Sinking in Debt?

I keep seeing these ads for services that would help people who are "sinking in debt".  It truly is a sign of the times.  A lot of people seem to be in a lot of debt.  Whenever my kids say to me, "wow mom, look at those people with the big house, big cars, all the toys and gadgets, they must be rich".  I would say, "hmm, or they are in debt up to their eyeballs!".

I provide free financial counseling to people who need it, as a charity (or as a ministry, for those who know church lingo).  I am amazed at how much debt so many people have accumulated.  As mentioned in my previous blog, in the days when relatively big money was rolling into our household, we were constantly running a deficit.  When Outgoing expenses > Income, there is a deficit.  In today's day and age, when we have overdraft protection and our monies flow in and out of our bank accounts electronically, it is very difficult to tell whether or not we are in a surplus or a deficit situation.  When both husbands and wives are too busy, it becomes very difficult to pay attention to the details and stay on top of what comes in and goes out.  That was our problem back then.

A deficit of a few hundred dollars a month, resulted in debt of thousands of dollars over many years.  If you are doing one of the following, you are probably running a deficit in your household:
1)  paying one credit card with another credit card
2)  not having enough money to pay all your bills every month, resulting in late fees
3)  Overdraft protection is invoked every month
4)  You cannot pay off your credit cards every month - that balance keeps getting larger and larger

Solution?  Like any business, your household needs a finance manager who will ensure that you stay in the black.  However, the entire family needs to participate in the financial plan.  Otherwise, the finance manager would be very frustrated, exhausted, resentful and eventually give up and let everything "go to pot".

First order of business is to have a plan.  This is otherwise known as a budget.  I tend to be very practical when it comes to a budget.  If you've eaten out most of your working life, it is unrealistic to expect that you will no longer eat out and only bring bagged lunch every day.  You are just setting yourself up for failure.  When I help people create their budget, I first create it based on what they think they spend on things.  Then, we would go over their expenses (I like using 6 months' data by downloading 6 months' worth of bank transactions onto a spreadsheet and categorizing all the expenses - I have customized an Excel spreadsheet just for that purpose) and see how close they were to their budget.  We would tweak the budget if it was not accurate and use more accurate numbers, based on the average over 6 months.  I like using 6 months to 1 year data because it covers the various seasons in life, such as Christmas expenses, birthdays, winter natural gas bills (for higher heat requirements), summer hydro bills (for higher air conditioning power consumption) and averages them out.  If the outgoing expenses are higher than the income, then the couple/family (so far I have only counseled couples, but this would work for singles also) need to discuss what they can eliminate or reduce from their budget.  I had one couple decide that they would go longer in between hair appointments!  Some people needed to review how much they are paying for their Cable, Internet and phone bills - it is amazing how much that Bell/Rogers bill can vary from household to household.  What is "cut" depends solely on your personality and hierarchy of needs!  My husband and I cut cable but for some, that is their sole entertainment and they'd rather eat more KD than shrimp kebabs.  We are all different - whatever we eliminate (if we needed to), we need to stick to the plan/budget.

There's a website that I like to visit which provides some good tools for budgeting.  Crown Ministries have a lot of good tools and tips you can use for budgeting.  I have been using their Budgeting spreadsheet when helping others - I cannot find it on their new website.  If you need a copy, please let me know and I can email it to you.

Once the budget is created, then comes the harder part - sticking to the budget.  I will discuss this in a different post.

Happy budgeting!  Remember, it does require quite a bit of effort to create a proper budget/spending plan but once you have an accurate one that the whole family can follow, you will not regret spending the time on it.  It is the beginning of your journey to being debt free.