How to Get Out and Stay Out of Debt
Part 3–Start Yearly, Not Month-to-Month
The first tip for someone who meets the requirements I listed in Part 1 of this series is definitely to move away from living paycheque to paycheque. However, when mapping out a budget, you should definitely not take the month-to-month approach, either.
For those of you who get paid every two weeks like I do (i.e., 26 times a year), did you ever wonder why you never seem to get two “extra” paycheques per year? We think of a month as being four weeks and we know that a week has seven days, so why does 4 times 12 equals 48 and 52 minus 48 then divided by 2 not translate to 2 extra paycheques a year? Well, of course, it’s because months have 28 to 31 days. Only February has 28 days, three years out of four, with the fourth February having 29 days, four months have 30 days and seven months have 31 days. In other words, “one month equals four weeks” is a false axiom that needs to be avoided.
What’s more, while many expenses are monthly, most follow a different timetable. For instance, rent, car and apartment insurance, cable (a want I can afford) and telephony are billed monthly. However, I have to go to the dentist every four months (i.e., 3 times a year); I get my hair cut every 6 weeks (i.e., 8.67 times a year); my power and water heater bills need to be paid every two months (i.e., 6 times a year); my car registration and plates (the car being another want I can afford) are billed annually…
Start by making a list of every conceivable expense you must pay in the course of one year. I’m talking needs here, not wants, but I do mean EVERYTHING! Don’t leave anything out! Don’t forget bank fees or interest you’re having to pay on debt. Don’t forget haircuts. Don’t forget all types of insurance. Anything that comes back like clockwork! For food, have “groceries” and “eating out” on their own line but combine those two totals, and remember that this is not the time to put yourself on a food diet just to come up with a smallish but unrealistic number.
Now although I’m saying you should list everything, don’t go down to ridiculous details. Don’t have a line item for toilet paper and another for toothpaste! Most people buy their toilet paper at the grocery store, so there’s a wonderful bit of poetic irony in lumping it under “Groceries” since you use it mostly to wipe your ass as a result of what you ate.
Leave out savings for now. If you have some that are automatically deducted from your paycheque by your employer and placed into a pension or dividends-sharing plan, you’re already not counting it as take-home money (below) so you haven’t been getting that money into your hands to spend (although you might find out later that you should temporarily be contributing less to such a plan… but we’re ahead of ourselves at this point). However, like I just said, do include how much you’re paying against your consumer debt, although that number, too, might need to be altered soon (probably upwards this time) after you’ve done this exercise.
If you have been saving on your own — let’s call it self-directed savings, like automatically transferring 5 percent of every paycheque into a savings account — you’re probably wondering why I’m suggesting that you leave this line item blank for now. Quite simply, it’s because you’ll be adjusting that number real soon in that you might even be discontinuing this practice in the short term because there’s absolutely no point in socking away money that earns you a paltry 2% in savings interest (if that!) while you’re having to pay five to ten times that much interest (if not more!) on consumer debt. In fact, if what you have saved is not locked into a registered retirement plan (RRSP) or a non-refundable guaranteed investment certificate (GIC), I’ll be suggesting in Part 4 of this series that you take that money and plan on using it on your needs that are just around the corner. It’ll do you more good that way, because your savings are almost passive at this point while your debt is aggressively active and killing you financially.
A GIC is otherwise known as a fixed-term deposit. The amount you deposit becomes known as your capital which you’re guaranteed never to lose. If the GIC is refundable, you can cash it before the end of its term and you will get back your capital as well as the interest you’ve earned to that point. Typically, because of this flexibility, the rate of interest paid is lower on a refundable GIC than on a non-refundable one of equal duration. For having agreed to pay you more interest on a non-refundable GIC, the bank can refuse to allow you to cash it before it comes to term and, if the bank does allow you to cash it, it will only give you back your capital and maybe, but not likely, the interest that’s been merged into your capital on a multi-year GIC. As this type of deposit is non-registered when not under the umbrella of an RRSP or a Tax-Free Savings Account (TFSA), you will have to pay income tax on the interest earned, to be declared on your tax return for the year during which the GIC came to maturity.
In Part 2 of this series, I suggested that you self-consolidate your debt with a line of credit (LoC). However, the minute you decide to work your way out of debt, you should also work on making bank fees, including interest payments, your Enemy Number One. Right now it’s a need (because you have no choice but to pay it because at one point you chose to borrow) but it’s one of the few needs out there that can be converted into a want… and who WANTS to pay the bank anything?!
You should never, ever make evading paying taxes part of your budgeting strategy, as frankly it reeks of Trumpian immorality and risks to come back to bite you in the ass. But banks are not the State; they’re huge businesses. You should only pay for services they render AND minimize or outright refuse (if you can) that they render you the service of loaning you money.
If you must borrow money from a bank, as is likely necessary for a mortgage, don’t be lazy or a creature of habit. Shop around! “Loyalty” is a word that has meaning to banks only if it helps their bottom line, so you owe banks shit in terms of loyalty when it comes to your financial health. Once you do get out of debt, you should find ways of symbolically getting back some of the money you paid in interest and fees even if it’s not from the same bank that charged you those fees. But only once you’re out of debt can you transform banks into merely a safe place to store your money and, more importantly, a driver to EARN you more money, which loops back to the notion of how being out of debt is a means of opening up your array of financial choices.
When you finally do get out of debt, the number on that savings line will definitely change again because you’ll be reassigning a good chunk if not all of what you’ve been putting against your debt to savings. In fact, when you do reach that point, you should split that savings number into at least two categories (long-term versus short-term savings, including a smallish fixed amount in the latter that should be held ready for emergencies or spontaneous splurges and that you’ll replenish after dipping into it). In turn, those two categories will be divided even further but, yes, you’ve guessed it: we’re ahead of ourselves again.
Now I can’t say it enough: If your budget depends on starving yourself, then it will certainly fail, so don’t put a ridiculously small amount on that line. If you’re a smoker and your budget depends on you quitting smoking, it will fail if you fall off that wagon even though you know you shouldn’t be smoking in the first place and you’ll be beating yourself up for having failed at not just one but two things! Talk about self-sabotage! You might consider reducing your smoking with the goal of ultimately quitting, but in this first step of building your budget, you shouldn’t low ball. In fact, you should never low ball expenses on a budget — high balling a bit, on the other hand, might not hurt in that the difference can go toward your debt — and in this example, you should definitely be writing down exactly what your smoking is costing you. Yes, I recognize that smoking is a want, not a need, but a want like this one can’t be dismissed so easily and the point of this exercise is to identify exactly where every cent of your money is going.
…and Actual Net Inputs
Then you need to find out exactly how much money you’re taking home in the course of one year. Now I didn’t say “what you could be taking home.” I said “how much money you ARE taking home.” Winning the lottery cannot be part of this equation, nor can “I might get $1,000 if I sell these lovely little widgets I’ve been making in my spare time.” Selling those widgets might be part of what Gail Vaz-Oxlade calls your budget booster challenge, but again we’re ahead of ourselves at this point.
Pull out a year’s worth of pay stubs if you have to, but don’t eyeball this number. In fact, contrary to listing your needed expenses, here it’s better to low ball. That’s because when you’ll be constructing your budget later, you’ll be basing yourself on what you’re certain will be coming in. Then if you come across a few extra bucks once you’ve already made peace with counting only on expected income, you’ll just accept that this extra should go on debt repayment if you’re still at it. And if you’re not still at it, you should be so accustomed to this discipline by then that you could allow yourself to maybe skim off a few bucks as a little “reward” but put the lion’s share into savings.
See? Real choices will become possible!
Time to Start Doing Some Math!
After all of this tallying, most of you are probably going to find out that the sum of your needed expenses (outputs) is lower than the sum of your incomes (inputs) — unless you’re paying more than you can afford on food or housing — and that’ll seem counterintuitive at first because you never have any money left over. Surely you must have forgotten something, right?
In fact, that statement is so counterintuitive that many of you might dismiss it as impossible before even going through this exercise. But you really should go through this exercise of listing your outputs and inputs over a whole year because that difference is the amount that you’re frittering away on mindless micro-purchases.
That difference is made up of hundreds of little pieces that you can’t see anymore and that you long ago stopped appreciating. It’s the coffee every morning on your way to work. It’s the muffin during coffee break every other day. It’s that impromptu outing last week and the one two weeks before that. It’s the great item of clothing you just couldn’t leave on the rack, and the latest toy that everybody says is the best thing since the personal computer itself and that you couldn’t see yourself existing without. (First-world problems…)
You might be thinking that I’m about to advise you to cut out all the little pleasures of life, but I’m not. However, if indeed you’ve just found out that your expenses for your needs are lower than your real net income, you’ve just discovered what you’ve been doing wrong. Indeed, it means that you shouldn’t be in debt in the first place and there has to be a way of getting you out of debt and staying out of it.
You just need to come to terms with the fact that the multiplication of all those mindless micro-purchases has finally come to royally bite you in the ass …or more accurately, the pocketbook. You also have to come to terms with the fact that you’re currently not in a position, while you’re in debt, to have choices. And you have to come to terms with the fact that, when you’ll be out of debt, sometimes the choice will have to be to say No. But, thankfully, when you’ll be in a postion where you have choices, the answer won’t always have to be No. The answer can sometimes be a carefree Yes, and other times a well-pondered Yes …in a few months, after I’ve realigned my short-term priorities.
Depending on the size of the gap, you’ll probably find that you’ll have the choice to include more wants than you might think. For example, I could have been dogged and said, “I’m paying way too much for those haircuts! I’m going to start just going to a barber instead.” However, given that I don’t get out much, getting my hair cut by Gabriel every six weeks is a bit of an outing for me. So is $225 more a year in my expenses column going to make that much of a difference if, elsewhere, I cut out or cut down on that from which I don’t derive nearly as much pleasure? (Gosh, I’m almost making it sound like Gab gives me a happy ending for that money!)
Now don’t go overboard with rationalizations like the one I just made for my haircuts! Maybe you’re in such bad shape financially right now that $225 a year WOULD make a difference, small as it may be. But if you’re having trouble figuring out if something is a need rather than a want, ask yourself this: “Will I *DIE* if I don’t get this?”
Okay, maybe that’s a bit of an overstatement. Of course, if you don’t eat enough for sustenance, you’ll eventually die. If you forego shelter and start living under an overpass, you might die. If you don’t pay your taxes or your car registration, you might not die but you’ll almost certainly get in trouble with the law. And if you don’t get that prescription, your condition may worsen… and you may even die if your condition is serious enough.