Don’t despair. I know getting to Debt Free Forever is no cake-walk. Sometimes it feels as if the debt is a forty-foot fence, and you’re looking at a lot of barbed wire on top. It requires a plan and the gumption to stick to the plan. Here are some things that may make it easier for you and your family:

Get Everyone Involved. While your instinct may be to hide the mess you’ve made from your children, your parents, your siblings, and your friends, this is counter-productive. Very often I make my fams confess their debt to get them out of the habit of keeping secrets. Most people underestimate how much family and friends will chip in to support your goal. Whether it’s offering hand-me-downs to cut down on your clothing costs, or suggesting pot-luck dinners at home instead of restaurant celebrations, the people who love you will want to help you. And they are more likely to understand why you suddenly won’t spend a cent if you tell ‘em you’re in hock up to your eye-balls. Instead of hiding from family and friends – leaving them with a big sense of “what happened?” – enroll them in your plan. Explain to children that you’re all working towards a goal of having no debt and why it’s important.  Many people are afraid to let their kids think that everything isn’t perfect. But if you’re trying to pretend that everything’s same-old same-old, they’re not going to understand why they can’t have the toys or expensive clothes as their friends. Even if they don’t understand everything you say the first time you say it, it’ll be an important lesson for them in living within your means.

Set milestones. Create a goal that is achievable and set a date for completion. Make that goal clear to everyone in the family so that when the temptation to spend arises, you can focus on the goal. So, if you decide you’re going to have that dumb department store credit card that’s charging you 28.8% interest paid off in 10 weeks, that means you need to put $176.45 a week against that card. When Little Lucy says, “Mommy, I really need new runners,” you can say, “Sure Lucy, as soon as we’ve achieved this milestone of getting the Dumb Department Store Credit Card paid off, we’ll look at how to get you those sneakers.”

Make saving money a game. Assign everyone some part of the budget and challenge each person to find ways to cut back on the money you typically spend. If Lucy decides to become the “electricity monitor,” praise her liberally. Then, when the next electricity bill comes in, celebrate how much Lucy has saved with her vigilance and apply that savings directly to your debt repayment so Lucy can see her contribution. If Tony decides he’s going to help cut the grocery bill by shopping with coupons, praise him each time he scores a savings.

Create a “We Saved” Jar. This will help the whole family visualize what you’re accomplishing. Whenever anyone in the family makes an active choice that saves money, put that money a jar and let it sit where everyone can see it. When it’s time to apply those savings to the debt, put a label on the jar that says how much you’ve saved so far.

Create a chart to monitor your progress. Whether you use a “thermometer” drawn on poster board, and have the kids colour in the thermometer as you move towards your goal, or you create a poster board with a picture of your goal, and boxes you can check off as you get closer, keep your chart in a place where y’all will see it all the time and everyone can remind themselves how your smart saving moves are paying off.

Making debt repayment something you focus on as a goal, as opposed to a dirty little secret you keep hidden, is much more likely to keep you on track and get you to Debt Free Forever! After y’all have worked soooo hard to get to Debt Free, y’all are going to be that much more vigilant about staying Debt Free!

Usually when we think about cutting back, we target stuff like coffee, lunches out and cable television. Wasteful, pointless things that simply bring us pleasure but no long-term payback. You probably get tired of hearing people say, “Skip lunch and you can save $10 a day, or $50 a week. That’s $2,600 a year.” Who wants to skip lunch every day? Besides if I skip lunch for a month and save $200, and then turn around and buy two tickets to see Jersey Boys, I’ll blow through my lunch savings in one sweep of the credit card…k’ching! Which is exactly the problem people have “saving” money.

Mentally, we perceive our various pots of money as having different values, and we react to them in different ways. The money we’ve committed to our Super-de-dooper cable package is “spent” money, even though with one quick call, we could cut our costs in half, and slam $50 a month more against our mortgage every month. The money we blow on our cell phone is “sunk” money… we’ve already spent it by the time we get the bill… even though a call to revamp our plan, and a commitment to using the phone only within the parameters of our plan could save us hundreds of dollars every month. We think switching banks is too much trouble. Gosh, just think of all the auto-debits you’ll have to change. We think of switching telephone providers as a major pain in the butt, even through we could reduce our long-distances charges significantly. We think of switching from Buying New to Buying Used as just plain yucky.

We have a saying in Jamaica: Every mickle makes a muckle. It’s much like the saying, “Take care of the pennies and the pounds will look after themselves.” If you even remember what a “pound” is.

Whenever I start telling people to find ways to save, they start finding ways to tell me why they can’t be bothered. “Sure, I can give up eating lunch out and save $25 a week,” they say, “but what’s that really going to get me?”

If I could show you a way to save $30,000 off your mortgage and cut three years off your repayment, would you be interested?

On a $250,000 mortgage at 6% amortized over 25 years, if you find a way to add an extra $100 to your monthly payment, you’ll save $32,640 off your mortgage and chop 3 years off your amortization. Want to see how you’d do on your own mortgage. Head to Citizens bank’s mortgage payoff calculator and let it do the math for you.

Most people never realize the gains they could make because when the do something to “save” money, they leave their “savings” in their wallet, where it eventually vanishes into a cup of coffee, a new magazine, or a DVD for the kids.

If you want to make your “savings” work as hard as you do, then you’ve got to apply them somewhere important quick, quick like a bunny. Let’s say you do decide to trim your lunch habit by $25 dollars a week, or $100 a month and use that money to pay down your credit card balance. Each time you don’t spend that money, take it home and put it in your Credit Card Jar. When you get to the end of the money, apply it to your balance, and watch your interest costs drop.

“Saving” doesn’t have to mean giving up everything you love to do. It just means looking for ways to take the money you may be spending unconsciously, and finding better uses for it. It’s moving from the routine spending we do habitually, to purposely deciding to buy that beautiful bunch of flowers, that warm, delicious muffin, or that cozy new pair of gloves. And if we decide we’re going to cut back on something so we can have something else – OMG, you mean prioritize?! – then we’ll apply those savings to our big goal before we have to chance to blow them.

I’ll bet there’s a bucket-load of ways you’re spending unconsciously… blowing money that could better be used to pay down credit cards, get rid of big, fat mortgages, build up emergency funds. I’ll bet you can find the $100 a month that’s gonna save you $30,000 off your mortgage. Why don’t you take a look?

The level of desperation in the letters I’ve been getting has ratcheted up quite a few notches over the past couple of months. People who haven’t been paying their taxes are watching their bank accounts being tapped by the Tax Man and having to explain to their mortgage lender why they can’t come up with a payment. Creditors are calling non-stop. Families are watching as their weaker links break; desperate as they are to help, they have little enough resources of their own.

I’ve done a fair amount of interviews with the media recently.  While doing The Motts on CFRB, I got one call from a man in his sixties who had lost 40% of his retirement portfolio and wanted to know what to do now. A little like trying to close the barn door after the horses are out, dontcha think?

If you are less than 10 years from retirement, you do NOT have a long-term investment time horizon, and you should not be heavily invested in stocks (which include stock-based mutual funds). I told this man he should have been more conservatively invested. He said he was. I replied that no conservative portfolio lost 40% in the recent shake-out, so he’d best have a word with his financial advisor.

People, if you’re going to be investors – if you’re buying mutual funds, bonds, stocks, anything other than boring GICs – you HAVE to know what you’re doing. You can’t just take someone else’s word for it.

As is typical, now that people are “scared of the markets” diversification is still NOT the name of the game. The solution to having been overly weighted in equities when the crash came is NOT to be overly weighted in fixed-income investments in the aftermath. The solution is to figure out what your asset mix should be, and then execute a plan and stick with it. Diversification is all about balancing your need for return with your time horizon and your risk personality. Running and hiding isn’t a solution.

For those of you who think this is a once-in-a-lifetime opportunity to get into the market, you may be right. But don’t just throw your money wherever… there are still a lot of downs to go. Create a plan, and then dollar-cost-average into the market. Think about where the world will be 10 or 15 or 20 years from now. Course, if you’re gonna need the money any time soon, the market’s not for you. But if you won’t, if you’re 20, 30 or 40 and putting this money away for retirement, create a plan NOW.

As for all the people whose knees are knocking together and who just want a safe place to park their money: Canada Savings Bonds, GICs (stay under the CDIC limits), and high interest savings accounts are all still here. Just don’t whine and complain about the current interest rates. With prime the lowest it has ever been, interest rates aren’t really at the top of their game right now.

If you’re tempted to take advantage of the miracle  investments springing up that guarantee a much higher rates of return, then you were the sucker born today. There’s no such thing “a great return guaranteed”… just ask all the people who got soaked in the ABC debacle. If it sounds too good to be true, it’s too good to be true.

People are doing all sorts of dumb things in reaction to the markets, and because they weren’t prepared for anything going wrong ever. People who are losing their jobs, losing their homes, losing their retirement nest eggs are panicking. But responding to the current economic turmoil emotionally isn’t going to get you where you want to be. So stop, breathe, and take rational, well-thought out steps to get to where you want to be next.

Pay down your debt. It doesn’t matter if you have to work three jobs, get the debt paid off. Give yourself a V8-Slap and swear you’ll never do it again! If you can’t do it on your own, head to a bank… it doesn’t have to be your bank… and get them to help you figure it out. Or find a friend who can help. And if you’re really desperate, go see a bankruptcy trustee to determine if that’s the only option left.

Don’t stop saving. If anything should prove to you the need for a pool of money for emergencies, this should be it. It may be tough to find $50 to stick away, but things can always get worse, so make like a boy scout and be prepared.

Look to the future. You’re still going to need money for retirement, so don’t stick your head in the sand on the investment front. NOW is the time to figure out how money works and what you can do to make it work for you.

Don’t stop saving for your kids’ education. Don’t take money out of your retirement plan to make ends meet (get a job!). Don’t use a line of credit as your emergency fund.

Do pull together with friends and family to figure out the best ways to weather this storm. Do keep on top of where your money is going every single day. Do make a plan for staying on budget, getting out of debt, and building a nest egg for the future.

There’s no magic to creating a sound financial foundation. I’ve been saying it for years, and you should be bored by now: spend less than you make, create an emergency fund, get your debt paid off, save some money. I know it doesn’t sound like rocket-science. It isn’t. But money management isn’t rocket-science, it’s discipline. The basics work, and if you’re not doing them, you’re never going to be anything but financially unbalanced… and miserable.

I have a Happy New Year present for you. Y’all have been at me to make the budget worksheet a download so you can keep it on your computer. Some people have been creative and done up their own budget at home. One very determined woman created her own version of my budget for download. Hmmm. I guess you really want it, eh? Okay, then. You win. Now when you go to the worksheet, there’s a download button. Click that before you start making your budget if you think you’ll want to keep it.

I’ve been getting a lot of questions – at least 50 a week – from people who haven’t bothered to read the instructions that go with the budget. Really, people! Taking a shortcut just ends up taking longer.

People sometimes want to debate with me whether an expense category should be fixed or variable. I get long letters from people telling me why a budget category is in the wrong place. I don’t care. If you want to make the expense a “variable” expense, feel free. When I created the budget worksheet, these are the choices I made. But you should feel free to make your own.

People also want to debate the validity of something being in the LIFE category, as if LIFE isn’t a valid category. I get letters from people all the time objecting to the fact that “childcare” is a LIFE expense. They find that childcare drives their LIFE category out of the acceptable percentage so they want to put it somewhere else.

Do you want to put your childcare expenses under Housing? Transportation? Savings? Debt Repayment? Those are the other options. The percentages I give are guidelines. If you’re spending nothing on debt repayment – yeah! – that means you have another 15% to stick in any of the other four categories. But if you’re over the top in one category, it means you’ll have to cut back on the others. So what if LIFE is 50% of your spending. As long as your budget balances, you’re saving at least 10%, you’ve got no debt,  and you’re happy, you’re fine.

The other huge misconception seems to be around the debt repayment category. Yes, the guideline is 15% of your income. But what that means is if you are spending more than 15% of your income paying off your consumer debt you have far too much debt. IT DOES NOT MEAN you should only put 15% of your income to debt repayment. You need to put as much of your income into debt repayment as necessary to get all your consumer debt paid off in three years or less. And if that means your debt category is up to 25%, 30% even 40% of your income, so be it. Then you have to cut back elsewhere or make more money to have enough for the other categories. If you’ve dug yourself a deep hole, it’s time to grow up, suck it up, and pay it off!

Savings is another area people have questions. Yes, your company pension plan counts toward savings. If you want the savings number reflected on the budget, add the money going to your company pension in to your income, and then take it out again on the savings line.  Or just know that you’re setting aside 8% for savings (or whatever it is) and make up the difference on the savings line.

The 10% rule applies to long-term savings. Emergency savings is separate. So is saving for your kids’ education. And if you’re saving for a vacation, a downpayment on a home, a new car, those need their own lines on your budget and do NOT belong in the “savings” category because they are, in fact, “planned spending.”  Ditto that money you’re automatically deducting from your paycheque for savings bonds, when you plan to use those bonds to buy Christmas presents. That’s your Christmas fund, and it may need it’s own line on your budget. But it’s NOT savings.

“Savings” is the money you NEVER spend unless you are destitute or have so much money it doesn’t matter anymore.

If you’re accumulating money for any purpose, it’s “planned spending.” And the best way to keep your “planned spending” organized is to have a line on your budget and a savings account set up for each category.  That means you may have to customize the budget to your specific needs, which was why I never bothered to make the budget a download to begin with. I thought y’all would fill it in, print it, and then make your own version. I sorry I never allowed for the spreadsheet-challenged amongst us, of which there appear to be plenty. But now that you have the budget worksheet to work with, you can still make changes to make it work for you.

I recently received a mighty big question from  NM and thought I’d share it and my answer here since she is asking a lot of the same things many other people are asking and I can kill many birds with this one stone.  NM writes:

I recently bought your book and in it, you suggest Disability Insurance, Critical Illness Insurance and Life Insurance. I’ve made a spending plan and am trying to figure out how/when/where these insurance products would fit in. Now that you’ve convinced me insurance isn’t evil, I’m wondering… I’m 24 (about to turn 25), single, and I just started a new job in June grossing $33,000/year. I have about $6,500 owing on a line of credit at 8.5% interest and $2,000 on a credit card at 19.97% interest. My question is: do I need all three types of insurance? Should I get them now or wait until I pay off my debt? And how do I figure out how much disability or critical insurance I would need? I’m assuming that once I move out on my own or collect any assets I would need to look in to getting Critical Illness or Disability insurance?

NM, since you are single and young, you’re most important insurance step is to get disability insurance. Not any old disability insurance, but the very best disability insurance you can afford. (Tomorrow I will post a guest blog on disability insurance from a Guy In The Know, so read it.)  Life insurance is important when you have assets and dependants, and since you have neither, and are still very young, this doesn’t have to be a priority. Critical Illness insurance is also useful, but I often recommend it for those who can’t get disability insurance because they are old, and that’s not you. So, the best DI you can find, m’girl, that’s what you’re after.

NM went on to say:

Speaking of debt, I plan to pay off the 19.97% interest credit card debt and then start an emergency fund (meaning I will have a very small emergency fund until I pay off that high interest credit card). I was then going to put away about $300 per month for emergencies. 5% of my income goes in to my company’s pension plan; I was also thinking about increasing those contributions once I pay off the credit card. Should I save less and continue making huge debt repayments? Or should I work on boosting my savings even though it would take me longer to get out of debt?

Also, my company’s pension plan acts like an RRSP in that my income is taxed after the contributions are deducted. My company also matches my contributions. The plan is locked, meaning I can’t get to the money until I retire. Is there any downside to having this type of a pension plan (for ex. I can’t borrow against it to get a house, etc.)? I want to contribute the maximum to this plan, but I’m wondering if I should also get an RRSP?

Thank you for this book–I can hear your voice talking to me through the pages! I plan to use it to guide me in to being a Woman of Independent Means.

Good questions all, NM. Focusing on getting your debt repaid is the right thing to do, particularly since you are not ignoring either your long-term or emergency savings. When I work with my fams, I often start them off saving only $100 a month for each, just to get the habit established. You’re already doing this so go nuts on the debt repayment.

Since 5% of your income goes toward your company pension plan (which is fine, by the way) and they match your contributions, that means you’re saving 10% long term. Perfect. And $300 a month for emergencies until you get to the months’ worth of Essential Emergency Expenses is terrific. As for not being able to borrow against your retirement savings for a home, I’m not a huge fan of this strategy. Once you have all your consumer debt paid off, take the money you were using for debt repayment and start building a Home Downpayment Fund.

I’m glad you’re enjoying A Woman of Independent Means.  It’s always good to hear when people are using the book to make more sense of their money. I’m working on an outline for a new book, but if you stay this course you’re on, you won’t need it! Ha!

This is my final blog of the year, so I want to wish you all a very healthy and happy 2009. Last year I made a resolution that kept me sane through all my ups and downs. Being the stone in the river was one of the things that got me through the tough changes at the end of the year. (All your hugs and my emergency fund were the other two.)

We have been in our new home now for almost a month and things are settling down and developing a rhythm. I want to thank you all from the bottom of my heart for all your good wishes and kind words. I believe that it was being wrapped in your positive energy that made the last couple of months bearable. Now I can hardly wait to see what 2009 has in store for me!

The best to you all. I am so proud of so many of you for seeing the light and taking control of your money and your lives.

Hey, I’m almost out of success posts, so if any of you want to share your stories, please send them along so everyone else can be inspired by you, or can share their wisdom with you to help you along.

One more thing: Since we’ve covered a lot of ground in the past year, is there anything in particular you’d like more information about? I already know you want more on investing, so I’m going to work up some stuff on that. Anything else?

Cheers, with heaps of love, and great big hugs.

People are always claiming to be serious about becoming debt free, and then out they go and drop $3 on a coffee, $30 on a book, $60 on a new pair of shoes. The little things we spend money on may improve our lives for the time it takes to consume them, but they do nothing for our long-term goals. If you’re serious about becoming debt free, you can do it. But you have to have a plan.

Step One. Put Snowballing to Work. List your consumer debts (not your mortgage unless you’ve done a mortgage consolidation for debt) from most expensive to least expensive, noting your interest cost, your total debt and your minimum payment amount. You might have something that looks like this:

1. Buy-now-pay-later         32%            2100             84
2. Department Store CC        28.8%          700             28
3. Department Store CC        28.8%        1200             48
4. Credit Card                       18.9%        3000            120
5. Credit Card                       14.9%          400              16
6. Student loan                     11.6%      13700            548
7. Car loan                            10%         25,000           650
8. Personal Line of credit        9%         15,000           112
9. Second mortgage/Consol   8%         28,000           212
10. Home Buyer’s Plan              0%         18,000           100
11. Family                                 0%            2,800               0

The idea of the list is to prioritize where you’ll make your payments. You’ll start at the top, with your most expensive debt. (I know some people like to start with their smallest debt, but that’s not efficient.) As that’s paid off, you move to your next most expensive, all the while making the minimum payments on everything else so you stay in good standing with your credit history. Each time you move down the list, you’ll snowball. You’ll add the payment you were making to the most expensive debt you’ve just paid off to the next most expensive that you’re about to tackle.

Step Two. Start today. Like eating smart, exercising and everything else in life that takes discipline, the number one cause of Not Doing It is PROCRASTINATION. You have to wait until your next pay period. You have to wait until you know you have some extra money. You have to wait… and wait… and wait… How’s that working for ya? Any closer to being debt free? Nope? Well then Start Today. 

Step Three. Make a budget. If you don’t know where your money is going, you don’t stand a hope in hell of being debt free. You have the tools on this site. Go to the Gail’s Budget Worksheet and make a budget that balances. The amount you put in for debt repayment will equal the total of all your minimum payments.

Step Four. Cut back. Go over your budget with a paring knife and trim out all the non-essentials that are sucking away your money. How much did you come up with? Do it again. Now how much do you have? Do it again. And again. You want that budget to be so tight it squeaks. You’re going to add whatever you’ve squeezed out of your budget to the payment on your most expensive debt. So if you managed to squeeze out another $300 from your budget, you add that $300 to the minimum payment on the first loan on your list.

Step Five. Make a payment. Don’t wait for the due date. If you owe money it’s always due. And the faster you make a payment, the quicker you turn off the interest clock.

Step Six. Every penny counts. Start carrying a notebook around with you, and whenever you save money on something, write it in your notebook. When you get home that night, make a payment of however much you’ve saved that day against the debt that’s at the top of your. Now you’ve put what you saved to good use, as opposed to just spending it on some other crap.

Step Seven. Every penny counts, repeated. Scour your house for all your change. And every time you empty your pockets of change, add it to your change pot. At the end of every month, deposit it to your bank account and then immediately use that money to make a payment against your most expensive debt.

Step Eight. Sell stuff. Have you heard? Less is the new more! Go through your home, room by room, and choose two things you can live without. Have a yard sale, list things on craigslist or eBay, or sell things through a consignment shop. You might not get a lot for whatever you’re selling, but whatever you get is money you won’t have to pay interest on. Apply that money to the debt at the top of your list.

Step Nine. Make More Money. You knew it was only a matter of time before I got here, right? You have no time to waste if you’re in debt. Turn your time into money in whatever ways you can.

Okay, that’s the plan. Now it’s up to you whether you implement it or not. If you choose not to, you can’t whine about being in debt. Nope. You’ve made your bed and now that it’s full of flees, you’ve only the dog in the mirror to blame!

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