Attitude ADJUSTMENT Money Makeover

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"I thought that I could make it work because I felt that I would be happier than the position I was in, and certainly, that's been the case, except for the money part," says the single, university-educated professional in her mid-30s.

Her gross annual income dropped to $58,000 from $66,000 last fall.

Vacations, home-repair emergencies and other expenses have pushed her line of credit to its $5,000 limit.

In the last few months, she has resorted to using three credit cards to deal with cost overruns. She carries a balance of about $1,500.

Her only savings are for retirement, about $30,000, not including her work pension plan. She also contributes $300 a month to Canada Savings Bonds, cashing them in February to make a contribution to her RRSP that consists of ethical mutual funds.

Betty owns a character home she estimates is worth $150,000 on which she owes $122,000. The mortgage is up for renewal in July, and she has discussed with her credit union the possibility of increasing her home-secured line of credit to help her eliminate credit card debt and pay for about $7,000 in required home maintenance.

"They said that they would increase my credit limit, but that they would also increase my interest rate," she says, adding the potential rate hike and associated loan fees have made her think twice. "I could probably get a better deal somewhere else with one of the big banks, but I've consciously decided to stay with the credit union."

Betty says she wants a plan to eliminate her credit card debt, cut costs, fund renovations and replace her car. She adds she doesn't "live large" and "lives off cash" during the week.

"Obviously I have these competing issues: I'm going to need a new car; I need to fix the house; I want to travel, and do all those other fun things that I normally do."

Certified financial planner James Kraemer says Betty's choice to move to a more fulfilling job is admirable, but choices of the heart often result in financial instability unless a person is willing to make sacrifices.

"Basically, she needs a change in attitude and philosophy," says the financial adviser with TFI Financial in Winnipeg.

What that boils down to is spending money only when she has it. "It's a whole different view when you're paying the 18 per cent or more on a loan instead of using a credit card as a 30-day, interest-free loan and paying it off every month."

Still, Betty does have enough income to eliminate her debt and start building for the future.

First, Kraemer says she should stop contributing to Canada Savings Bonds, which pay very little interest, and "the only one benefiting is the government." Under normal circumstances, Betty should contribute that money directly to an RRSP every month to benefit from dollar-cost averaging, making the purchases of equity mutual fund units less prone to price volatility. In contrast, with a lump-sum contribution, she could be buying Investment A at $10 a unit only to see its price drop to $8 the following month. By making monthly contributions, the overall average cost should be lower than making one large, yearly contribution.

For the time being, however, any savings should be used to eliminate her credit card debt.

Besides diverting $300 from savings bonds, Betty likely has additional money she can use to pay down debt, he says.

"When I looked at her total variable and fixed expenses every month, it came to $2,346, so with her monthly net of $2,992, she should have close to $650 left over every month."

Kraemer says it could be that her "living off cash" strategy is leading to inefficient money management and that she is spending more on discretionary expenses than she realizes.

"This cash strategy is more for people who are spendaholics and can't have credit cards."

This likely doesn't apply to Betty because, until her job change, she managed to pay off her credit cards, only using her credit line for home repairs.

Betty would be better off using her credit and debit cards for most expenses in the future so she has a paper trail to track her spending, he says.

Regardless of whether Betty finds additional money to pay her debts, she should also consider extending her credit line even if it means she has to pay a higher interest rate.

"Even if they increased her interest rate to six per cent, it's still better than credit card rates," he says, adding she should use a mortgage broker to find the best deal. "She's very loyal to her credit union and that's fine because she can give them a chance to match or at least offer a better deal than is currently on the table."

Getting the best interest rate is beside the point, since what she really needs is access to a few extra thousand dollars of her home equity to provide some breathing room for emergencies.

"If she uses the credit card for an emergency and doesn't have the money in the bank, she can transfer it to the line of credit at a much lower rate," he says, adding it's crucial she uses the line of credit wisely or it will only add to her problems.

But with some sacrifice and a little luck (no major emergency repairs), Betty should be able to turn her finances around within a year and be able to start saving again for retirement and enjoying all those fun things such as going on vacation.

"It's not a matter of saying, 'For the rest of my life, I have to do without,' " he says. "But she may have to for the next year in order to get the situation reversed so she's ahead of the game instead of behind it."

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Betty's finances

Income

Annual gross income: $58,668 (was $66,239)

Monthly net income: $2,992 (deductions include $300 for Canada Savings Bonds)

Expenses

Fixed expenses (including mortgage and PowerSmart loan payment): $1,546

Variable expenses (including food, gas and entertainment): $800

Total: $2,346

Unaccounted-for income after monthly expenses: $646

Debts

Line of credit: $4,790 with $5,000 limit at 4.25 per cent

Credit card 1: $477 at 19.5 per cent

Credit card 2: $908 at 19.9 per cent

Credit card 3: $169 at 18.5 per cent

Hydro PowerSmart loan: $2,038 at 6.5 per cent (ends in July 2012)

Mortgage

Payments: $350 biweekly on $122,000 principal

Paid: $140,000 with 10 per cent down payment

Interest rate: 5.05 per cent fixed, renewal date is July 2010

Home's worth: $150,000

Retirement savings

$30,000 in mostly socially responsible investment equity mutual funds

Car

Estimated worth $3,500; owner says it will likely last another year or two before repairs become too costly.

Republished from the Winnipeg Free Press print edition March 13, 2010 B11