Hey there, time traveller!
This article was published 18/1/2013 (1497 days ago), so information in it may no longer be current.
Battling debt is a bit like waging war against the bulge -- it can sneak up on you, especially after the holidays.
And if you're stepping on a scale or looking at the credit card statement, thinking "Yikes! How'd that happen?" it may be time to take steps to improve your health -- financially or physically.
Reducing debt and losing weight are fairly basic concepts. You don't need an astrophysicist's IQ to understand shedding kilos involves eating less and exercising more, or that getting on better financial footing entails spending less and earning more income.
But underneath the veneer of simplicity is an often complex myriad of circumstances, behaviours and attitudes that make both very difficult to accomplish.
"Budgeting is very much like a diet," says debt counsellor Yvonne Neu. "We all know we need to do it and we feel good when we do, but just to get going and to keep motivated are difficult."
And the latest statistics on Canadians' debt-loads suggest many of us could do with a deficit-fighting calisthenics regiment.
The latest debt-to-income ratio numbers in Canada -- the measuring stick for consumer indebtedness -- hit another record high in the third quarter of 2012. On average, Canadians owe a little more than $1.64 for every dollar they earn.
But it's not as if we're not aware of our problem. A recent CIBC-sponsored poll found 17 per cent of Canadians cited debt reduction as their No. 1 priority for 2013, the third year in a row it has topped the list for the annual study.
Yet, according to a recent survey by the Canadian Association of Accredited Mortgage Professionals, which represents mortgage brokers, most people are fairly comfortable with their debt-loads.
It found 83 per cent are comfortable with the loan to home-value ratio of their mortgage, and 80 per cent of those surveyed could afford at least a $200 a month increase in mortgage payments if interest rates rise.
Still, Canadians seem to be worried -- at least about their neighbours, says mortgage broker Daryl Harris.
Of those surveyed, 89 per cent felt Canadians as a whole have too much debt, and 77 per cent felt others owned homes they probably couldn't afford.
"Everybody is looking at debt as their neighbours' problem and not their problem," says Harris, with VERICO One Link Mortgage and Financial in Winnipeg.
It's a little like discussing how others have gained weight while ignoring the waistline bulge directly below.
Regardless of whether you've recently recognized a monetary mea culpa you'd like to correct, or you've been waging an ongoing war on debt for years, below are a few tips, guidelines and other generally informative tidbits that may help turn the tide in the fight for financial solvency.
Behold the naked, ugly facts...
As a debt counsellor with Community Financial Counselling Services (CFCS) in Winnipeg, Neu often sees an influx of new clients at the end of this month when the credit card statements for the holiday season show up in mailboxes. Some people may not even want to open them, fearing carnage.
But the day of reckoning has come and it's best to examine the devastation carefully.
The first step toward better financial health involves fully understanding one's current situation. That means looking at all the bills and how they match up to the income.
"Dig out the statements. Look at them carefully and see what you're paying each month," she says. Determine your cost of living: mortgage, rent, food, gas, car payments, utilities and even a little entertainment. Any income over that amount can go toward debt. The next step is calculating debt servicing costs, the minimum payments. If those exceed your surplus, or even if they don't, you likely need to cut costs or increase income to make progress. To do that, you need to get a true picture of all spending.
"Tracking expenses is a great place to start so you know what exactly is going out," Neu says. "It usually takes a good, solid month."
With the past behind, determine the future...
Debt reduction is an admirable goal, but it's a little too general. You'll need to set a guidepost that is more concrete.
"If you have specific goals, then you are more apt to accomplish them because you have something tangible to work toward rather than this less specific idea like, 'I want to be debt-free,' or, 'I want to lose weight,'" Neu says.
"If you say, 'I want to lose 10 pounds by March break,' then you have something to work toward."
But just because it is a personal goal doesn't mean it should remain private, says Christi Posner with Credit Counselling Society.
"Put your debt reduction goal for 2013 in a conspicuous place like on your refrigerator or desk so that you will see it every day to stay focused," says the Winnipeg-based debt counsellor. "Better yet, enlist the support of friends or family members also wanting to reduce their debt so that you can support each when tempted to spend."
Plan of attack...
Here's where we get to the "earn more spend less" advice portion, which is so easy to read, but tough to implement. Yet it can be easier than you think, Neu says.
"Sometimes, you need to think outside the box," she says.
Go over every bill -- like the cable/Internet/phone bill -- and look for possible places to save.
"Maybe you don't need all those channels?" Neu says.
Pack lunches. Cut coupons. Take the bus to work. All of the small stuff adds up.
"Making your cup of coffee in the morning instead of buying a $3 specialty coffee will save you over $1,000 a year," Posner says.
If staying on track has been problematic in the past, leave the credit cards at home. If they're persistently maxed, consider cutting them up or stashing them away for the time being.
"Paying for your purchases with cash instead of credit will help you to separate needs from wants," Posner says.
Look to sell items you may not necessarily need -- even that second or third vehicle. Not having to pay for gas, insurance and maintenance alone will save thousands a year.
If you have multiple debts, try consolidating them into a lower interest loan for one easy payment.
Harris says homeowners can take advantage of low-interest home equity loans to consolidate, but the rules regarding the amount of equity now available to borrow has changed recently.
"You used to be able to have a home equity loan for up to 85 per cent of the value," he says. "That's been reduced to 65 per cent."
Consolidate what you can. Maintain paying the fixed debts like the mortgage and the car loans. Pay interest-only on the others and then identify the highest interest-bearing debt and use any surplus cash to pay it down first. Once that's retired, move onto the next, Posner says.
Be sure to leave a little money each month -- $25 even -- for an emergency fund. This prevents sliding backward to pay for the unexpected, like a car repair, she adds.
And do budget for some fun and games because a plan without provisions for enjoying life is likely to fail.
How much is too much?
Most people can tackle their debt problems by cutting spending on their own. Others may find that after tallying up the bills, they have very little left over -- maybe nothing at all. This is a sign to seek professional help.
Many financial counselling services are non-profit. CFCS and Credit Counselling Society both offer free-of-charge services and can help people develop informal debt proposals that help them pay back what they owe at a lower interest rate -- or sometimes with no interest at all -- over a set time period.
Yet when debts become completely unmanageable, and it's unlikely the entire debt can be paid back, more drastic measures may be required.
People have a couple of options under the Bankruptcy and Insolvency Act, federal legislation, to get out from under crushing debt in a fair and timely manner, says Brent Warga, a trustee in bankruptcy with Deloitte and Touche.
The first choice is often a consumer proposal.
"With proposals, individuals essentially put forward a reasonable and affordable offer to their creditors to satisfy those debts," he says. "That can range from 100 cents on the dollar to a much lower offer depending on the situation."
Consumer proposals have become more popular in the last couple of years following changes to the act that increased the debt limit from $75,000 to $250,000, excluding mortgages on a principal residence.
But when paying back even a small portion of the debt is a major challenge, filing for bankruptcy may be the only option.
In bankruptcy, creditors may only receive a negligible return of their money if anything at all.
"Generally, all non-exempt assets -- equity in their home, a vehicle and investments -- will vest with the trustee, but the bankrupt will have an opportunity to re-purchase assets," he says, adding RRSPs are exempt for debt repayment.
Otherwise the assets will have to be sold to repay the debt.
Yet, bankruptcy can be a fresh start.
"For a first-time bankrupt without surplus income, the bankruptcy process can be as short as nine months," he says, adding it generally stays on a credit report for about seven years.
In contrast, a consumer proposal remains on a report for five years after completion.
In either case, you can still apply for credit so long as your disclose your circumstances, but it's unlikely a creditor will lend you money without a guarantor.
Not the end of the world...
Whether you have to simply cut costs, work more or file for bankruptcy, it's not as bad you may believe. Most people feel relieved once they tackle their debt and get on track, Neu says.
And certainly, no one should feel ashamed.
"Long story short, there is still a negative connotation to bankruptcy, but I would say it's not something individuals should avoid if their circumstances become too burdensome," Warga says. "You're not ostracized from the economy because you file for bankruptcy."
Reducing and eliminating debt doesn't have to mean life in the salt mines either, Neu says.
"A lot of clients will say, 'I will have no life at all,'" she says. "You can still have a life. It may not be regular dinners at The Keg, but people just have to learn to look at life in a different way."