Sometimes, it's the little things that get you going in the right direction. Anyone who is trying to recover from extreme debt knows that one of the very first steps is to STOP USING YOUR CREDIT CARDS. Yes, it is obvious that to eliminate debt, you have to stop accumulating new debt, otherwise you're just running on a treadmill, or perhaps getting thrown off the back of one.
But this is easier said than done: pulling out a credit card to pay for something is a long-standing habit for many in this situation. Even worse, if you are using your credit cards to cover truly essential expenses, such as food, then it may not even seem possible to kick that credit addiction.
The good news is that it definitely is possible. I can tell you think because I'm doing just that, right now. If you are in extreme debt, then it may not be as simple as destroying your cards one day--the implications of this may be kids going without breakfast. But over time, if you take the right steps, you can get there.
Building a reasonable emergency fund is critical. I started transferring $100 from every biweekly paycheck to a savings account a few moths ago, and I'm nearing $2,000 in the emergency fund, despite a bit of an emergency fund malfunction. Having this emergency fund is so incredibly comforting; I know that if I have no other options, I can always use that money to get by for a short period of time, rather than racking up even more debt. I plan to continue to build this emergency fund for the foreseeable future--perhaps until it reaches at least $10,000, given our significant monthly expenses.
Beyond the emergency fund, I have gradually eliminated all the automatic payments from my credit cards. For example, I used to pay my monthly auto and car insurance from my Visa. This seemed like a good idea at the time, since I never had to worry about having enough money in my bank account for this. The problem, of course, is that this put a serious hamper on gaining any kind of momentum in lowering my Visa balance. Psychologically, seeing that balance go down, even by a small amount every month, is so important.
Finally, all day-to-day purchases are paid for by cash or debit, even when a credit card would be more convenient. For example, entering your debit card PIN at the gas station, when it's cold and snowy out, is much less appealing than swiping your quick-pay pass (that's linked to your credit card). But by avoiding this, you stand a good chance of seeing no new purchases on your monthly bill--what a great sign of progress.
Saturday, February 20, 2010
Monday, October 26, 2009
Borrowing from Retirement
Not everyone agrees whether you should focus on paying off debt before saving for retirement. On the one hand, if it will take you many years, or even decades, to eliminate every last penny of debt, it may be too late to save enough for retirement before you plan to stop working. On the other hand, diverting money to retirement savings while you have too much debt outstanding may prevent you from reducing your debt load, or worse.
When you are in extreme debt, there is no good answer to this question. The reality of an extreme amount of debt is that it will almost certainly take an extended period of time to pay off. So to date, I have been contributing about 5% of my full-time salary towards my company's pension plan, with the company chipping in another 5%. The problem is, I don't think this is working.
Yes, I am slowly accumulating retirement savings, but at what cost? Despite making a number of significant changes to our spending habits, we continue to run out of rope when it comes to finding ways to make ends meet. Last month, I even had to dip into my newly created emergency fund, cutting it in half to avoid running out of cash.
All of this has me questioning my current strategy of continuing to save for retirement right now. Yes, the company matching of my 5% contribution seems like a shame to give up, but extreme times call for extreme measures. Perhaps diverting this 5% of my income towards debt repayment will start the ball rolling in the right direction.
But of course, simply diverting retirement savings towards debt repayment is not enough. I realize it is critical to have a plan to continue to decrease spending and increase earnings to the point where there is enough leeway to restart retirement savings. And given the amount of debt we have to repay, we cannot wait until it is all paid off to reach that point. I also realize that every year that goes by without continuing our retirement savings will have a significant impact on the overall amount we will be able to save before we may want to retire.
I will not be able to make thing change until January, since contribution rates can only be changed annually. Therefore, in the mean time, I have decided to withdraw about $4,000 from my retirement savings, to keep us going until then. Short sighted? Perhaps. But at this point, I feel this is a better option to falling behind on our bills, which we have so far managed to avoid. I think that as long as we use this only as a means to buy us the time to get our spending and income to where it needs to be, the sacrifice will have been justified.
Whether that actually happens, time will tell. Stay tuned.
When you are in extreme debt, there is no good answer to this question. The reality of an extreme amount of debt is that it will almost certainly take an extended period of time to pay off. So to date, I have been contributing about 5% of my full-time salary towards my company's pension plan, with the company chipping in another 5%. The problem is, I don't think this is working.
Yes, I am slowly accumulating retirement savings, but at what cost? Despite making a number of significant changes to our spending habits, we continue to run out of rope when it comes to finding ways to make ends meet. Last month, I even had to dip into my newly created emergency fund, cutting it in half to avoid running out of cash.
All of this has me questioning my current strategy of continuing to save for retirement right now. Yes, the company matching of my 5% contribution seems like a shame to give up, but extreme times call for extreme measures. Perhaps diverting this 5% of my income towards debt repayment will start the ball rolling in the right direction.
But of course, simply diverting retirement savings towards debt repayment is not enough. I realize it is critical to have a plan to continue to decrease spending and increase earnings to the point where there is enough leeway to restart retirement savings. And given the amount of debt we have to repay, we cannot wait until it is all paid off to reach that point. I also realize that every year that goes by without continuing our retirement savings will have a significant impact on the overall amount we will be able to save before we may want to retire.
I will not be able to make thing change until January, since contribution rates can only be changed annually. Therefore, in the mean time, I have decided to withdraw about $4,000 from my retirement savings, to keep us going until then. Short sighted? Perhaps. But at this point, I feel this is a better option to falling behind on our bills, which we have so far managed to avoid. I think that as long as we use this only as a means to buy us the time to get our spending and income to where it needs to be, the sacrifice will have been justified.
Whether that actually happens, time will tell. Stay tuned.
Thursday, October 15, 2009
Carnival of Personal Finance
I am happy to report that Extreme Debt Story was included in the Carnival of Personal Finance last week, for the article Emergency Fund Malfunction. Please visit last week's Carnival here, to find the other great articles it featured.
Monday, October 5, 2009
Emergency Fund Malfunction
Every good personal finance expert will tell you that the first thing you need to do when trying to get out of debt is build a basic emergency fund, typically $1,000. So, a few months ago, I went and created a new ING Direct sub-account called "Emergency", and set it to automatically transfer $100 every other week from my checking account, to align with when my pay comes in. As of last week, I was up to $800--almost done with the initial emergency fund goal.
But then, something went terribly wrong.
Despite the fact that I believe we have gone to great lengths to get our spending under control, including making many cutbacks in many areas, our expenses are still not significantly lower than our income. In some months, we pretty much broke even. In other months, we still spent more than our income. The reason for this is that prior to the cutbacks, we must have been spending so much more than our income, growing and growing our debt load, that even with significant expense trimming, we're still not in a great position.
This month, a few unexpected expenses came up, and a week and a half from my next pay day, I found myself in a position where I could not pay a couple of bills without withdrawing cash from my credit card. So between the option of doing that, and withdrawing from my emergency fund, I chose the emergency fund. How much did I take from it? Half. Yes, the bill is now paid, but I am back to just $400 in the emergency fund.
Talk about an emergency fund malfunction!
Was this the right thing to do? When you're piled under so much debt and fighting just to survive, there are very few "right" options. Ultimately, the right thing to do is to cut spending further, and raise income as well, to the point where all expenses can be covered without looking for other options. But when you are in extreme debt, it takes longer to make enough changes to spend less than you make, unless you are willing to do something drastic like sell your home, which I am not willing to do, at least not unless I have absolutely no other choice.
When you are in extreme debt, cutting your spending may take several rounds of changes, and even then, there is only so much you can cut. On the flip side, adding income sources also takes time. Whether you are starting an on-line business, or getting a part-time job, the new income flows are not instantaneous.
Until your spending is well enough under your income to account for budgeting flaws, you are left with few options when that bill is staring you in the face. Sacrificing your emergency fund is like throwing your life vest overboard when you have no idea if a storm is approaching. Here's to hoping for clear sailing ahead.
But then, something went terribly wrong.
Despite the fact that I believe we have gone to great lengths to get our spending under control, including making many cutbacks in many areas, our expenses are still not significantly lower than our income. In some months, we pretty much broke even. In other months, we still spent more than our income. The reason for this is that prior to the cutbacks, we must have been spending so much more than our income, growing and growing our debt load, that even with significant expense trimming, we're still not in a great position.
This month, a few unexpected expenses came up, and a week and a half from my next pay day, I found myself in a position where I could not pay a couple of bills without withdrawing cash from my credit card. So between the option of doing that, and withdrawing from my emergency fund, I chose the emergency fund. How much did I take from it? Half. Yes, the bill is now paid, but I am back to just $400 in the emergency fund.
Talk about an emergency fund malfunction!
Was this the right thing to do? When you're piled under so much debt and fighting just to survive, there are very few "right" options. Ultimately, the right thing to do is to cut spending further, and raise income as well, to the point where all expenses can be covered without looking for other options. But when you are in extreme debt, it takes longer to make enough changes to spend less than you make, unless you are willing to do something drastic like sell your home, which I am not willing to do, at least not unless I have absolutely no other choice.
When you are in extreme debt, cutting your spending may take several rounds of changes, and even then, there is only so much you can cut. On the flip side, adding income sources also takes time. Whether you are starting an on-line business, or getting a part-time job, the new income flows are not instantaneous.
Until your spending is well enough under your income to account for budgeting flaws, you are left with few options when that bill is staring you in the face. Sacrificing your emergency fund is like throwing your life vest overboard when you have no idea if a storm is approaching. Here's to hoping for clear sailing ahead.
Wednesday, September 30, 2009
First Steps Out of Extreme Debt
When you are extreme debt, the first big steps in the right direction are the hardest. Even if you feel completely committed to tackling your debt problem, there are just so many areas that need improvement that it is difficult to know where to focus your attention, and at the same time it feels like small changes like not buying that coffee at the coffee shop couldn't possibly dig you out of the enormous hole that you're in.
There is no shortage of good advice on personal finance blogs, or in books. But reading through the majority of these sources, people are generally trying to eliminate something like $20-50K of student loans, on top of $5-20K in credit card debt. Few and far between are stories of people in hundreds of thousands of dollars in debt, and still trying to stay afloat. Perhaps this is because most people who get to this level of extreme debt just don't make it, declare bankruptcy, and pay a dear price.
Does this mean that the general techniques for debt recover don't apply to those in extreme debt? No, I believe the same techniques do apply, but since the problem is of a significantly larger scale, the solutions must also scale if they are going to succeed. Also, it will likely take much longer to recover from extreme debt compared to "regular" debt, so patience and persistence are key.
The first steps you take in the right direction will seem trivial compared to the size of your debt load. But don't let that be a reason not to take those steps anyways! Remember, you got yourself into an extreme amount of debt through both small and large purchases, and so you can get out of it the same way, but in reverse.
Here are the first steps that I took:
This was discouraging at first, but I decided to think of it as the first step, as opposed to the final solution. And for a first step, putting the breaks on accumulating debt seemed like a reasonable accomplishment. The key now, of course, is to take the next step, and then the next, so that we can start seeing some actual debt reduction.
There is no shortage of good advice on personal finance blogs, or in books. But reading through the majority of these sources, people are generally trying to eliminate something like $20-50K of student loans, on top of $5-20K in credit card debt. Few and far between are stories of people in hundreds of thousands of dollars in debt, and still trying to stay afloat. Perhaps this is because most people who get to this level of extreme debt just don't make it, declare bankruptcy, and pay a dear price.
Does this mean that the general techniques for debt recover don't apply to those in extreme debt? No, I believe the same techniques do apply, but since the problem is of a significantly larger scale, the solutions must also scale if they are going to succeed. Also, it will likely take much longer to recover from extreme debt compared to "regular" debt, so patience and persistence are key.
The first steps you take in the right direction will seem trivial compared to the size of your debt load. But don't let that be a reason not to take those steps anyways! Remember, you got yourself into an extreme amount of debt through both small and large purchases, and so you can get out of it the same way, but in reverse.
Here are the first steps that I took:
- Cut spending on anything that was not really important to me and my family. This included things like eating out, trips to the coffee shop, new gadgets and home electronics, most new clothing, and house cleaning services.
- Gave up our second car. Instead, make more use of public transit, walking, bicycling and occasionally renting a car.
- Stopped eating out for lunch at work. Instead, bring leftovers or a quick sandwich from home.
- Downgraded to basic cable. No time to watch all those extra channels anyways!
- Stopped using the dry cleaner for clothing that isn't "dry clean only". Time to dust off that iron!
- Switched to regular coffee from premium coffee beans. Sure, doesn't taste quite as good, but if you experiment with different brands you can get close enough.
- Started to grocery shop in more than one store, to maximize value from sales.
- Consolidated as much credit card debt as possible into a new line of credit, with an interest rate of 5.75%, versus the 19% I was paying on the cards.
- Started to investigate additional income sources, both online and off-line.
This was discouraging at first, but I decided to think of it as the first step, as opposed to the final solution. And for a first step, putting the breaks on accumulating debt seemed like a reasonable accomplishment. The key now, of course, is to take the next step, and then the next, so that we can start seeing some actual debt reduction.
Sunday, September 27, 2009
Running out of Rope
Anyone in a significant amount of debt knows all too well the feeling of running out of rope. This is a gut-wrenching, sinking feeling you have when you realize how close you are to complete financial chaos. Now, for those people without any significant debt-load, you may see a situation such as mine as financial chaos in the first place, and you are probably right. But for those of us in the midst of such a situation, chaos means not knowing how you are going to pay your basic bills, or buy groceries for your family, or simply make the ends that you have meet anymore.
When you have extreme amounts of debt, you become good at finding ways to pay what you need to pay. When I say "good", I don't mean good in the financially sound sense, but good in the get-it-done-at-all-costs way. You may do things like withdraw some cash from a credit card, transfer money around between credit cards or lines of credit to make minimum payments, or even withdraw from retirement or other savings. All of this behaviour is why you are in debt in the first place, but regardless, when you have an expense staring you in the face that you feel must be paid, this is what generally takes place.
But what happens when you start to run out of options? First, panic. Your mind frantically starts searching for other possible alternatives. When you can't think of any, the panic increases, followed by a deep sense of dread. Could this be the end? Will I lose everything? Unfortunately, for someone in extreme debt, this is not just paranoid thinking--it could happen on any given day that brings just too many expenses to handle, despite how many financially questionable tricks you have up your sleeve.
Of course, anyone in this situation knows what the right thing to do is: cut back spending to only what is absolutely necessary, make sure this results in you spending less than you earn, and use the difference to pay down the debt for as long as that takes. But the problem, of course, is that while this may be so incredible simple in concept, it is very, very difficult to implement when you have so many conflicting habits rooted in your life.
For example, if your mortgage is so large that the payments consume too much of your income, there is no way to reduce these payments other than to sell your house and move to a less expensive one, or a rented property. According to basic math, there is no doubt that this is the #1 fastest way to fix your financial problems. But selling your house is a huge emotional endeavour, not to mention a logistical one, and gaining the mental momentum to actually do this, unless you have no other choice, is extremely uncommon.
This is the case for me: as I have mentioned previously, we bought the most expensive house the bank would allow us to finance, and we absolutely love everything about it. Giving up the house, the area, the neighbours, and the life here that we expect our children to have would be a huge sacrifice, and not one we feel able to make. On the other hand, selling this house would immediately wipe out the vast majority of our debt, and would likely leave us free and clear. We could easily afford to rent a nice enough house in a nice enough area for several years, while we accumulated the cash to buy another house in the same area we are in now.
Doing what you know is the right thing financially is far from easy. But when you start running out of rope, and are losing your other options, everything is on the table. That said, I think that until you are forced to make a major change that everything but the dollars and cents says is right, it just will not happen.
When you have extreme amounts of debt, you become good at finding ways to pay what you need to pay. When I say "good", I don't mean good in the financially sound sense, but good in the get-it-done-at-all-costs way. You may do things like withdraw some cash from a credit card, transfer money around between credit cards or lines of credit to make minimum payments, or even withdraw from retirement or other savings. All of this behaviour is why you are in debt in the first place, but regardless, when you have an expense staring you in the face that you feel must be paid, this is what generally takes place.
But what happens when you start to run out of options? First, panic. Your mind frantically starts searching for other possible alternatives. When you can't think of any, the panic increases, followed by a deep sense of dread. Could this be the end? Will I lose everything? Unfortunately, for someone in extreme debt, this is not just paranoid thinking--it could happen on any given day that brings just too many expenses to handle, despite how many financially questionable tricks you have up your sleeve.
Of course, anyone in this situation knows what the right thing to do is: cut back spending to only what is absolutely necessary, make sure this results in you spending less than you earn, and use the difference to pay down the debt for as long as that takes. But the problem, of course, is that while this may be so incredible simple in concept, it is very, very difficult to implement when you have so many conflicting habits rooted in your life.
For example, if your mortgage is so large that the payments consume too much of your income, there is no way to reduce these payments other than to sell your house and move to a less expensive one, or a rented property. According to basic math, there is no doubt that this is the #1 fastest way to fix your financial problems. But selling your house is a huge emotional endeavour, not to mention a logistical one, and gaining the mental momentum to actually do this, unless you have no other choice, is extremely uncommon.
This is the case for me: as I have mentioned previously, we bought the most expensive house the bank would allow us to finance, and we absolutely love everything about it. Giving up the house, the area, the neighbours, and the life here that we expect our children to have would be a huge sacrifice, and not one we feel able to make. On the other hand, selling this house would immediately wipe out the vast majority of our debt, and would likely leave us free and clear. We could easily afford to rent a nice enough house in a nice enough area for several years, while we accumulated the cash to buy another house in the same area we are in now.
Doing what you know is the right thing financially is far from easy. But when you start running out of rope, and are losing your other options, everything is on the table. That said, I think that until you are forced to make a major change that everything but the dollars and cents says is right, it just will not happen.
Tuesday, September 22, 2009
Driving and Money
To turn around your financial life, you need to take a holistic approach. That is, you cannot make changes in some areas of your life, while leaving others the way they were. Without applying a new way of dealing with money, and everything related to money, to every area of your life, your savings in one area will simply leak out another.
A good example of this is driving. Until recently, I had always been someone who drove a little faster than the speed limit (and sometimes, without even paying attention, quite a lot faster). I also did not take much care to fully stop at stop signs, or follow other rules of the road too closely. For years, this seemed fine--I did get the occasional minor ticket every couple years, but nothing to worry about.
Then, all of a sudden, over the course of just over three years, I ended up with four minor tickets: three for speeding and one for an illegal U-turn. To make matters worse, I then had a car accident which included a charge for an unsafe turn, a ticket for not having my ownership signed (who knew I hadn't signed it for the years that I'd had it), and a ticket for not completely stopping at a stop sign. Uh Oh.
At first, I was frustrated and confused as to why I was being caught for what seemed like so many insignificant issues, especially when I had been driving the same way for many years. Having this many convictions on my record will certainly result in a huge insurance rate increase, which is the last thing I need, and flies in the face of all the other changes we have made to get our financial situation under control.
But then, it dawned on me: if I was serious about revamping my financial outlook, it was hypocritical to continue to drive the way I was used to. An article on The Simple Dollar with some Thoughts on Speeding drove the point home. From that moment on, I decided to completely change my driving habits: it was time to slow down, and obey all the rules.
The first week or so of driving this way seemed unnatural, and I had to continuously resist the urge to speed up. One useful technique I continue to use is to put on the cruise control when I hit the speed limit, as long as the road is open (which is when speeding is most tempting anyways). But after the initial adjustment period, this new, slower, safer way of driving seemed just fine. In some ways, it is a relief not to have to worry about passing cars--now I just smile when I see someone weaving through traffic, trying to get home 10 minutes before everyone else.
The moral of this story is that there are many obvious ways that you can reduce spending, and manage your finances more responsibly. But there are also some less obvious areas of your life, where your behaviour can eventually result in places where your money will start to leak out. Sometimes, sealing those leaks requires a change in mindset about what is really important.
A good example of this is driving. Until recently, I had always been someone who drove a little faster than the speed limit (and sometimes, without even paying attention, quite a lot faster). I also did not take much care to fully stop at stop signs, or follow other rules of the road too closely. For years, this seemed fine--I did get the occasional minor ticket every couple years, but nothing to worry about.
Then, all of a sudden, over the course of just over three years, I ended up with four minor tickets: three for speeding and one for an illegal U-turn. To make matters worse, I then had a car accident which included a charge for an unsafe turn, a ticket for not having my ownership signed (who knew I hadn't signed it for the years that I'd had it), and a ticket for not completely stopping at a stop sign. Uh Oh.
At first, I was frustrated and confused as to why I was being caught for what seemed like so many insignificant issues, especially when I had been driving the same way for many years. Having this many convictions on my record will certainly result in a huge insurance rate increase, which is the last thing I need, and flies in the face of all the other changes we have made to get our financial situation under control.
But then, it dawned on me: if I was serious about revamping my financial outlook, it was hypocritical to continue to drive the way I was used to. An article on The Simple Dollar with some Thoughts on Speeding drove the point home. From that moment on, I decided to completely change my driving habits: it was time to slow down, and obey all the rules.
The first week or so of driving this way seemed unnatural, and I had to continuously resist the urge to speed up. One useful technique I continue to use is to put on the cruise control when I hit the speed limit, as long as the road is open (which is when speeding is most tempting anyways). But after the initial adjustment period, this new, slower, safer way of driving seemed just fine. In some ways, it is a relief not to have to worry about passing cars--now I just smile when I see someone weaving through traffic, trying to get home 10 minutes before everyone else.
The moral of this story is that there are many obvious ways that you can reduce spending, and manage your finances more responsibly. But there are also some less obvious areas of your life, where your behaviour can eventually result in places where your money will start to leak out. Sometimes, sealing those leaks requires a change in mindset about what is really important.
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