8 steps to prevent personal debts – Debt consolidation Part II

by Karen

Would you like to be debt free? I am sure your answer is yes. Even if the debt incurs for the right reason such as student loans or emergency situation, you would still like for the debts to go away. I totally share this feeling. I had to get a student loan to pay for a MBA program which costed me $60,000. It did hurt my pocket badly, but it was the necessary investment for me to growth as a person and increased my earning potential, so I bit the bullet. It was a good debt, but I wanted to pay it off as soon as I could. So, the first chance I got, I consolidated my student debt into my mortgage and paid it off.

Like me, you can make it happens. You can prevent yourself from getting into debts or consolidate them to payoff sooner.  The even better news is: it is not hard. There is a “but” somewhere, and yes it is. But you need to be discipline and focus. Not so hard right? So let’s talk about the “how”. Here are the preventive measures to help you keeping debts from entering your life and create mental stress.

Steps to prevent personal debts

1. Manage the plastic – Don’t let it manage you

 Don’t forget for a second that a credit card is a short term debt. It is a mostly 21 days debt to be exact. You have a minimum of 21 day grace period before the credit card companies starting to charge you a hefty 15% – 19%interest rate on average. There are some credit cards companies use the 0% or lower introductory interest rate to lure you into a promotional period, but they will reverse the interest rate back to contractual rate (typical range from 15% to 19%) after the promotion. Here are my tricks to manage my use of the plastics.

Use debit.

The first trick to prevent you from getting into credit card debt is to use debit card more frequent. In contrast to credit card, a debit card draws the fund directly from your account. So if you use debit card for most of your transactions, it will prevent you from reaching for the credit card and spend more than you earn. This will also reduce the balance that you may still have on a credit card. If your credit card balance is not a large one, you can pay off the entire balance without paying the credit card companies a penny of interest and get yourself into debt.

Use just 1 credit card.

This trick is for the credit card reward points die-hard collectors. I am your pep and I get it. I have travel Elite card that gives me all sort of travelling perks corresponding with the card balance, so I use this card extensively. Now, the trick is not getting myself into spending frenzy while earn a lot of reward points every month. Here are the steps:

  • Create my personal budget so I know exactly how much I can spend.
  • Use 1 credit card only. I pick my Elite travel card because I want to get reward points for travelling convenience and perks.
  • Use this card for all transactions if permit. I use my card for 95% of my monthly spending.
  • Track all my transactions and compare to the budget to make sure I haven’t overspent.

This sounds exhausting, but it is not. I assure you! Most banks have online banking platform and you can extract the list of all your credit card transactions in 1 single click. Then copy and pasted the total balance into your personal budget to compare. Not hard at all. Just point, click and see.

You can tell that I am a cheapskate and I will do almost everything to save a buck! There I admit it. But this trick allows to earn the maximum rewarding points while still spend within my budget. Yes, it requires monitoring and effort on your part, but you will be reward with lot of perks and yes, you can outsmart the credit card company.

Limit the number of credit cards.

My friends laugh at me because I have 2 credit cards and I only use one of them. So technically, I have 1 credit card and I always payoff the balance by the grace period. I never carry a credit card balance more than 30 days (my card allows 30 days grace period). In contrast, my friends all have more than 4 cards. A friend of mine has every credit card that issued in Canada. I call him: “the card collector”. It was not surprise when he grabbed me for a debt consolidation chat couple months ago. The more cards you have, the higher the likelihood that you will overspend.

2 . The big B word – Budget

The bullet-prove solution for debt prevention is: have a personal budget and stick to it. Yes, you know it. I have to bring this subject up because it is very important. My sister is rolling her eyes right now, as I’ve I sufficiently talk your ears off on this subject but this is one proven method that will help you with spending discipline and debts management. End of lecture.

3 . Build in savings in your budget

You know the say: Save for the rainy days. Yes, emergency and unexpected things happen all the time. It is a part of life. Fate will mess with us at some points, but if you have some savings set aside, you will be in much better shape to deal with the unexpected. With savings, you will be more prepared financially to absorb loss of income, medical expenses and emergency.

I know you start rolling your eyes at the screen now. Yes, we know Karen. We should save. But how? Cost of living is not cheap. I save for retirement, vacation, kid tuition fund and you want me to do a rainy day fund too? What are you, sadist?  No, I don’t want to torture you. There are little tricks you can use to save for little rainy days fund without stress out about it.

First, start small.

The experts will tell you: you need to save 3 months’ salary. Nope, it is not useful advice when you just start saving. Start with a small amount so you can give yourself the high five or booty shake to build your saving stamina. Once you get over the first hurdle then go for higher amount. Don’t stress yourself out with how much you can save immediately. This is a long-haul game, so if you stress out at the beginning you won’t able to finish.

Breath, visualize and then start with $100 for the first 6 months. Once you train yourself to leave without the $100, and then move to $150 per month. You get the picture now? Building up your tolerance for less cash slowly, don’t just start with $500 saving. The drastic cut on spending can deter you. This is why most of people jump back to old spending habit because they can’t handle the drastic change. If you can do it, then kudo to you but for the other folks, try to go slow and steady.

Second, be consistent.

Start small but be consistent. My trick is automatic transfer. I created a monthly automatic transfer from my account on my payday directly to my non-registered investment account. This method forces me to live with less cash. If you need spending discipline, this method will be helpful. There is no shame in it. Use what make sense for you.

Where does your saving go?

Now that you have some tricks up your sleeve for saving, where can you stash this fund? Again, most experts suggest saving accounts or GIC. They have good reason for it. Saving account and GIC can be cashed out easily and take no time. Well, I don’t agree with their suggestion. No, I don’t love to contradict people but their advice is not sound for couple of reasons. Saving account doesn’t earn you a lot interest because ranges from 0.06% to 2.4% annual percentage yield. Banks don’t typically offer more than 2% interest on saving account. They typically offer high interest rate on a promotion only, so read the contract carefully.

In Canada, the annual inflation rate was 2.6% as of May 2018 while my American neighbours had a 2.8%. What this means is: even if you get the highest interest rate saving account (2.4%), you still loss 0.02% (as Canadians) or 0.04% (as Americans). In short, you actually lose some cash in a saving account. No thank, I will try another saving vehicle.

As for GIC, not all GIC products are cashable. Read your GIC account agreement carefully. For a typical 1 year GIC term, you can only cash out after 30 days and there will be restriction on maximum and minimum. The longer the term and higher the interest rate, the more restrictions there will be more penalty to cash out as well as minimum and maximum amount of the GIC. Need I say more? GIC is not a convenience and cashable investment as it is advertised.

Instead saving account and or GIC, I would encourage you look for a low risk and higher return investment and there are options such as mutual fund, bonds and stocks. I have been investing my rainy-day fund into bank stocks and in a non-registered account. Canadian bank stocks are general safe and earn a decent return on stock price as well as dividends. Plus, I know the industry well, so I am comfortable with this risk for my rainy day situation.  Read my post: Getting over your fear of investing in stock market and find the investing solution that work for you.

4 . Buy insurance

I am not an advocate for insurance industry, but I recognize that insurance is the right answer for certain situations. If you are very wealthy and have enough asset to “self-insured” then, save your cash and don’t buy insurance.  But for the folks who can’t afford self-insured yet (myself include), it is worth your effort to research and understand: what are insurance products available? How can you use insurances to plan your finance in most efficient way? And is insurance the optimal financial solution or is there an alternative? Insurance is another topic that I can talk endlessly. I envision another post of this important topic. For most of us, car, home and health insurance are essential. But as you look at your full finance planning picture, consider life, accidental illness, disability, and job loss insurance if you don’t have sufficient savings in place to deal with the unexpected.

5. Put your ego aside

It is easier said than done.  You will need to do some soul searching. We all have ego, but it is not healthy for your mind or wallet to live your life in pursuit of others. So, don’t keep up with the Joneses. Live happily and within your mean.

I had a customer who spent $80,000 on her dream wedding. It was an over the top event at a fancy hotel and all the guests talked about it for days. But my customer and her husband spent the next 5 years paying for the wedding debts and they missed out the chance to buy a house. When I met her, she regretted spending the $80,000 on 1 day instead of having it as down payment of their first home. So, know what is important to you and what do you need instead of want.

6. See a counsellor

If you have a gambling problem, I can’t help you. Seriously, gambling is an addiction and you will need professional counsellor to help. There is no other way except to face up to your inner gambling demon and fight it.

7. Consolidate your debts

Yes, we will get there. We will talk about this one in length next.

8. Don’t pay for unused space

Whether you rent or own, I encourage you to honestly answer the question of how much space do you need? House (rent or own) is typically the largest monthly expense for most of us. You can save yourself a lot of cash to payoff your debts if you don’t have to pay for the used space that you own or rent.

Let’s end here. I will continue with the next post on how you can consolidate debts. My last words on how to prevent debt is: it is all within your control. You can prevent getting into debts by putting your ego aside, live within your means and have a plan in place to deal with the emergencies and unexpected. Even life event challenge such as illness and divorce can be managed if you have plan in place. Living within a spending structure can be hard because you are not free to do what you want. However, the trade-off is well worth your effort.

Life is full of trade-offs, the key to have a blissful life is to make the right trade-off and know what is important to you. You will be able to make the most of your wealth, make your money grow for you and likely afford the life that you want. Till the next post.

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