? For teens with specific requests, your budget might allow you to pay the first $50 for new shoes and then they can top up the rest for the name-brand pair. This also helps teach them about the value of money.
Q: My wife and I have been looking for ways to help our family manage our money better. We're doing OK, but with Christmas just around the corner, we don't want to end up in debt again after the holidays. Do you have any suggestions?
A: It's great that you've been able to make some adjustments to manage your money better. Looking ahead is an important step, and you're wise to be planning now. This will make it easier to find the money to pay for holiday expenses without going into debt.
Fall is a great time of the year for cleaning and clearing the clutter. As you're doing your fall cleaning, ask yourself what items you might sell to earn some money for the holidays.
Q: It's hard to believe that Christmas is less than two months away. What can we do to keep our holiday expenses more manageable for our family this year?
A: Even if you haven't been able to save money for the holidays, it's not too late to make a plan for your holiday season.
Talk to family and friends about a holiday plan. What is financially reasonable for everyone, or is this the year to start new traditions?
Nail down your holiday spending budget -- gifts, festivities, decorations, travel, clothing, entertainment, babysitters, taxis, hostess gifts, office party expenses, etc.
Write down your goals for this holiday season. Decide what's important before you're caught up in the hustle and bustle. Having a plan will keep your spending in line when things get busy.
Q: My sisters and I usually go down to the U.S. to shop during their Thanksgiving weekend. A friend of mine thinks it's cheaper to buy in Canada. Is she right?
A: The American Thanksgiving weekend, or "Black Friday" as it is often referred to, is the day when retailers start to turn a profit and be in "the black." Many Canadians will cross the border during this weekend to make their Christmas purchases.
Before you pull out your passport and cross the border to take advantage of the savings, there are a number of points to consider. These include:
Q: With a growing list of recipients, where do you draw the line on holiday gifts, so you don't seem cheap?
A: With all the attention on finances and personal credit use, many people are looking at their needs and wants differently. Making budget-conscious family spending choices for day-to-day expenses is a great first step. Extending this to your Christmas gift-buying decisions is important as well.
Start by thinking about what you enjoy most about the holiday season and what it means to you and your family. Gifts are only one fun part of Christmas. Ask yourself a few questions:
Q: Every year we plan to make a few purchases during the Boxing Day sales. Are the deals really worth it?
A: The sales and offers at this time of year can look very enticing -- and so they should, as retailers look to further enhance their bottom line. But the real bottom line you need to consider is your own. Ask yourself a few questions as you think about what you might still like to buy over the holidays:
- Is this something I have planned to buy?
- Do I need this item?
- How much can I afford to spend?
It's very easy to be swept away by offers created for this time of year. But many of these sales will occur again early in the new year. Take advantage of the markdowns later and avoid standing in long, cold lineups only to miss out on the "one" item they had at the special, low price.
Q: Each year I make a New Year's resolution to tackle my credit card debt. I never seem to get anywhere. Can you help me?
A: A plan to tackle your credit-card debt is a great New Year's resolution. A realistic plan will help you shed the weight of your bad debt and help you get on track again.
Start by listing how much you owe and how much interest you are paying. Then prioritize your obligations; mortgage and vehicle payments are typically at the top of the list.
Next , track what you're currently spending. Before you can make any changes, you need to identify what you can change.
Ask yourself the following questions:
Q: I never have any money left over after paying my bills to even think about financial goals. I'm frustrated because I know I have to do more than just think about my future. Can you help?
A: It's not how much you make, but what you do with what you've got. Proper money management doesn't involve a magic formula to find more money; it simply means getting the most from the money you have.
Before you can begin to manage your money, you need to identify and write down what is important to you and use your list to help you determine goals for your money.
Next, turn these ideas into SMART goals. Most people's money problems occur because they don't clearly know what they want to do with their money and therefore spend it randomly. Clear goals are the targets you are aiming for to help you build your plan. SMART is an acronym for:
Q: I got engaged over the holidays and we're starting to plan our wedding. What suggestions do you have to help us keep costs reasonable?
A: Congratulations on this next big step in your lives! It's an exciting time charged with emotions and expectations. Start by deciding what the two of you want for your big day and what you can afford.
Many couples are getting back to the basics with something old -- a budget. Written down, a budget can be strangely motivating, and a budget for your big day gives you and your intended the freedom to plan and make choices with what you have. Your discussions then change from what you can't afford to what you can afford (which is a lot more fun!).
Q: I want to pay off my credit card bill this year but to do this I won't have any money left over to start contributing to an RRSP. Is this a good strategy?
A: While it always makes sense to pay off high-interest credit-card debt, there are advantages to taking a balanced approach. As an example, if your goal was to pay off a credit-card bill of $3,500 (with an annual interest rate of 19 per cent) in one year, you would need to pay about $325 a month to do it.
Q: I'm not working and my employment insurance just ran out. Can I withdraw money from my RRSP until I get back to work?
A: You can access money in your RRSP as long as the funds are not "locked in" (although in some provinces you can unlock RRSPs for certain financial hard reasons). There are strict rules about accessing locked-in funds. Your banker or financial adviser can provide you with more information.
Q: I've received another email for sunny vacation specials that look like a great deal. My friend and I are considering taking a week and going, but are these deals too good to be true?
A: During the long, dark days of winter, any mention of sunshine is welcome. The vacation offers that come by email or fax are meant to tempt you with the low cost of a basic flight and hotel. You're wise to take a look at these offers carefully and make sure the company offering the vacations is properly licensed, well established and has a good reputation. Before you say yes, consider all of the costs you're likely to incur:
Q: We collect points on our credit card to help pay for our vacation costs but sometimes it can be hard to use them. I wonder if using points is actually a good deal.
A: Credit cards that earn rewards can be a friend for one, but another's greatest foe. It boils down to how you use credit and manage your household spending.
Here are some things to keep in mind as you choose which rewards to collect and how you earn the reward points:
Q: We can't afford to go on a vacation this summer. I've heard about 'staycations' but I'm concerned that doing one will just end up feeling like more time spent at home. How do you turn it into a real vacation?
A: A staycation can be a great way to enjoy a vacation while saving money on transportation and accommodation. Whether you are travelling 5,000 kilometres or in and around your city, the key to having a memorable vacation is planning.
With staycations you also need to create a holiday environment. Some people set up a tent in their backyard and sleep outdoors to set the right mood while others plan daily outings and enjoy local festivals, attractions, parks and activities.