Debt-Free Forever (8 page)

One of the biggest problems people have living on a budget stems from their failure to plan for inevitable and sometimes infrequent expenses. Sometimes people refer to these as “unexpected” expenses—I’m not sure why, since some of the things they include as “unexpected” aren’t unexpected at all, just irregular. “Unexpected” is really just another way of saying, “I don’t want to have to think about it.”

Be honest. Did you really think you were going to get through the year without your seven-year-old car breaking down at least once? Did needing new tires actually come as a surprise? Did you think the window that got broken last summer was going to mysteriously repair itself?

Home maintenance is one of the areas where people act all surprised when the bill comes due. The rule of thumb is that you should be budgeting between 3% and 5% of the value of a home for annual maintenance. Older homes require more
financial investment. Brand-new homes require almost nothing initially, often lulling home-owners into a false sense of what things really cost. People just about choke when they work it out for themselves. One couple with a $400,000 home informed me there was no way they could afford $1,000 for home maintenance. Really? Your most important asset? You can’t afford its upkeep? So you have people paying through the noses on their mortgages, watching their homes crumbling around them because they don’t want to have to deal with the realities of home maintenance. That’s how the new roof becomes an “unexpected expense.”

It’s time to pop a Home Maintenance amount into your budget. While hitting the 3% to 5% goal may not be doable with the debt you are carrying, popping that number in as a starting place will give you a good idea of what you have to work toward. Let’s say the value of your home is $276,000. Of that amount, 3% would be $8,280 a year ($276,000 ÷ 100 × 3 = $8,280), which when divided by 12 is $690 a month.

GAIL’S TIPS

The same holds true for household appliances. Do you have an appliance replacement fund? Are you saving up for the next electronic item that will fizz out, or will it be an “unexpected expense?” How about the new hockey equipment the kids will need next winter?

It’s not like these things aren’t inevitable, it’s just that no one wants to think about them because that would mean we would have to budget for them, and that would mean less cash is available to spend on the random stuff we want to buy ourselves. So we go ahead and go shopping for Stuff. We act surprised when we’re faced with the expenses we knew were inevitable, and then we whine about not having any money.

It’s easy to forget about the annual car, home, or life insurance coming due this month if you don’t have it built into your budget as a monthly amount. Ditto your vehicle registration and plates, your health club membership, and the kids’ soccer fees. Then there are your property taxes, if you pay them directly. You can’t ignore your home maintenance forever, so you might as well put it in your budget monthly and set aside some money for when the roof starts to leak. And if you’re self-employed or working on a contract basis, you should also be setting aside the taxes you’re going to have to come up with come tax time. There are Internet tax calculators that will automatically calculate the tax you’ll likely owe when you enter your income and province of residence. Whatever
amount the calculator comes up with, divide by 12 and set that amount aside every month so you can stay on the right side of the Tax Man.

You may be able to wear your jeans until the bum is bare, but the kids will outgrow their clothes before they wear them out, so you should have some money budgeted for them on a monthly basis. Look at how much you spent last year, divide by 12, and use that as your monthly amount for your budget. Pet care costs are predictable until Poochie gets sick. If you don’t have pet insurance, then you should have a little set aside monthly in your budget for your inevitable trip to the vet. The amount you set aside will be dependent on the type of critter you own. (Pure breeds cost more, and some four-legged friends are more susceptible to certain illnesses than others.) Ask your vet what he or she thinks is a reasonable amount you’ll likely have to spend on Fido this year.

Don’t forget medical costs. Yes, I know we have universal medical coverage, but not everything is paid for, no matter how “universal” it is. So if you aren’t budgeting for things like glasses, the dentist, cold medicine and painkillers, and all the other stuff you’ll end up buying, you’re bound to run into some “unexpected expenses.”

GAIL’S TIPS

One of the big benefits of a budget is the fact that it becomes the reason why you do or don’t do things. Yes, you can make the budget the bad guy. The budget becomes the control point. If you’re trying to cut your expenses, it’s easy to get upset with a partner who seems to be spending too much. But do a budget together, and if either of you can’t buy that thing you want it’s because “It’s Not in the Budget.” You’re not monitoring each other anymore. The budget becomes the monitor. And since you both agreed on the budget, getting upset with each other doesn’t make much sense.

This works. It’s one of the reasons the people I work with see so much change by the time I’m ready to say buh-bye. As an outside force, they now have someone else to blame for why they can’t spend: me. By the time I’m done, they’re in the habit of checking with the budget before making a spending decision, so they’ve created their own inside force.

I’ve watched people’s lives change significantly because they’ve implemented a budget and have control over where their money is going. I’ve watched their relationships change as they move from being a “parent and child”—as in, “you can’t buy that” or “you’re spending too much money”—to two adults sharing responsibility for their family’s financial health. It works if you do it right. So take the time and see for yourself.

Remember, your budget will require some fine tuning, like
a musical instrument, to get it just right. Let it evolve to meet your changing needs.

It’s a good idea to review your budget at least twice a year. Look at where your money went and what you didn’t notice while it was happening to you (like bank charges that snuck up, up, up). Make conscious decisions about what you’re going to do differently, how you’re going to live differently, and what you want from your life.

So often we sleepwalk through our lives, completing tasks by routine, keeping on keeping on. We slip, drift, slide into bad habits, but because we’re just doing same old, same old, we don’t even notice. Expenses creep up, and we fall out of touch with our own financial realities.

Keep your eye on your budget, make adjustments that make sense to you, and keep an eraser handy. And get a calculator!

Budget Worksheet

P
eople are always claiming to be serious about becoming debt-free, and then out they go and drop $3 on a coffee, $30 on a book, $110 on a new pair of shoes. The little things we spend money on may improve our lives for the time it takes to consume them, but they do nothing for our long-term goals. If you’re serious about becoming debt-free, you can do it. But as I’ve said earlier, you have to have a plan.

Before we go any further, it is vitally important that you reduce the interest you’re paying on your debt to as low a rate as you can get. The more money you must spend on interest, the less you have to pay off what you owe.

In Chapter 3 you made a list of all the debt you have, including the interest rates you are paying on each of those debts. Now it’s time to tackle those rates to reduce your interest costs.

On your Debt List, circle all the interest rates above 10%. You are going to attempt to get your costs way, way down. There are four strategies for how to do this:

1.
Call and negotiate with each creditor individually to reduce the rate you are paying. This works best when you have just a couple of very high-interest debts.

2.
Do a balance transfer to a cheaper form of credit. Whether you use a credit card with a lower rate or a line of credit to pay off your more expensive debt, a balance transfer can be a great way to reduce your costs.

3.
Get a consolidation loan, where you lump all the debt together at a lower rate. If you’re walking around with umpteen different sources of credit, then a consolidation loan may be your best bet as long as you can get a loan at a reasonable rate.

4.
Ifyou have equity in your home, use that equity to pay off your consumer debt so that you reduce your interest costs. I’m all for using the equity in your home to pay off high-cost debt IF you get rid of all forms of credit and swear on the soul of your cat that you will never, ever, ever spend money you don’t have again. Refinancing debt should not be seen as a way to hide that debt. Nor should it be a way to free up money in your cash flow so you can keep shopping. Refinancing makes sense when you are determined to cut costs and can use the leverage of home equity to achieve your goal.

GAIL’S TIPS

If you choose to call and negotiate with your existing creditors for a reduction on your interest rates, you must be very persistent. Very, very persistent. Your call may go something like this: “Hi, my name is Molly McGoo and I want to find a way to lower the interest rate on my credit card.”

Some lenders will give you a lower rate simply because you asked. Some will agree to lower your rate only if they also freeze your account so you cannot continue to use it. Others will say there’s nothing they can do.

If you’re denied a rate reduction, don’t give up. Wait a couple of days and try again. You may reach a more cooperative customer service rep. If it doesn’t work on your second try, escalate the call. Ask for a supervisor. Explain your situation
again and then ask, “What can you do to help me out?” If he can’t do anything, ask for a manager. If she can’t do anything either, keep escalating the call. You want to find the body that
can
do something.

If you have a good credit history, remind the person you’re talking to that other card issuers want your business. Be polite. Stress how much you like your card. But be firm. You’re not going to settle for a crappy rate. You’ll move the business. They may reduce your rate on the spot. Or they may say they need to look into it and will get back to you. If they don’t, call again.

GAIL’S TIPS

If you have a crappy credit history, remind the person you’re talking to that you are desperate, that he is only one of many creditors you’re speaking with, and that if you can’t find a way out of this mess you’ve made of your financial life, then you’re willing to bite the bullet, declare bankruptcy, and start fresh.

While that works a lot of the time, sometimes it doesn’t. Or sometimes the rates don’t come down enough. Time to try the second tactic: the balance transfer.

Transferring your balance from a card with a 28.8% interest rate to a 2.5% interest rate seems like a no-brainer, right? But there are a few things you should watch for since not all balance transfers are created equal.

If you’re doing a balance transfer to a card with a promotional offer, check how long the lower rate will last and what the rate will be when the special offer period is over. Offer periods vary from six months to one year, after which the card will revert to the normal (usually much higher) interest rate. If you can’t pay your balance off before the rate skyrockets, you may be stuck paying even more than before. Note on your calendar, in your daybook, or in Big Fat Red Capital Letters on your wall the date that the promotional interest rate ends and plan either to have the balance paid off in full or to transfer the balance to a cheaper option when the higher rate kicks in. The credit card company isn’t going to remind you, so if you don’t keep track you can’t go whining about what fiendish louts they are.

Make sure you understand what the low rate applies to. There are generally three types of transactions you can have on your credit card: a cash advance, a balance transfer, and purchases. Each of these transactions may have a different rate, with cash advances usually the highest and the balance transfer rate the lowest.
If the offer you receive applies only to a balance transfer, do not make additional purchases on that card.

Why? Because every payment you make will go against the balance transfer amount, leaving the new purchases to build up interest at the higher interest rate. Really! That’s what happens! Believe it!

Balance transfer fees are usually buried in the mouse print, so read your credit card agreement thoroughly before you make your transfer. Many people receive offers with no balance transfer fees and that’s usually clearly stated since it is a selling feature that’s attractive to buyers.

While you’re always supposed to pay your credit card on time, missing your due date by even one day on a balance transfer will result in the lender switching you automatically from the promotional rate to the standard rate, no ifs, ands, or buts.

If you do a balance transfer, cut up the old card. Don’t cancel the account for six months so you don’t lose the credit history. But don’t fool yourself into thinking that you’ve taken care of the problem and that you now have even more “free money” to spend. This is one of the biggest traps of balance transfers. If you forgive yourself and don’t get a handle on your expenses—if you continue to think of credit as disposable income—then it’s only a matter of time until you’re pulling your hair out and running naked through the streets screaming!

Remember that credit card companies don’t make low-interest balance transfer offers out of the goodness of their hearts. They know the odds are on their side that you’ll fail to pay off your balance on time, triggering the higher rate, or that you’ll neglect to switch your balance to another credit card when the promotional period is up.

Make sure you like the features of the card to which you’re transferring. A card with an annual fee is a card that costs more. Call it a fee, call it interest, whatever you call it, it’s costing you money, and since the point of the transfer is to get those costs down, taking on an annual fee makes no sense.

And please, please, don’t forget about your old card. Until you receive some sort of confirmation that the balance has officially been transferred, you still need to meet the next due date of your old card or you risk getting slapped with a late fee and a black mark on your credit history.

If you have room on your line of credit, transferring the balance from more expensive debt to your line will make sense. Don’t fall into the trap of thinking you “paid off” your credit card debt. You didn’t! You simply moved the debt around. Take those credit cards and cut all but one up. And make sure you’re actively paying down that line, since the biggest temptation with a line of credit is to make only the interest payments required to keep the line in good standing.

If you’re walking around with balances outstanding on dozens of cards, plus car loans, student loans, and other forms of credit, you may need a consolidation loan.

For people who have been chronic credit abusers, consolidation loans work better because they are not “revolving credit.” They are “instalment credit.” The amount to be repaid is set for a specific number of months, at which point the loan will be repaid in full.

GAIL’S TIPS

If the bank you regularly deal with won’t help you consolidate, go and ask another lender. Sometimes our own bank
takes us for granted, but another bank that would like the biz will cut us some slack. Offer any other business you may have: your retirement plan, your mortgage, your accounts, whatever you have to show the new lender good faith.

Remember, a consolidation loan only makes sense if your interest rate is coming down. If it’s not, you need to find out why. You may have a crappy credit history that is affecting your rate, in which case you’re unlikely to do better elsewhere. But it may simply be that you’re speaking to the wrong person. Lenders don’t have as much discretion as you may think. You may have to ask to deal directly with the branch manager to make your case. If you are a good client with a strong credit history and a decent income, you shouldn’t have any trouble getting a consolidation loan with a decent interest rate. Don’t settle! Demand the most you can get in terms of a low rate. And be prepared to do some serious legwork to find a financial institution that is willing to work with you to help you achieve your goals.