In my last column I discussed step 2 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
I would like to continue discussing debt in answer to the question, "how is it possible to live without debt?" I would argue not only that it's possible to live without debt but that it's the best way to live (with the exception of a minimal home mortgage after a healthy down payment). I would even strongly recommend living without access to credit cards or lines of credit. Gasp! No credit cards?!
But what about emergencies?! That's what baby step 1 is for - $1000 to hold you over while you get rid of debt. Once you are rid of all your debt, work hard to complete baby step 3 by saving 3-6 months of expenses, which should be plenty for almost any emergency. Then you won't compound the emergency with years of payments on high-interest debt. Not having access to debt also forces you to be creative and resourceful with how you handle emergencies rather than simply handing over the plastic.
But how do I book hotels or buy stuff online?! Following the lead of US banks, more and more Canadian banks are offering Visa or Mastercard cards that are identical to a credit card except the funds are deducted directly from your checking account, like a debit card, rather than building a debt balance. I have the Global Mastercard from 1st Choice Savings, and I have never missed my credit card!
But I need to build my credit score! Why? So you can go into even more debt? Did you know that you can get a home mortgage without a credit score? If you have a good employment record and a history of paying rent, utilities, etc on time, you won't have trouble getting a mortgage. If a lender won't consider you because you don't have a credit score, take your business somewhere else.
As you can tell, I feel strongly about the pitfalls of debt, and it's not because I have always been smart about steering clear of debt. I have made my share of stupid decisions fueled by debt, and I never want to be caught in those traps again!
If you have any questions or comments, please email me!
Thursday, March 18, 2010
Thursday, March 4, 2010
Baby Step 2 - Getting out of Debt
In my last column I discussed step 1 of Dave Ramsey's Seven Baby Steps (see http://www.daveramsey.com/new/baby-steps/). The baby steps are as follows: (1) save $1000 to start an emergency fund, (2) pay off all debt using the debt snowball (besides your home), (3) 3 to 6 months of expenses in savings, (4) invest 15% of household income into RRSPs, (5) college funding for children, (6) pay off home early, and (7) build wealth and give.
This week I will discuss getting out of debt (besides your home). Some people are deep in debt with no readily apparent way out. Some have debt but plenty of assets that could be used to pay off debt. Many are somewhere in between, but it's these two scenarios that I would like to discuss.
First, to those who have debt and the means to pay it off, I would say write a check today and get rid of it, even if you have to sell assets. If you think you can borrow money at a low rate and invest at a higher rate, you’re probably forgetting about risk and taxes. For most people taxes alone will eat up at least one-third of gains. Risk can be a topic for another column, but suffice to say that, in general, the difference in return between different investments is due to a difference in risk (the higher the return, the greater the risk).
Second, to those who are deeply in debt and see little hope, I would say the key to gaining hope is having a plan. The snowball method for getting out of debt is simple and effective. The plan is to put all of your extra money toward your smallest debt, pay it off, and then work your way to your largest debt. In most cases ignore interest rates because the psychological effect of gaining momentum as you pay off debts is more important than saving a little bit of interest.
The key to this step is FOCUS and INTENSITY. Take care of your most basic needs of food, shelter, clothing, and transportation, and then pour everything else into your debts. Sell stuff, take an extra job, stay away from restaurants, cancel cable, eat inexpensive food, and take inexpensive vacations, if any at all. It will be tough, but the sacrifice will be worth it when you can pay cash for things without any associated stress. Once you sit down and write out your plan you will be very surprised at how quickly you can get out of debt. A family with an average amount of debt and average income can be completely debt free within 18-24 months!
If you have any questions about debt or anything else related to personal finance, please email me
This week I will discuss getting out of debt (besides your home). Some people are deep in debt with no readily apparent way out. Some have debt but plenty of assets that could be used to pay off debt. Many are somewhere in between, but it's these two scenarios that I would like to discuss.
First, to those who have debt and the means to pay it off, I would say write a check today and get rid of it, even if you have to sell assets. If you think you can borrow money at a low rate and invest at a higher rate, you’re probably forgetting about risk and taxes. For most people taxes alone will eat up at least one-third of gains. Risk can be a topic for another column, but suffice to say that, in general, the difference in return between different investments is due to a difference in risk (the higher the return, the greater the risk).
Second, to those who are deeply in debt and see little hope, I would say the key to gaining hope is having a plan. The snowball method for getting out of debt is simple and effective. The plan is to put all of your extra money toward your smallest debt, pay it off, and then work your way to your largest debt. In most cases ignore interest rates because the psychological effect of gaining momentum as you pay off debts is more important than saving a little bit of interest.
The key to this step is FOCUS and INTENSITY. Take care of your most basic needs of food, shelter, clothing, and transportation, and then pour everything else into your debts. Sell stuff, take an extra job, stay away from restaurants, cancel cable, eat inexpensive food, and take inexpensive vacations, if any at all. It will be tough, but the sacrifice will be worth it when you can pay cash for things without any associated stress. Once you sit down and write out your plan you will be very surprised at how quickly you can get out of debt. A family with an average amount of debt and average income can be completely debt free within 18-24 months!
If you have any questions about debt or anything else related to personal finance, please email me
Subscribe to:
Posts (Atom)