In Debt and In Trouble
There is an old Spanish saying that goes like this:
"Habits start out as cobwebs, and ripen into chains."
A little while ago I mentioned that all of our choices have two things in common. The first was willpower.
The second is that our day to day choices are what make up the sum total of our lives.
Each choice is like a single thread in a tapestry. Every day you weave a new thread into your life's work, the question is "are you adding something beautiful to your life or are you adding something that makes it worse?"
A habit like junk-spending on things you don't need with money you don't have is a sure fire way to weave misery and disappointment into your life.
Frank is a junk-spender. He may not realize it, but his own actions are the cause of his problems.
Most of our clients start off as Frank and while we can help them with their debt situation, there is only one way they can escape their debt problem.
If you find yourself in Frank's shoes, you need to realize that you are the one in control. You are your own jailer and you hold the key to your prison cell.
And what's more, it's only a prison for as long as you see it that way.
Willpower is overrated. As long as you feel like you are making a sacrifice when it comes to your spending, you will never truly escape your debt problem.
Once you realize and accept the fact that your junk-spending habits are the source of your problems, you will be happy to stop spending money on frivolous things you don't actually want.
It will no longer be a sacrifice that causes you pain.
Switching your mindset is the first step, the next step is you need to put yourself into an environment that makes it easy to accomplish your goal of becoming debt free.
This is how we go from Frank to Sally.
Sally approaches money in a completely different way than Frank.
Sally knows that willpower doesn't work. She's been down that road before. Like many Canadians, she had racked up her credit cards and accumulated debt. She even had a great reason to do it.
Going into debt during hard times is a common experience for a lot of people. But your debt doesn't care how you got to where you are now.
Sally used to be just like Frank, she handled her money in exactly the same way:
- She spent it on things she didn't really need with money she didn't actually have
- She didn't believe she had a debt problem
- She had no system in place to keep track of her spending
- She spent money to feel better about herself without realizing that it always made her feel worse
- Her bank account always seemed to be empty just days after getting paid
The vital difference is that Sally realized that if she wanted to have the kind of the life for her family that she always dreamed of, something needed to change.
She couldn't just spin her wheels anymore.
Her debts weren't going to just disappear.
Her savings wouldn't grow without putting money away each month.
Sally understood that you don't know what you don't know. So Sally did some research.
She discovered two key secrets.
One was a system that made it easy to pay off her debt. A system that removed the factor of willpower and made the whole process automatic.
The second was a way to leverage the equity in her home that allowed her to reduce the interest she was paying on her debt to nearly fives times less than what she was paying before.
But we'll get to that part, first...
Pay Yourself First
She found that by automating a certain amount of her finances, she wasn't falling into the same traps as before. She began by having 10% of her pay cheque go immediately to her savings account each pay period. From there it was automatically invested in a low cost mutual fund.
This insured that Sally's savings began to grow without her having to do much more than check in on the account every few months. But more importantly, the whole process is hands off.
Getting set up only took an hour of her time, and now Sally's savings are growing on autopilot.
Sally began paying herself first.
Next, she crunched a few simple numbers, figured out what her fixed costs were and set up another account specifically for those expenses. Every time Sally gets paid, a certain amount of money comes out of her chequing account and into her expense account.
Again, everything is automated. The money goes into the account immediately to cover her mortgage payments, her car payments, and the rest of her bills without her even having to lift a finger.
And the money comes out of the account automatically.
She arranged for all of her bills to be paid by automatic withdrawal after working with each company to make sure her bills were all paid on the same day. That insured that Sally was always ahead of schedule when it came to making her payments and there were no surprises.
And that includes Sally's debt payments.
That's right. Once Sally decided to make paying off her debts a priority, she built it into her plan.
She figured out what she could afford to commit to each of her credit cards each month and set those up as automatic withdrawals out of her expense account.
By automating as much of her family's finances as possible, Sally eliminated willpower as a factor in their spending. She began forging new good habits out of her old ones.
Any money that was left over is guilt free spending money. Sally knows that since her debt and savings are being taken care of automatically there is no reason to regret anything when she goes out and spends her money on things she wants or on her family.
Sally no longer had to dodge incoming phone calls from creditors looking for money.
They weren't calling anymore.
She didn't have to wonder about if she was going to have any money for retirement.
Her savings were being taken care of.
She didn't even have to worry about missing a bill or not paying one on time anymore.
She was in control.
Sally decided to take another road, one that will take her to where she wanted to go.