By Matt Paul
December 3, 2018
It doesn’t take much more than a good budget and keeping to a financial plan.
Do you have a job and know how much you make every week, month and year?
If this is true then you are one of the many Canadians with financial security. With a steady cash flow, the task of being free financially should be a simple one, right? The truth is no. The banks do not teach financial literacy or adequately explain their products to assist customers in making informed choices. In spite of clear language guidelines, credit knowledge is taken for granted. Often a card or line of credit, even a mortgage is issued only to have the person come to terms with the deal after many subsequent payments.
When you make a consistent fixed amount, you can hopefully find a reasonable place to rent. If you pay for a phone, utilities, insurance these are usually the same every month. Methodically adding up all your monthly bills will give your perspective on how much you actually have to feed, cloth and transport yourself. There are certain things that you need and other things that you can make choices on. I like to use a spread sheet software, like Excel, to track my expenses.
Here is a sample:
Auto Insurance $90
Total Fixed Costs –$1365
Debt Minimums – (not fixed)
Line of Credit $140
Credit Card $100
Car Loan $285
Total Minimums – $525
With this sample example you should notice that this person pays $1900.00 before having money for gas in the vehicle, food on the table or clothes on the back. This is not an outrageous picture of a normal single person in Canada. Keep in mind though that under Debt Minimums, if we pay only our minimums, a debt can take 50 to 100 years to pay off. In the case of the car loan, the $285 was a 5 year amortization. It is important to know the terms and repayment conditions before deciding to use one’s credit. A credit card with a minimum of $100.00 payment on a $3500.00 balance could take 350 months if only $10.00 was going to the principal every month and likewise with a line of credit. So while it looks like the $1900 is manageable, a more healthy reconciliation of the expenses amount would be $2100.00 to really tackle the Line of Credit and Credit Card debt.
Before food or gas or entertainment these obligations need to be met. Once a year, or more frequently in the case of life changes, these items could be reviewed and adjusted to a degree. Often times though we are not able to change the housing costs or certain fixed costs. There are ways to become more financially free. One big way is to eliminate debt.
Life happens. Expenses happen.
We use credit or savings for things we need right now. In this case an aggressive repayment plan would be tackling the debt before any saving or investing in the future would take place. Savings rates vary from 1-5 % and investment returns can vary so when faced with interest costs of between 6.99 and 21.99 % or more. First thing to do is not take on any more debt and pay down what you have. When you pay it down or off, make sure to renegotiate better interest rates with the company when you have the leverage.
I have only dealt with a simple example of a person with no children, no spouse or pets etc. If it feels like your situation is similar and you need help, you can contact me at firstname.lastname@example.org for a personalized approach. I can talk about more complex scenarios involving the family budget, multiple debt products and restructuring options. Until next time.
This is not financial advice. Nor is this legal advice. The author has over 9 years of experience working for Canada’s largest financial institution in Credit Collections and Recovery. Everything written is his own personal opinion which you may find useful.
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