With the media constantly bringing the issue front and centre and with reports that the Bank of Canada Governor is concerned with personal debt levels, I am being asked by clients more and more “do I have too much debt and how do I get out from underneath it?”
Before I answer the question, it almost needs to be broken down into two parts: is your debt healthy or unhealthy, and do you in fact have too much?
Healthy debt? Does such a thing exist?! Believe it or not does. If your debts are structured in a way that they are tax efficient then your debt is healthy. Healthy debt leverages your finical position which works towards building wealth. I will be writing a post later this week titled “Debt and Taxes” which will talk about how to convert your debt from unhealthy to healthy.
Unhealthy debt. This is one that keeps Mark Carney up at night. We live in a consumer society, with marketing messages whispering constantly in our ears, encouraging us to open our wallets. Combined with how the human brain works, (we actually get a shot of the reward chemical dopamine when we make a purchase) it is easy to see how debt can sneak up on us.
The solution: I find you need to approach the solution from three different perspectives.
1. Re-pattern your brain: Change your thoughts around your relationship with money. It may sound odd, however I have seen it a lot in my finical career. Sometimes a persons relationship with money is the reason why they never seem to have enough of it. Using words like “filthy rich” and “I am always in debt” create sub conscious patterns that prevent you from accomplishing your financial goals. The first step. Accept yourself as the person who is in debt. The key issue is not to beat yourself up. Feeling bad is not a solution. Instead focus on the feeling: how good do you will feel when your debts are under control. By focusing on that feeling and you will attract the right habits. Remember your brain sends a chemical reward that makes you feel good when you do something it likes. If you reframe what the brain likes then you can get that chemical reward from staying on track with your debt plan. Remember to use positive associations. “I’m trying to get out of debt” is negative vs.”I’m building my net worth” is positive. After all the equation for net worth is: Assets – Liabilities! You don’t hear people talk about their savings plan in a negative tone or with a heavy sigh, do you?!
2. Develop a debt repayment plan: Take a look at all your debts and the corresponding interest rates. Pay off the credit card with the lowest balance first and then take that payment and add it to the other cards. Keep on doing this until you are done. Why pay off the smallest credit card first? Its purely for psychological reasons. It creates a feeling of winning and forms positive associations with the process. Also, look at all the monthly subscription payments too. I find annualizing the monthly payment put things into perspective. Saving $15 a month doesn’t seem worth the effort, however saving $300/yr does. Ask yourself “Do we really need a 5GB data plan for our cell phone when we routinely only use 1GB”? Focus on fine tuning your expenses and not cutting back too much. This will only cause you to give up. The best diets are based around gradual changes in habits.
3. Consolidate your debts into one payment: This can be done by taking out a consumer loan or adding your debts to your mortgage. If you have the equity in your home, adding the debts to your mortgage would be the best solution. Given todays interest rates I have found that clients can improve their monthly cash flow and structure a debt repayment plan that pays off the increased mortgage balance relatively quickly.
Don’t get caught up in the fever pitch of worry that is spreading about debt levels. Sit down with a trusted financial expert, review your situation, determine your goals and set up a plan. One of the tools I have is a debt analysis calculator which blows away anything you would find on the internet. If you would like a review of your debts and a free repayment plan please contact me.
Next time the subject of consumer debt comes up with a friend, work colleague or family member, and you see a shift in their body language, please pull out your phone and give them my number. Friends often don’t discuss their financial situation with each other, but we all want to help our friends rest easy.