We hear a lot about debt today: Things like personal debt is at all-time highs; government debt is out of control. What does it all mean? What’s the truth?
UNDERSTAND YOUR DEBT
It is most important to understand your debt. Where did that debt come from? Was it from a one-time event that was out of your control? For instance – were you out of work for a period of time? Is your debt increasing every month?
CREATE A CASH FLOW STATEMENT
It is imperative that you know what is coming into your household on a monthly basis and what is going out. If you find that your income does not match your expenditure – it’s easy to see that your debt can increase every month. For instance, if you find that you are $200 short every month- and that $200 ends up on your line of credit-you start one month with $200 and the following month you add $200 and on and on – you get the idea. Not only is the debt increasing but you have also added a bill payment that does not fit in the budget. Contrary to popular opinion – having a cash flow statement can be liberating because it creates knowledge and control and it means having a plan. Yes – plans create freedom.
NOT ALL DEBT IS CREATED EQUAL
There is a big difference between debt that is creating an asset and consumer debt. When I speak about debt that is creating an asset I’m talking about a mortgage on a home or a course that was needed for your work. When I speak about consumer debt I’m talking about the impulsive purchase of a big screen TV, a seventh pair of cute dress shoes or a new tool that you think is really cool but that you might only use once.
When your cash flow statement shows that you do not have enough flowing in each month to cover the expenses flowing out, there are two approaches you can take to fix this.
1. You may find that there is a behaviour that needs to be addressed. I’m certainly not against big screen TV’s and shoes. What may need to be addressed is the impulse buying. It’s so easy for us to see what we may see as a deal that we can’t pass up and to put it on a credit card. If there are a large number of impulse purchases in your history, you may have to look at these behaviours and put some limits in place. This is not to say that you can never do anything impulsive but wouldn’t it be great if you had that worked into a budget and you knew what discretionary funds you had to work with?
2. You may find that your purchases are all practical; that you are actually doing a great job and there is nothing in your cash flow that you can give up. Perhaps there just is not enough money coming in to pay your bills. For instance if you find that you are going to be $200 short every month – you have discovered that you need to earn another $200 a month. This could be a second job. This could be taking something that you love to do and turning it into something that you can earn some extra money doing. Be creative.
BE KIND TO YOURSELF
Be prepared to accept what you learn and take whatever steps you need to. Take control of your cash flow. Give yourself a pat on the back because you have examined the situation and are taking steps to correct it. Please do not beat yourself up for the situation you are in. It does you no good to blame yourself or beat yourself up.
When was the last time you checked your credit score? Within the last year? Five years? Never? If you have no idea what your score is, what makes up your score, and how you can improve your score, you’re not alone. On podcast Mindful Money Management, Jeffrey Schwartz, executive director of Consolidated Credit Counselling Services of Canada, teaches us the ins-and-outs of your all-important credit score.
Tune in here: Demystifying Your Credit Score.