Debt-Free Forever (2 page)

Do not leave anything off the Spending Analysis Worksheet. If you spent money on stuff and can’t figure out where to put it, make up a new category. It is important that every penny you spent be accounted for somewhere. And if you guesstimate, you’re wasting your time.

Now that you have the total amounts you’ve spent in a variety of categories over a specific period of time, it’s time to break it down to a monthly amount. If you used three months’ worth of information, you’ll have to divide the total amount in each category by three to come up with an average. If you used six months’ worth, you’ll divide by six. The closer you are to six months’ worth of information, the more
realistic a picture you’ll paint for yourself. Yes, it is easier to use less info, and you can always choose to use the statements for the months you didn’t shop all that much. Hey, if you want to keep deluding yourself, you’ll find a way. But if you finally want the truth, if you want to see where your money has been going, you’ll use six months’ worth of information, even if it takes you days to plug in all the numbers.

Having come up with a snapshot of what you’ve been spending on average every month, it’s time to get an accurate picture of how much money is coming in. When I ask most people how much money they make, they quote me their gross income. People also have a tendency to round up their income. Both these tactics lead us to believe that we are richer than we are, which subsequently leads us to spend more money than we actually bring home. The only way to avoid this problem is to look at the actual amounts coming into the bank.

Go back over your bank statements and add up all the deposits you made. Transfers between accounts cancel each other out, so ignore them. Include any money that went into your bank account, including your pay, bonuses, support you may have received, repayment of medical costs, government payments including child benefits, retirement benefits, and disability benefits, expense reimbursements … everything. (Since things like medical costs and business expenses are shown in the numbers you are tracking, adding the reimbursements into your income gives you a true picture of your actual financial outlay.)

If you make some of your money in cash—perhaps you work for cash or earn tips—you don’t need to take any special steps to account for this as part of your income if the money goes into the bank since you’ll see the deposit. However, if you’re paying for stuff you buy with the cash you receive without it ever going through your account, your numbers may look weird. Why? Well if you buy all your groceries with the cash you receive, then your expenses may have only a paltry amount for Groceries. Most people do a pretty crappy job of monitoring their cash receipts and expenditures, choosing to do mental math to keep track of it. Mental math doesn’t work, and you’ll have to come up with a better plan, but not until it’s time to make a budget. For now, don’t sweat it.

Once you’ve totalled up all your deposits for the past six months, divide your total by six. That’s how much you bring in, on average, each month. Keep in mind that for the purposes of your analysis, we’re working with averages. When it comes time to do a budget, we will have to be more specific.

Now that you know how much you’re bringing in and how much you’re spending a month on average, you have to figure out if you’re under or over. Subtract your total monthly expenses from your total monthly income.

If you have a positive number, you’ve been spending less than you make. If you have a negative number, you’ve been spending more than you make.

At this point, you may be in shock. Routinely people say, “How can I be spending so much more than I make?” The
answer is “credit.” People use credit to fill the holes in their cash flow. And they do it so routinely, whipping out the credit card even at the supermarket, that they don’t have a clue about how much money they’re blowing through every month. They just know that no matter how hard they try to pay off their debt, it never seems to go down.

Want to see how you got so far into debt? Take the amount you’ve been overspending every month and multiply it by 12. That’s how much you’ve been overspending each year. Wow!

If you’re in shock, that’s a good thing. Like the couples I work with, you may need a big shock to get you to a place where you know, beyond a shadow of a doubt, that things have to change.

Spending Analysis Worksheet

I
t’s time for some more math and some more hard truths. Most of the people I work with don’t have a clue how much they are spending on their debt. When I ask people to fill out a list of what they owe, including their interest rates, they guesstimate. And often when they sit down to add it all up, they just about choke on the total. Sure, they knew they had that student loan, and that car payment, and that buy-now-pay-later furniture, and those three credit cards, but they never added it all up. And now that they have, they feel sick.

You, too, may have compartmentalized your debt so that the number doesn’t seem quite so large. And you may be so afraid of the hole you have dug that you choose to remain ignorant even when you say you want to make things better. Well, you can’t make things better until you deal with the reality you’ve created, so make sure you check all the interest rates and loan balances when you’re making your list. Guesstimating doesn’t count.

John Wayne said, “Life is hard. Life is harder for stupid people.” Hmm. So it’s time to get those statements out and see just how much damage you’ve done.

The first step is to list everything you owe. Grab all your outstanding bills, a piece of paper, and a pencil. I’ll wait …

Start by listing all your debts (everything but your mortgage), from most expensive to least expensive. Your most expensive debt is not the biggest one, although over time it may prove your most costly if you diddle around with paying it back; your most expensive debt is the debt with the highest interest rate.

While your list of consumer debt does not include your mortgage, if you have refinanced your mortgage to repay a line of credit, a bunch of credit cards, or any loans, that portion of your mortgage must be included on this list. Why? Well, it’s become pretty popular to use home equity to pay off consumer debt. People end up hiding past spending indiscretions under their roofs and then fooling themselves into thinking it’s “housing” when it is in fact “rabid consumption.” Have you been playing that game with yourself, pretending you’re not in debt and hiding your rampant consumerism in your mortgage? It’s time to get past playing games, right? You need to ‘fess up to ALL the debt.

Your list of consumer debt should include the individual interest rate for each debt and the total amount owed on each piece of credit. If you can’t find the interest rate, pick up the phone and call your lender. You need all this information so that you can finally make a plan to deal with your debt.

This list can help you to prioritize where you’ll make your payments. You might have a list that initially looks like this:

Now that you know to whom you owe what, and the interest rates you’re paying, the next step is to figure out the minimum amount you must pay to stay on the right side of your credit history.

When it comes to listing your minimum payments, the amounts will depend on the kind of credit you have.

Credit cards:
Credit cards show the minimum payment required on the monthly statement, so plug that into your chart beside the amount owed.

Instalment loans:
The minimum on an instalment loan—like a car loan, student loan, or consolidation loan—will be whatever payment amount you agreed to, since to pay less would mean you would be in default. The bank statement for the account from which this payment is coming will show how much you’re paying every month, so check there to make sure you put in exactly the right amount. No rounding!

Line of credit:
The minimum payment on a line of credit is usually the interest accumulated for the month. If it’s not listed on your statement

1. Check the outstanding balance on your line.

2. Multiply it by the interest rate that applies.

3. Divide by 100.

4. Then divide again by 12 to get the monthly interest payment on your current balance.

Taxes:
The Tax Man is often unwilling to wait for more than a year, so the minimum payment on a tax bill is whatever it takes to get it cleared up in 12 months or less. Take the amount of your back taxes and divide by 12.

Overdraft:
Overdraft never has to be repaid unless it is “called”—cancelled by the lender—so it’s like quicksand … you
just sink deeper and deeper every month. But if you’re determined to live debt-free, then you need to get that overdraft paid off. Take the amount of overdraft you owe and divide by six to get a minimum payment amount that would get you out of overdraft in about six months.

The RRsP Home Buyer’s Pla
n: The Home Buyer’s Plan (HBP) has to be repaid on a schedule—the minimum is 1/15 every year, but you can pay more—and failure to do so will add to your tax bill. Divide your total owed by the remaining number of years you have to repay the HBP and then divide by 12 for your monthly minimum.

Buy-now-pay-later financing:
Buy-now-pay-later financing doesn’t have to be paid at all during the “grace” period, but the minute it comes due it’s payable in full or the financing kicks in at a whopping interest rate back to the date you took home whatever it was that you bought. To avoid the financing costs, you must have the whole kit and kaboodle paid off on time. Take the amount you still owe and divide it by the amount of months, less one, remaining on your grace period. This is your ideal monthly minimum.

Pay-advance loans:
Pay-advance loans have to be repaid in full in your next pay period. Of course, the pay-advance people will be happy to extend you another loan at their rapacious interest rates if you’re a little short!

So now your chart looks something like this:

Okay, time to face the music. Add up how much you owe, and what your total minimum monthly payments are. So, in this example, the total amount owed is $135,630 and the minimum payment is $3,065.

If your eyes are popping out of your head or your stomach has sunk to your toes, take a breath. What you are doing—facing up—is
hard. Don’t panic. You’re taking steps right now to make it better. This isn’t the time to be scared stiff. Financial paralysis is often a result of not knowing how you can possibly make things better. Don’t freeze. You are making progress and you need to stay focused on what it is you’re trying to accomplish. Running and hiding at this point won’t make you feel better; it will just delay the inevitable and might, in fact, make things worse. So keep breathing and keep moving forward.

Every month you make your minimum payments like a good little borrower, and then you pat yourself on the back for making your minimums on time so you have a great credit score. But have you ever added up what the interest on all the debt you’re carrying is gobbling up from your cash flow?

Well, now it’s time to figure out what all this debt has been costing you. Back to the list. Take the first amount you owe and multiply it by the interest rate and then divide by 100. That gives you how much interest you’re paying on that debt in a year. But we want monthly amounts, so you’ll have to take that number and divide it by 12.

Here’s an example. The department store credit card with the $1,200 balance at 28.8% is costing $28.80 a month in interest: $1,200 × 28.8% ÷100 ÷12 = $28.80.

It’s easy to look at the interest you’re paying on a single piece of credit and think, “Hey, that’s not so bad.” Add them all up and you’ll see just how much you’re contributing to the bottom line of your lenders. Yup, add ‘em all up now.

Are you surprised at just what it’s costing you a month in interest on all your debt? And that $150, $300, or $500 a month isn’t doing anything to reduce your debt; that’s just the
price you’re paying for having used someone else’s money to buy stuff. Want to see what that interest is costing you each year? Take your total monthly interest cost and multiply by 12. Remember, that whopping number is doing nothing to reduce your total debt at the bottom of the Amount Owed column. That’s just the interest you’re paying for the privilege of using someone else’s money to scratch your retail itch.

GAIL’S TIPS

Time to see how much of a dent those minimum payments are making in the overall amount you owe. Brace yourself!

Subtract the total amount you pay in interest each month from that total amount of your minimum payments. The answer is the amount that you are actually reducing your debt by each month. We’ll call this your Actual Repayment Amount. So, if your total minimum payments add up to $3,060 and your monthly interest costs add up to $1,038.95, your actual repayment amount is $3,060 – $1,038.95 = $2,021.05.

Now take the total amount of your debt (the bottom total of your Amount Owed column) and divide it by your actual repayment amount. This will give you the amount of months it’ll take to get to debt-free if you keep going on this track. If your total debt is $135,630 and your actual repayment amount is $2,021.05, it will take you 67 months ($135,630 ÷ $2,021.05 = 67.11), or about five and a half years, to pay off the debt! And that’s if you don’t put another penny on credit.

If the math makes you want to run screaming from the room, that’s natural. It’s hard to face up to the mistakes we’ve made. And it’s hard to look at the details when we feel overwhelmed and out of control. But only by doing the detail, by facing the reality you’ve created, can you get through Debt Hell. (I did tell you this was going to be hard, right?)