Tag Archives: step up debt repayment

Someone Actually Did a Written Budget! Wow

Good morning George. I’ve just finished your Money Tools & Rules book! Thanks so much and well done on a great book!

We have two kids between 7 and 10-years old. I have done up a budget and I have reduced my monthly expenses a reasonable amount to add to my payments towards my credit card and line of credit debts. I have that goal of paying off those debts to be able to buy a house in the future, while also looking to gain a foothold in investing.

Part of my reply that relates to (this portion of) the email: I only ever answer questions of what I would do since I never have all the information. Plus, caring isn’t telling someone what they want to hear, it’s caring enough to be honest and direct.

Nice that you’re one of the rare people that put their spending on paper to be able to see it AND reduce it a bit – that’s pretty impressive. And remember you’ll be way over here and there – just keep tweaking it for the variable bills and DO have some “me” money in there and some “kids” money. And tell them in an age appropriate way some of the budget stuff!

When they know the rule of what their “me” money is AND what it can go to (clothes, field trips (?), school extra billing (?), dollar store, snacks, etc) they’ll learn to live within their own budget and it’ll take most of the hassle out of shopping with them. Make it cash in an envelope for each of them so that they can “see the money,” or lack of it, towards the end of the month! This, however, is not their (hopefully) earned allowance! That’s their money to invest – give – spend as you’ve defined the rules for it.

Your investing goal is confusing as it states opposite things in your full email: If you’re NOT adding to your investments,  you just need to follow the step up plan in the book to the letter, which would be credit card only – minimum payment on LOC. Then the LOC with the minimum you paid all along AND all the money you’ve paid extra on the card that’s now cleared.

If you meant ADD to your investments as well: Unless you’re a doc, vet, or someone else making maybe $150k or more, you’re doing the exact opposite of what works. I hope you’ll email me in a few years that you’re in roughly the same position, just a few years older. Plus, you won’t meet the debt ratios, etc. of the Trudeau stress test for debt load, total debt service ratio, etc. if and when you want to qualify for a home purchase.

Your E-mail Segment

Here are a couple of e-mails from listeners. Chance are if one person e mails, there are lots of others who have the same questions:

Hi George: We are going on vacation to Mexico. The question is what do you suggest as far as taking money? I have asked lots of people and everyone has a different opinion. Some people say use your debit card (that sort of scares me aside from charges), some say Visa/MC, others say strictly US cash or take Canadian and exchange it down. I am confused…

This isn’t worth your brain power. I only answer questions as to what I would do, and in this case, you’re dealing with a pretty amount of money. You’re not buying a house down there, so we’re talking about the exchange on about $400 or $500. Whatever it is, it’s a $5 to $7 decision. I don’t pull out my debit card – that’s way too risky, unless it’s at a bank ATM. Not many places want our crappy Canadian dollar, and it’s a giant pain to find a bank to exchange it at. In the US, by the way, most banks now won’t even do an exchange unless you are a customer. They can’t recognize counterfeit foreign money and don’t give a hoot about non-bank clients anyway.

Take what you think in US cash. If you’ve got a credit union MasterCard, use it, because it has the least foreign exchange rip off, most others are 2.5% or more, there’s a chart in the back of the It’s Your Money book on everything credit card related, or you can call the 800 number on the back of your credit card and ask.

Hello George: In the It’s Your Money book, you talk about getting debt free by paying off the smallest debt to the largest debt. Wouldn’t it be more logical to pay the highest interest rates first?

Yes and no. You’re presuming that getting into debt and paying it off are logical decisions and three-quarters of it isn’t logical – it’s emotional. Is it logical to charge something on a 20% credit card? Is it logical to take a car loan over 7 years when you’ll always owe more than it’s worth? Is it logical to take a 6-months don’t pay that reverts to 29% right back to the get-go? No way.

Just like getting a car unstuck in the snow you need to get traction. Traction and extra cash comes from paying off the smallest bill. It’ll take a month or two, tops and frees up the payment that was going on that bill, as well as creating a huge self-confidence feeling that one is gone forever.

Rolling that money into the next smallest bill makes it go twice as fast, and so on. In the book is an example of $25,000 debt and how quickly it’ll get paid off with some huge interest savings. Remember that interest isn’t a rate thing – it’s interest dollars which we can control.

Besides, when it’s a single-minded focus to get rid of your debt it’ll happen really quickly. So the rate doesn’t matter that much when it’s only being paid for a year or so.

An E-mail From a Listener:

I’ve freed up an extra $100 in my budget. Do I put it in RRSPs or against the house? Our family income is $90,000, we’re putting $600 into RRSPs, an extra $450 on the house right now.

The listener, let’s call him Greg, is in a 40% tax bracket and in his late 40s. What he didn’t put in his first e-mail is that he’s got a car payment of $250 for 2 more years, a snowmobile owing $2,000 and a boat at $3,000.

Becoming debt free is ALWAYS ahead of savings. In a leaky boat, fix the leak or all the bailing in the world won’t get you anywhere. Greg’s on track to be debt free in two years or so.

If he takes the $100 extra, stops the $600 RRSPs and diverts the $450 from the extra house payments, that’s $1150 a month. The debts get listed smallest to largest, then make minimum payments on all but the smallest debt. Does that make sense?

That pays off the snowmobile in two months. The $1150 and now the freed-up snowmobile money of $200 a month goes onto the boat. That’s now a $1350 payment and clears it off in two more months. Now the boat payment is gone and that $200 a month is added to the $1350, making it $1550 towards the car and it’s gone in three months.

Seven months from now, or February 09 he’s debt free but the house and has $1550 freed up. THAT is some serious money. Now we’re not talking about a spare $100, and $1550 now gets broken down into retirement savings and paid on the mortgage.

A half a step back has jumped Greg tons of steps forward, saved about $4,000 in interest and got him debt free a year and a half ahead of schedule.

A big section of the debt chapter in the It’s Your Money book walks you through this process very simply. Smallest debt to largest, minimum payments on all but the smallest and every one that’s paid off gets rolled into the next one.

Think of Greg in February when he’s got almost $1,600 a month going to pre-pay his mortgage or freed up that $20,000 a year into savings! Oh, and Greg got one more piece of advice: Never buy toys or cars again unless you can afford to pay cash for them.