Take the Debt Test
Posted by Gail | Filed under Credit Wise
A lot of the people think that being in debt is part of life. Their parents are living beyond their means. Their sister is always into her line of credit. Their best friend is up to his armpits in credit cards. Hey, man, debt IS.
While the Life Pie makes allowance for the fact that lots of people are in debt – a piece of the pie is all about debt repayment – the reality is that people are carrying far more consumer debt than they can reasonably handle. And the slip into Too Much Debt happens slowly and insidiously so that many people don’t even realize how close they are to Debt Hell until they feel the fire on their faces.
So how much debt is too much debt? From a purist’s perspective, any consumer debt is too much debt. Whenever you have to take money from your cash flow to pay for things you’ve already used up, you’re getting behind the eight-ball. The Life Pie says that if you’re spending more than 15% of your cash flow on debt repayment, you’re in trouble. And that’s not 15% to make your minimums. That’s 15% to get to Debt Free in three years or less
If you do the calculation and you find a larger and larger percentage of your income going to debt repayment, you should wake up and smell the coffee. And if you’re so focused on debt repayment (it’s taking all your resources just to keep up) that you have no safety-net (savings) in place, you need to give your head a shake.
- Are you at or near your credit limits on your lines and/or credit cards?
- Can you make only the minimum payments?
- Are you late with regular bill payments?
- Are you using credit to buy items you used to pay for with cash?
- Are you not even sure how much you owe?
If you answer yes to any of these questions, you’re headed for a collision with your creditors. To avoid the crash, you’re going to have to find a way to cut your expenses so you can:
- Balance your budget, so you no longer need to use credit
- Stop using credit completely
- Repay what you owe as quickly as possible.
While my rule of thumb is to make sure you’re getting your debt paid off in three years or less, the OR LESS is important. Three years is the absolutely longest you should take for any consumer debt (give yourself 5 years for any regular student loan debt; for professional student loan debt you may have to go 7 or more years.)
The less time it takes to get out of debt, the less you’ll pay in interest and the faster you can get back to what you want to actually want do with your money: buy a home, raise a family, go on a fabulous vacation, whatever your little heart desires.
To this end it’s important to accept the fact that every purchase we make—excluding the absolute necessities like food, rent, and gas for the car—is a choice. And each time we prioritize spending on a “want” over debt repayment we’re just dragging out the misery.
There are loads of ways to cut expenses. From forgoing pop or coffee on the fly, to saving money on groceries, making even small changes can net big rewards for your debt repayment plan. Some people swear by The Weekly Meal Plan. Others swear by The Shop Only Once a Month plan. Hey, whatever works for you.
The important thing is to find the money you’ll need to get your debt under control and within your goal period achieve debt freedom. Nobody else is going to do this for you. If you really want to be Debt Free Forever, YOU are going to have to make it so.
September 22, 2009 at 6:15 am
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September 22, 2009 at 7:33 am
“t’s important to accept the fact that every purchase we make—excluding the absolute necessities like food, rent, and gas for the car—is a choice.”
Very true. At first, a lot of the families on the show don’t seem to understand this – some of them even argue that they “need” everything they’ve bought, or wouldn’t give up what they have for a debt-free life. Many of them come around when living on the jars to see that it’s easy to postpone or let go of some of the things they once thought of as necessities.
One of the keys, I think, to not feeling deprived when you’re on a budget, is to remember that you always have choices. You have control. You can find creative ways to fulfill your needs and wants. You can make some sacrifices. Or you can go deeper in debt. But whatever you do, you are in control of that decision.
September 22, 2009 at 8:35 am
Good test!
I so wish I could send this anonomously to a friend of mine who, due to an employment issue, is using her line of credit as her paycheque.
She apparently has ~3 months left of “savings” as she likes say.
This same friend has a Starbucks card that is auto-loaded ON HER CREDIT CARD!!!
She is a firm believer in the Everyone is in Debt theory. And we all know misery loves company.
I do wish that companies were not allowed to prey upon those people who are not so strong on self-control. It is so easy to just use your credit card for the most inane things (ie filling a coffee card).
All the advertising lures referenced in yesterday’s blog are like a drug to people who are searching for something to make them happy.
Each ad should be prefaced by the Debt Quiz…just like a warning on a cigarette pack.
I keep telling my friend to watch Gail or just to read her blog. You can lead a horse to water…..I am just afraid of the eventual fall out when she doesn’t want to drink.
But in the real world, I guess we all just have to take responsibility for ourselves.
September 22, 2009 at 9:14 am
Diana,
Your concern for your friend is genuine and caring, but don’t forget that sometimes the biggest lessons we have to learn ourselves, the hard way. Many of us have to really experience the pain in order for us to change our behavior. And if there are enough people around us helping serve to justify our behavior (staying in debt) then it is even harder to go against the grain.
I often feel that I am one of few people who seem to have any debt. Either that, or everyone else just pretends their debt doesn’t exist. I guess the whole idea of debt isn’t very sexy. I have made a conscious effort to be open about my debt and our goals so that I can stay true to those when temptations to spend arise. I think people sometimes think my debt is bigger than it is because of my openness about it. But no, most of it is just a small student loan that I am trying to wipe out in 2 years instead of 10. And when people ask about family planning and I respond that we’re waiting to be debt free in 2 years they think I’m a little weird. There really is a lot of mentality with student loans that they are a long-term debt and that it’s normal or ok to spend 10 years paying them off. Which would essentially mean (for me) paying them twice! CRAZY!!
ok, rant over
Good post today Gail (as always:)
September 22, 2009 at 9:18 am
This is a little off-topic, but a friend reminded me earlier today about the delayed gratification experiment: kids were given a marshmallow and told that if they wanted to eat it right away, they could, but if they waited for 15 minutes, they would get *another* marshmallow. They followed up on these kids a number of years later, and they found that the kids who waited were, on average, more “successful” than those who didn’t wait.
By more successful, the experimenters meant: higher SAT scores, better marks in high school and college, getting along with peers and teachers, etc. The kids who didn’t wait had more problems. You could argue that higher SAT scores/getting into university/high marks is not a good test of “success” (and I might agree with you), but some of the kids who didn’t wait had *significantly more debt* than those who waited.
I think we can agree that the current credit crisis was in part caused by people who couldn’t wait to “eat their marshmallow!”
Diana, maybe the ads should be prefaced with “Can you wait to eat your marshmallow?”
The TED talk can be seen here: http://www.ted.com/talks/joachim_de_posada_says_don_t_eat_the_marshmallow_yet.html (if the link doesn’t post, google “TED marshmallow”).
September 22, 2009 at 9:21 am
How exciting for me personally to be able to say NO to all of those questions. A year and a bit ago, the answers would have all been a sadly resounding YES.
I have a very long way to go and I still have debt. I started this late so a lot of things like good RESPs and a lot of RRSPs I will never get. Bittersweet indeed.
Thank you Gail for the YES answers you helped me to turn into NO.
September 22, 2009 at 9:39 am
Many of my friends (and I) have student loans to pay off. Given that I went away for school and paid for all costs myself, I had to take a loan out for 4 of my 5 years of school (Teachers college was the worst year as I could not do my usual 3 p/t jobs). One day during our last year we all took a glance at the handy student loan calculator that the OSAP website provides. We were shocked at how much interest can accumulate over the standard 10 year repayment plan. I think I would be paying over 17,000 of interest. I said no thanks, I will keep most of that money and I have been paying on a 5 year plan ever since.
Now if I could only get a fulltime teaching job….
September 22, 2009 at 9:42 am
@Diana I definitely understand where you are coming from. I have tried to help my brother by directing him to this site and the show but unfortunately, he just didn’t listen. He’s in bad financial shape but I guess some lessons need to be learned the hard way.
It’s strange but true in that I have found so much freedom in saying “no” to myself for things that a few years ago I wouldn’t have thought twice about buying on credit, but I do… In the past, I had thought the opposite would be true. That I would feel free by just buying whatever I wanted with whatever method available but all that was left was a crushing weight. There was little joy in anything I bought when left with the aftermath of debt. Now that I no longer have debt I feel so free and I’m able to save, invest and when I do buy something for myself I can really enjoy it without that terrible feeling attached to it. Priceless!
September 22, 2009 at 11:59 am
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September 22, 2009 at 12:41 pm
Really!? Five years for student loans?!
I only owe a little more then $8,000 (i started owing $10,500 a year and a half ago)… and want to get it paid off within the next two years, tops!
My boyfriend and I want to buy a house in a few years, and I want us to eliminate all debt prior to that HUGE endevour.
September 22, 2009 at 12:48 pm
Too many of my dear friends believe that cable, cellphone and the second car are NEEDS, even after being unemployed for months and resorting to borrowing from family or remortgaging their houses to make ends meet!
Drop the frick’n luxuries, folks!
Then there are the really scary friends that even continue to smoke cigarettes and every weekend have a few beers (to “unwind” from the stress, they say).
They always say how “lucky” I am to have a plan that works — that’s crap! I’m not lucky! I work very hard to make sure that food and housing is a priority (and MUST be within my means) and the very first thing to get dropped when times get tough is the paid-for entertainment. No more cable, no more wine…. it’s public library DVDs and walks in the park instead! When we were on one income, we had one car. period. If I had to go somewhere, I drove hubby to work, or I waited till he got home or I took the bus.
I could go on and on about how frustrated I am with the self-destructive cycles these dear friends have committed themselves to. Like Diana said, “you can lead a horse to water…” it doesn’t matter how often I tell them that I make my own luck, and offer to share my “secrets”, it falls on deaf ears that are ringing with the desire to feed their wants OVER their need to find financial peace of mind.
Debt is not the way it has to be.
September 22, 2009 at 12:48 pm
I am so glad that I could answer No to all of those questions too! a year ago it would have been almost all yes’s.
September 22, 2009 at 1:05 pm
I’d like to thank Gail for opening my eyes to the reality of finances. Before Gail, we too thought it was okay to carry a balance, max the credit card and even go over the credit card limit, now we make pay it off full every month. Before Gail, we would have spent every penny of our “windfall” instead of putting it into rrsps to be used for a down payment on a house. And we would have spent the refund from the rrsps in a heart beat, instead of having an emergency fund. I had no clue what an emergency fund had to do with me. Finally I like to thank Gail on filling me in on what it take to be a home owner. We now know that we need a plan to boost our down payment, to pay off all debt, to have an 8 mth emergency fund, to buy a house that we can afford so that we can still contribute to our long term savings and afford the maintenance. Whew!! The last thing I want to be is house poor. Tks again Gail!
September 22, 2009 at 1:07 pm
Jennifer:
“I often feel that I am one of few people who seem to have any debt. Either that, or everyone else just pretends their debt doesn’t exist. ”
To some people, having no debt means that they can pay the MINIMUM payments each month. If they can make their payment (whether by shifting debt or not), they consider themselves debt-free. Credit card ccompanies loves those people. I am glad to see that this myth is listed in Gail’s questions.
Jessie:
Some owe more than $10,000 in student loans out of school. Some amounts are very difficult to do in less than 3 years, especially if your program leads to a low paying job for the first couple of years.
September 22, 2009 at 1:11 pm
@Jessie: I had $27,000 worth of OSAP loans (not bad considering that my tuition, rent and books come out to $54,000 for my 5 years of school). A 5 year payment plan started me off with a $600 a month payment. That is quite a bit of change. As soon as I get a fulltime teaching job (and now that I live with someone and have to pay for all housing/food costs on my own…yay) I plan on having the remaining 16,000 paid very quickly.
It will be a glorious day when my loan is paid off.
September 22, 2009 at 1:15 pm
@Marie
Very True. Most people who had to pay for their education themselves (and had to go away for school) are in some sort of OSAP/Bank Debt. I remember hearing an average debt of about $30,000-35,000. In terms of employment being a new teacher means very unpredictable employment for the first 5 or so years. I could take another fulltime job outside of education while waiting for fulltime work, but that would mean potentially screwing myself over for teaching jobs in the future. Til then, Hello Loblaws!
September 22, 2009 at 1:55 pm
Jessie:
I’m with Rebecca – I also had $27K of OSAP debt (that’s what happens when you have to do it yourself). At the current rate I’m paying it, I’ll have it paid off by Dec 2010, but it was a struggle when I initially started working – I couldn’t afford their pre-definied minimum payment, and had them drop it to $255, since I was then adjusting my budget to accomodate living alone, and all the costs that I was just getting used to.
Since that time, I’ve substantially increased my payments (it’s now around 40% of my monthly pay), and my loan will be paid off within 3 years of graduating (less time than it took me to get the debt). I still don’t earn a whopping income, but splitting costs makes it easier to make my extra payment mid-month.
September 22, 2009 at 2:19 pm
I was too very open about our debt, what we can afford and can’t. I was that way all through university too. I worked as much as I could, came out debt free and stayed home with my newborn baby the year after graduation. The baby was born a week before my final exams. Nursing and studying all night was interesting…LOL. But because I had worked so much, vacation pay was integrated in my paychecks, and I didn’t pay any health benefits (I was still covered under my mom since I was a student), my employment insurance cheque was decient.
Taking ownership about your debt is so important. I realized that my mom was in debt again last year. Whenever she says she will something up for my girls that they might need, I tell her to put it towards her debt and I will take care of it. All they need from her is hugs, kisses and her time. Babysitting to give parents a night off is much better than any kind of monetary gift
September 22, 2009 at 3:23 pm
I can completely understand that folks who have 20, 30, 40k (or more!) worth of student loan debt may need to take additional time to get it paid off.
I wasn’t very clear in my post before – for me 7 years is wayyy to long – but that’s just for my circumstances.
September 22, 2009 at 3:25 pm
I agree with all these comments. I wonder, though, how much consumer debt is/was (in the past before we watched Gail)acquired simply because people are trying to “impress” other people, not even from a self-indulgent attitude. To show that you’ve so-called made it for your current age category. I know in the past we bought cars, clothes, kid toys, etc. just to keep pace with those around us. (Stupid!)
Today it’s all about living within our means, recognizing wants are unnecessary in the long-term and being content with what we have. It’s unfortunate though that we wouldn’t have to try so hard to squeeze our budget today if woke up to the coffee years ago…..I hope everyone who reads Gail smells the coffee today!
September 22, 2009 at 4:30 pm
I am so glad to see today’s post, because I wanted to share a recent conversation with one of my supervisors. I work in a government job, with so many who are ‘maxed’ out, but still take advantage of that “big screen TV deal – it’s only $40/month”. (for how long). A while back, my story was posted, and since then so much has changed… Long story short, I came to the realization that I needed to get a second job, one that would work around my night shift full time job. I found one, working two mornings a week and one weekend a month, which will generate around $400 extra (the ‘days’ are only 3 1/2 – 4 hours) It’s a start. There’s potential for another day a week. My reasoning for the second job are: #1 – my van needs about $500 worth of repairs, soon; #2 – my horse needs a professional trainer so I can ride her (horse was free, and she is a ‘need’ for me); #3 – my $8,000 7 yr old sewing machine needs a $700 upgrade so I can continue making extra income from it; #4 – I don’t want to be paying my student loan with my pension cheques; #5 – I will be needing a newer vehicle within the next year or so, and I prefer to pay cash; and #6 – I need to build an EF quicker. My employer requires that I fill out paperwork to ensure no “Conflict of Interest” with a second job, even tho over 30% of my co-workers also have second jobs, and 85% of them have a spouse/significant other to help make ends meet. SO – conversation with my manager went like this:
Mgr – I can’t believe you can’t live on your paycheque!
Me – Excuse me? I can live on my paycheque just fine – I can’t do anything else that I want/need to do on one paycheque. I am a single parent, supporting a teenager and a household which costs me approx $1,000/month for rent and utilities.
Mgr – You need a man in your life.
Me – I need a man like a fish needs a bicycle.
Mgr – Well, you need his paycheque.
Me – Well, why don’t I just go and become a prostitute then? Amounts to the same thing.
Mgr – You would have to move to a bigger city, wouldn’t make much money here. What kind of place are you renting that your rent is so high?
Me – My rent is ridiculously low, considering that I have a four bedroom duplex, two bathrooms, a fenced yard, and garage. Considering a .05% vacancy rate in this town, and one bedroom basement suites are $650, and two bedroom houses (which should have a match put to them) are over $900, I am very lucky to have what I found.
Mgr – Why do you need four bedrooms for just you and your son?
Me – see above (I use one bedroom for my sewing room, and another for a “Store”, with all my teddy bears, hobby horses, dolls, quilts, etc on display – which in two weekends is starting to generate some interest – sold $75 out of there last weekend!!)
Mgr – I still think you need a man
Me – Hardly, I prefer to stand on my own two feet.
Mgr – Yeah, I could probably live on my paycheque if I left my husband. I wouldn’t be able to do WHATEVER I WANT, WHENEVER I WANT anymore tho. (this is a woman who has told me more than once that if it wasn’t for the money, she would leave her husband!)
Am I wrong, or do most people have twisted perceptions of the real world? I am reasonably sure that she was teasing me, but on the other hand, she had me almost going to the general manager with her comments. Totally uncalled for, in my opinion. Another co-worker (well, several) takes at least two, if not three trips/cruises per year “while she is young”. When I asked how she does it, she ‘just puts it on her credit card, I’ll never get that thing paid off…” She has a husband who is an electrician, and a second job!! They have three vehicles between the two of them! I just want to scream!! On the other hand, I am super excited to project what I can/will do with the extra income. The horse will only take two months. When I moved here, an old debt for Energy had to be taken care of, so I am paying an extra $250/month for the next two months; that will be put to Student Loan again soon. I was paying off a company generated computer loan at the rate of $40/paycheque – it is done! There’s an extra $1040/year to the student loan. I was just accepted as a Mystery Shopper in my city – Friday I am getting an oil change which I will be reimbursed for, as well as paid for my time! My extra income will go half to debt and half to my Emergency Fund – I don’t intend to incorporate that money into my budget. Also, associated with my move, I had to put deposits on Power and Energy, which will be used to pay my utilities when I stay current for 12 months – that money will be my ‘forced savings’ to use for a summer road trip. It should cover each utility for at least two months. I don’t have a credit card, but am contemplating getting a secured card (only way I could get one), to help build up a credit history that is a little better than the one I have. Any advice?
Another request for advice – I have an old debt for a Canadian Tire credit card, not even sure how old the debt is (paperwork lost in too many moves). Yesterday’s mail had a bill from a Collection Agency, claiming my debt is $1,700 and change!! and gave me three options – Pay $263 to clear the debt and they would erase the interest; start making monthly payments of $13.00 (for how long?) and we could discuss the interest; or call them to make other arrangements. I know this debt is mine, and needs to be paid. I also know that it has been passed from one agency to another, (from my ‘head in the sand ostrich days) and wonder how much anyone really paid for the ‘collateral’? I will probably get yelled at, but isn’t there something out there about a debt being ‘erased’ after 7 years? Cuz I am sure that this debt is at least that old. My conscience says just pay it, offer them $200 cash and get it over with, but also get a discharge of the debt in writing.
September 2009 marks the 25 year anniversary of me quitting smoking! This is my ‘New Year” resolution time: I have declared a No Buy year, other than the bare necessities. Considering where I have come from, I believe that I can get where I want to go, now that I know where I want to go – on my bicycle!! Sorry for the book, I just wanted to vent….
September 22, 2009 at 5:32 pm
Pay the debt…you still owe it, you need to pay it…call them and settle…there is no magic wand “erasing” debt after a number of years…
September 22, 2009 at 6:40 pm
Suzanne:
I forgot which recent (past month?) of Gails answers your question:
“I will probably get yelled at, but isn’t there something out there about a debt being ‘erased’ after 7 years?”
No! You owe? Then you owe! Interest rates on store CCs are very high (typically 28%).
Good work with finding a second job that suits your schedule!
September 22, 2009 at 7:54 pm
Rebecca I can totally relate to you. I too am a recent graduate from teacher’s college and am in some debt. My goal is to have it paid off within 2 years of graduation (Graduated June 2008). It is extremely hard finding a permanent position, even those LTOs are rare! I wish you the best of luck with your teaching and everyone else in becoming Debt Free Forever!
September 22, 2009 at 8:24 pm
Suzanne, congratulations on your 25th anniversary of no smoking, that is something to be proud of! You are doing very well with are your planning and paying down debt too! There is an article Gail just wrote in September archived in Credit wise in the sidebar and it deals with rebuilding credit and is a great read, it was titled- Steps to Re-build Your Credit. You may find your answers there.
September 23, 2009 at 2:25 am
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September 23, 2009 at 2:26 pm
I love your blog!
My question is this:
I’m in the US. I often listen Suze Orman, a financial person on the news. She’s advising people to pay the minimums on bills now and build up your emergency fund before paying off debt. Gail, do you recommend this? Or should we be trying to build up the emergency fund but still paying more than the minimums to accomplish both ends at once?
Right now we only have about $1,000 is our EM fund. I have three small kids.
Thanks!
September 25, 2009 at 3:06 pm
Anna – having just studied more about Suze – the advice she is giving is very specifically to the US residents due to some interesting tactics of their Credit Card companies. I’m pretty sure Gail has (somewhere on this blog) said you should get yourself out of debt and be contributing to the Emergency fund. Our markets did not see the credit cards trying to massively recover their lendings to curb the severe downturn of that specific market in their country.
Take a look at Suze’s book Action Plan 2009 and you’ll understand that her advice is specific to the US market and is not related to ours.
That being said, her advice may not apply to your situation personally, and as such I’d still be working hard at getting debt free – any more of your money going needlessly to a Credit Card company means less that your family can use for vacations/outings/sports/extras. Make sure you are contributing to your emergency fund too – read Gail’s Start Here link from the main page to understand more about this.
Welcome to the boards!
September 25, 2009 at 3:42 pm
Anna:
If you are very likely to lose your job and your EF is not big enough to get you to your next job, then listen to Suze Orman. (consolidate to a lower rate if a company is willing to do that for you – don’t secure unsecured debt according to S.O.) Cut back expenses where ever possible.
If your job is relatively secure, pay off your debt while building a solid EF.
I build my EF while paying off my student debt and the peace of mind was worth it.
Your EF will help provide food and shelter if things go bad.
September 27, 2009 at 6:09 pm
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September 27, 2009 at 6:09 pm
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September 28, 2009 at 1:41 pm
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September 28, 2009 at 1:50 pm
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October 11, 2009 at 4:13 pm
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January 2, 2011 at 10:02 am
Wow, terrific article Ms. Vaz-Oxlade! I agree with the personal budgeting strategy. It’s the only way to live a life beyond the hassle of serving those annoying creditors!
Sincerely,
The Glaring Facts
http://www.theglaringfacts.com