I’m a 35-year-old single parent with absolutely nothing socked away for my retirement and a whole heap of debt. I’ve got two maxed credit cards and a line of credit, a car payment and a mortgage. I’m paying stupid amounts in interest every single month. I feel strangled by the amount of debt that I’m carrying.
And I’m not alone, says Patricia Lovett-Reid, a Toronto mom of four who is a Certified Financial Planner and senior vice-president at TD Waterhouse Canada. She tells me Canadian households now owe about $1.50 of debt for every $1 they have in personal after-tax income.
Yikes! That sounds dire — but, Lovett-Reid assures me, there’s always a way out of any messy money situation. Here’s how to get started:
Prioritize payments My first task, says Lovett-Reid, is to list every single debt I have, and rank them from highest to lowest interest rate (credit cards, then my car loan, then mortgage). The debt at the top of the list is the one I should tackle first, boosting payments to that one whenever I can, while chipping away at the others. Unless you simply don’t have the money, avoid making just the minimum payment, or you’ll end up paying interest on top of interest and take much longer to pay down your debt, advises Lovett-Reid.
Kick the buying habit I love splurging on restaurants, and have all kinds of justifications for paying with my credit card. And I always regret it afterwards, when the meal is a memory and maybe didn’t live up to my expectations. As Lovett-Reid points out, I’ve got to figure out a way to overcome those in-the-moment urges.
She told me about the strategies she uses to curb her spending. She doesn’t carry credit cards in her wallet, which means if she’s ever tempted to make a big purchase, she has to go home and get a card. That extra step gives her time to think about whether she really needs the item — and whether she’s just being seduced by the fact that something is on sale.
She also advises avoiding big-box stores, which can offer good deals, but often result in overspending on huge quantities of food that either sits in the pantry forever or spoils and goes to waste. (I know I’m guilty of this.)
So, when I’m applying these ideas to my own situation, the goal is to cut back my spending until I’m at the point where I spend less money than I earn. '
Get your family on board Although I feel ready and willing to kick my shopping habit, my four-year-old doesn’t quite get that I can’t always buy her everything she wants.
“Get her rewired now — let her know that you only have so much money. Make it a partnership and start looking at how much money you can save by working together,” says Lovett-Reid. “When you start to get children aligned with you, nobody feels penalized when you have to save money.”
Manage your mortgage The low interest rates right now had me wondering whether I should try to get out of my mortgage, which costs me 5.6 percent interest. These days, the best five-year fixed-rate mortgages are about 3.7 percent, which results in about $17,185 of interest over a five-year term.
But here’s the kicker: I still have two years left in my mortgage term, and the lender would charge me $7,000 to break it early. Consequently, Lovett-Read says this probably isn’t a good option for me, but for those locked in to a longer term, it’s definitely worth checking out. Ask your lender to crunch the numbers for you.
Also, Lovett-Reid says we shouldn’t be afraid to shop around when it comes to finances. For example, another lender might be willing to cover the cost of breaking your old mortgage, if you move it over to them. “Your money is mobile and you need to find someone who will help you and treat you well.” Call a couple of your bank’s competitors and ask for a free consultation with one of their financial advisers. They’ll hook you up with a branch close to your home or work.
Look into group rates Because the interest rate on my credit card balances is so high (12.9 percent!), I was thinking of switching everything to a lower-interest credit card, but Lovett-Reid advises against this. “Typically, credit card rates are much higher than the rates you’d get from a consolidation loan or a line of credit at your bank, especially in this low interest rate environment.”
The added bonus? I can use the loan or line of credit to group together all of my debts, including those pesky credit cards — so that instead of a mess of monthly payments, I’ll have just a single bill to worry about. Plus, Lovett-Reid says, I’ll likely pay less interest overall.
I’ll swallow my fears and talk to the bank because Lovett-Reid assures me they’ll want to help if they can — and not just out of the goodness of their hearts. Working with you on a payment plan you can manage means the the bank gets to recoup they money you borrowed, and they get to keep you as a customer.
5 signs you're in financial trouble See a credit counsellor (search for one near you at creditcounsellingcanada.ca) if this sounds familiar:
1. You make only the minimum payments on credit cards every month. 2. You use one credit card to pay another. 3. There’s not enough money left after making debt payments to pay for utilities. 4. Money worries keep you up at night. 5. Collection agencies are calling you.
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