Getting out of debt is one of the hardest things to accomplish in life. There are so many ways to dig ourselves into a financial hole that it’s nearly impossible to get out. I’ve reviewed the book “The Wealthy Barber” by David Chilton and how he writes about saving 10% of your income, but let’s face it, many Canadians struggle to get by on a monthly basis let alone have enough to save 10%.
There’s also been a lot of backlash over the recent legislation to increase the TFSA limit from $5500 to $10 000. Pundits argue that increasing the limit only benefit the rich and that’s because it’s impossible to save when there are so many bills to pay and so much debt to repay. Whether it be, credit card debt, student debt, line of credit or big huge mortgages, Canadians have gorged themselves on debt because of record low interest rates. It’s been a constant debt spiral for many people as it’s so easy to borrow money to continue living beyond ones means. As debt repayment eats up more and more of one’s monthly income how can someone possibly save for the future and invest?
Building A Budget
Let’s throw David Chilton’s advice out the door right now. If you have no money left over, or you’re going negative every month then that advice of saving 10% just won’t work. One of the neat techniques that I’ve been experimenting with over the last two months is to allocate money towards my expenses before I even make them. This is a technique that I’ve learned from an application called You Need A Budget or YNAB for short.
YNAB is an app that runs on both a computer or a cellphone and will help guide a user to start living not on this months’ paycheque but the previous month. It’s an interesting concept to say the least. It teaches the you to try to get yourself away from living paycheque to paycheque, but instead to live off the savings of the previous month. It’s a very powerful tool that will allow you to turn your finances around so long as you stay diligent.
Assign Your Money Tasks
One of the key concepts is to determine what you need to spend your money on for the next month. All of these should be written out. Even if you’re not using an application like YNAP, a good technique is to stick envelopes on your fridge, label the amount of money that needs to be allocated on the envelope and then label what that money is for. The goal is to make you aware of what you need to pay for in the upcoming month. It’s also very transparent what you are spending your money on.
When you’ve actually paid or spent money for a particular envelope, the dollar amount on the envelope should go down. That’s because you’ve already spent money for that category. If you follow this method it becomes clear how much more money you can spend on that category. This helps you plan what you can do with your next dollar.
The Hardest Part: Sacrifices
This is important if you want to get out of debt. You need to allocate money to debt repayment. This might mean that you will have to allocate less money to entertainment, clothes, dining out, etc. What I’ve found the hardest in budgeting is realizing that after all the necessities in life like food, shelter, utilities, etc. is that there is really very little left over. The necessities don’t even cover the debt repayment, which the next thing that needs to be covered.
Paying off debt is a priority before anything else that is fun. Unfortunately, that has to be a fact when you’ve dug yourself a financial hole. It might be hard to say “no” to your friends when they approach you to go hit up the club, but if you look at your budget and realize that you still have $200 left to pay on your debt and your bank account is showing only $200, then it’s time to make the right choice. No one said getting out of debt was easy or pain free.
Sometimes our budgets don’t work out exactly how we plan them. That’s fine. What needs to be done is that choices we made in our budgets have to get adjusted. For instance, if groceries went over the budget for the month then something else in the budget has to be decreased to make up the shortfall. Maybe for the current month you had to put in less gas for the car. It’s quite possible to take $30 dollars from the gas budget and put it towards groceries instead. It’s all about moving your money around and making the budget work for you. Eventually you’ll get a good sense of how much to allocate to each thing such that these changes will become less frequent.
Since this system is so transparent you can freely move the remaining allocation of your money around until it suits your needs. The only thing you can’t do is increase your budget in something without decreasing something else. Remember that when you budget, you want to ensure that maximum ceiling you can spend reflects what you are actually taking in as income on a monthly basis.
It takes a lot of discipline to not go over the budgets that you’ve assigned for yourself. It is so easy to just take out the credit card and swipe it for your purchase. Cheating by using a credit card or line of credit to pay for things when it exceeds the budget is just a recipe for disaster.You wouldn’t be truthful to yourself and it defeats the purpose of the budget in the first place. In essence you would be living a lie, just to save face in front of others. That’s a terrible predicament and eventually those lies will catch up to you.
Be fair to yourself. I’m sure those around you won’t feel slighted if they knew you were tackling your finances with vigour and perhaps they too will be motivated to help you.
Getting Over The Hump
It takes time, but once debt is retired, it’s like you’ve given yourself a raise. Imagine the possibilities of what you can do with that extra money in your personal budget. Save it. Invest it. Allocate more towards your entertainment. The ideas could be limitless.
Generally once debt is paid off, and you can start living off your savings rather than the current month’s paycheque, then it’s time to start considering saving 10% of your income.