Make a bet to get out of debt

Little Jonny · January 19th, 2009, 09:16 PM

Good read for those who need some financial house cleaning.

By Patricia Lovett-Reid
January 10, 2009

Canadians owe approx $1.2 trillion, and our biggest discretionary expense is debt.
Today, I want to make a bet with you. I want you to get out of your bad debt within six months. That's right. Six months.
When you're done, I hope you will e-mail me and tell me how you did it. If you do, I'll invite you to my next seminar, present you with [a signed copy of my latest book] and tell everyone your story. Or you can tell it yourself.
Why am I making this bet with you today? It's because we have become a consumption oriented society that finances too many of our purchases. It's time we took charge of our financial situation and that means we're going to have to cut back on our discretionary expenses. It might surprise you to know that Canadians owe approx $1.2 trillion, and our biggest discretionary expense is debt.
In a recession cash is king and debt will sting
Do you remember the wealth effect? For years, rising home prices and stock portfolios made us wealthier, even though there was little or no increase in our wages and incomes. Even though it turned out all we had were paper gains, because we felt wealthier we tended to spend more.
But now, the wealth effect is in reverse. Frugality is the new reality. And part of this new reality is getting a clear understanding of how much debt we actually have (our debt to income ratio). The ratio is ideally below 1, but the facts speak otherwise: Canada's household debt to income ratio increased from 110% in end 1999 to a whopping 137% by end of second quarter 2008.
Okay, so how do we cut back on our spending and eliminate debt during these tough economic times? First, recognize that debt undermines your ability to cut back. It is insatiable and always on time, and demands to be paid or it compounds in size.
Some quick facts to help get a grip on debt:
1. Know how much debt you have by figuring out your debt to income ratio
2. Your monthly housing costs shouldn't be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses.
3. Do not increase your credit during this turmoil: if you've resisted the urge to buy that 52" flat panel TV, don't give in now
4. Forget the credit and debit cards. Use only cash when shopping
5. Pay off high interest rate debt immediately because it compounds rapidly
6. Consolidate all high interest debt into a single, lower interest loan
7. Adjust your thinking: Research shows that consumers owe more than twice what they think they owe on their credit-cards
Distinguish good debt from bad debt
It's important to separate good debt from bad debt. 'Good' debt is used to make long-term investments, like a loan to purchase an RRSP, or pay for skills training or educational courses, or to take out a mortgage on your principal residence. These are clearly investments in the future.
Dump all your bad debt
Many of us pay for our food and clothes with credit, which turns non-discretionary expenses into more bad debt. Begin by paying off your bad debt, starting with credit cards first, as they likely carry the highest interest rates. Outstanding balances should be paid in full, or if that is not possible, try to pay a substantial portion of the balance. After the credit cards, work off your remaining bad debts one at a time from smallest to largest. Then tackle the good debt.
Reduce your good debt
Non-discretionary (essential) spending generally includes rent or mortgage payments, car payments, heat, water, electricity, phone, food and (basic) clothes. A mortgage is generally considered good debt (unless it's being financed with a credit card). Best of all, it is possible for you to reduce the amount of this good debt without breaking the bank. Simply opt to pay your mortgage on a weekly or bi-weekly basis and the extra payments generated by 52 or 26 payments (instead of the usual 12), will not only reduce the size of your mortgage, it will cut down the amount of interest you are paying and help you pay off your mortgage faster.
Deep in debt means deep changes are needed
For some Canadians, a complete lifestyle change may be needed if they are to avoid deep financial trouble. Lifestyle changes mean big sacrifices, but if the alternative is bankruptcy, these sacrifices are worth making. One money-saving option is to move from a larger to a smaller house. If that is not possible, move to a less expensive location. Another smart choice is to trade in your repair-prone gas guzzler for a more gas-efficient and reliable car.
Becoming debt-free starts with knowing how much debt you actually have, recognizing the bad debt portion, and then establishing and sticking to a monthly schedule to pay it off. It's time for you to take action. Make a bet with me and see if you can ditch all your bad debt within the next six months.

January 19th, 2009, 09:16 PM	#1
Little Jonny Senior Member Join Date: Jan 2009 Location: Toronto, Canada. Gender: Male Posts: 137	Make a bet to get out of debt Good read for those who need some financial house cleaning. By Patricia Lovett-Reid January 10, 2009 Canadians owe approx $1.2 trillion, and our biggest discretionary expense is debt. Today, I want to make a bet with you. I want you to get out of your bad debt within six months. That's right. Six months. When you're done, I hope you will e-mail me and tell me how you did it. If you do, I'll invite you to my next seminar, present you with [a signed copy of my latest book] and tell everyone your story. Or you can tell it yourself. Why am I making this bet with you today? It's because we have become a consumption oriented society that finances too many of our purchases. It's time we took charge of our financial situation and that means we're going to have to cut back on our discretionary expenses. It might surprise you to know that Canadians owe approx $1.2 trillion, and our biggest discretionary expense is debt. In a recession cash is king and debt will sting Do you remember the wealth effect? For years, rising home prices and stock portfolios made us wealthier, even though there was little or no increase in our wages and incomes. Even though it turned out all we had were paper gains, because we felt wealthier we tended to spend more. But now, the wealth effect is in reverse. Frugality is the new reality. And part of this new reality is getting a clear understanding of how much debt we actually have (our debt to income ratio). The ratio is ideally below 1, but the facts speak otherwise: Canada's household debt to income ratio increased from 110% in end 1999 to a whopping 137% by end of second quarter 2008. Okay, so how do we cut back on our spending and eliminate debt during these tough economic times? First, recognize that debt undermines your ability to cut back. It is insatiable and always on time, and demands to be paid or it compounds in size. Some quick facts to help get a grip on debt: 1. Know how much debt you have by figuring out your debt to income ratio 2. Your monthly housing costs shouldn't be more than 32% of your gross household monthly income. Housing costs include monthly mortgage principal and interest, taxes and heating expenses. 3. Do not increase your credit during this turmoil: if you've resisted the urge to buy that 52" flat panel TV, don't give in now 4. Forget the credit and debit cards. Use only cash when shopping 5. Pay off high interest rate debt immediately because it compounds rapidly 6. Consolidate all high interest debt into a single, lower interest loan 7. Adjust your thinking: Research shows that consumers owe more than twice what they think they owe on their credit-cards Distinguish good debt from bad debt It's important to separate good debt from bad debt. 'Good' debt is used to make long-term investments, like a loan to purchase an RRSP, or pay for skills training or educational courses, or to take out a mortgage on your principal residence. These are clearly investments in the future. Dump all your bad debt Many of us pay for our food and clothes with credit, which turns non-discretionary expenses into more bad debt. Begin by paying off your bad debt, starting with credit cards first, as they likely carry the highest interest rates. Outstanding balances should be paid in full, or if that is not possible, try to pay a substantial portion of the balance. After the credit cards, work off your remaining bad debts one at a time from smallest to largest. Then tackle the good debt. Reduce your good debt Non-discretionary (essential) spending generally includes rent or mortgage payments, car payments, heat, water, electricity, phone, food and (basic) clothes. A mortgage is generally considered good debt (unless it's being financed with a credit card). Best of all, it is possible for you to reduce the amount of this good debt without breaking the bank. Simply opt to pay your mortgage on a weekly or bi-weekly basis and the extra payments generated by 52 or 26 payments (instead of the usual 12), will not only reduce the size of your mortgage, it will cut down the amount of interest you are paying and help you pay off your mortgage faster. Deep in debt means deep changes are needed For some Canadians, a complete lifestyle change may be needed if they are to avoid deep financial trouble. Lifestyle changes mean big sacrifices, but if the alternative is bankruptcy, these sacrifices are worth making. One money-saving option is to move from a larger to a smaller house. If that is not possible, move to a less expensive location. Another smart choice is to trade in your repair-prone gas guzzler for a more gas-efficient and reliable car. Becoming debt-free starts with knowing how much debt you actually have, recognizing the bad debt portion, and then establishing and sticking to a monthly schedule to pay it off. It's time for you to take action. Make a bet with me and see if you can ditch all your bad debt within the next six months.

Make a bet to get out of debt

Off-Topic Discussion