Are you Ready for Change?
Turning the Page – Is a 4 part series on Financial Reform -by Sheila Smelt
Okay. 2013 is done and 2014 lies before you. How will this year be different than the last for you?
For most of us it won’t be much different at all and that’s frustrating. Beginning in January 2014 you hear TV ads and news items from financial professionals talking about maximizing your contributions to RRSP’s, planning for retirement, investment strategies, and on and on. And you missed the RRSP deadline, again! Even if you hadn’t forgotten, how can you invest if you don’t have a penny left over to make those contributions?
How about making a commitment to yourself to take control of your finances? We’re not talking about investment strategies or getting rich quick. If you were thinking along that line, sorry to disappoint. We’re talking about knowing and controlling how you spend your money every day and making informed decisions that will have an impact on your future.
We’re talking about 4 simple steps that can change your life. In this article we’ll start with steps one and two.
So, where do you start?
Let’s start by looking at your debt.
You can’t invest, or save, or plan for the future if you don’t get rid of your debt. Christmas is over and those dreaded credit card statements will be arriving any day and they have to be dealt with. Take that stack of statements, along with the overdraft on the chequing account, the line of credit, and every other debt except for your car loan and mortgage, and organize all the debts in the order of highest interest rate to lowest. On a spread sheet list all of the debts including the account number, the interest rate, the minimum monthly payment, and the balance owing.
Total the minimum monthly payment of all the debts. This is the amount which must be paid each month in order to keep the accounts in good standing. Keep that minimum monthly payment in mind and proceed to step two.
At this point you need to look at your cash flow.
This determines your ability to cover your general living expenses and to pay down your debts. Most of us use our debit cards, online banking or credit cards for the majority of our purchases. All of these systems provide online money management tools that will show you where you are spending your money. For example, purchases at Tim Horton’s or McDonald’s most likely belong grouped as “dining out” or “entertainment”, purchases at Shell most likely belong in “vehicle gas & maintenance”. This will help you see where you are spending your money.
If you use cash for the majority of your purchases you will need to get receipts for all your purchases for at least 3 months and sort the receipts the same way. A template for organizing and tracking expenses is available by sending an email to [email protected] with “cash flow template” in the subject line.
We should stop at this point and talk about the difference between “needs” and “wants”. Differentiating between “needs” and “wants” seems to be a problem for some people. “Needs” are the things you must have in order to survive and generally include: rent/mortgage, hydro, heat, phone, food, prescriptions, BC medical insurance, and transportation (including your car loan payment). Clothing is a “need” but most people have enough clothing for the purpose of this discussion. Cable & internet are not “needs” but we’ll include them in that category for the time being. Everything else is a “want”.
Now you take your pay cheque and first pay for your needs and second you make your minimum monthly payment (remember step one?).
Once you’ve paid those expenses you should have some money left over. So what are you going to do with that left over cash? You’re going to pay off your debts. Return to your list from step one and take the left over cash and pay that money to the debt with the highest interest rate.
Every payday you make a payment to that debt until it’s paid off. When that debt is paid off you go to the next debt on the list. You repeat this process until all of the debts are paid off. Sounds simple… it is not, it takes will power and constant management. It wont happen quickly but it can happen.
Where you go from there is the topic for my next article.
Sheila Smelt is a Certified General Account, a Charter Professional Accountant and a Chartered Insolvency & Restructuring Professional. She has provided financial counselling and insolvency advise to individuals and businesses throughout the Fraser Valley for over 16 years and helps them deal with their financial problems. She also teaches workshops and seminars on personal financial management.