This post was not easy to write and share. And it was not only “not easy” because of the complicated topic. The main reason it was not easy was that we had to come out of our comfort zone and talk about the money. The second big reason was that we had to confess about our big failure. Yes, we did fail. Big time. With two of us working full-time, fair-paid jobs, we still managed to fall into a huge financial hole in just a few years. And now it is time to find our way back to the financial freedom! Time to learn about better budget planning and wiser money management.
First thing first
Before our families and friends start calling us in panic, we need to explain our situation.
Let’s start with the good news.
We are still both working, we are paying the mortgage for the house which means we still have a roof over our heads, and we are not starving 🙂
Here comes the bad news. We were drowning in the credit cards and a line of credit debt and we did not like it. I did not like it. I noticed that I was going to the bed and could not fall asleep as I was counting days to the paycheque and the mortgage payments. And to the car loan payment. As well as all other payments that we needed to make in addition to the credit cards, insurance, and the list can go on and on.
As you can imagine it was affecting me.
If you know me good enough, you know I am a very positive person. And I am an optimist. But I had to acknowledge:
We Have a Problem!
I am not a Financial Analyst and don’t really like accounting. We had gone through difficult times in our life for a couple of times. But we always managed to come back on track. This time is no different. I know we will get back to ‘normal’. But we will need to learn and strategize our way back to the financial freedom.
Want even better news?
I love learning.
So I started researching on the budget planning and debt management topics. I’d read tons of books and blog posts. Some were very good and shared helpful information. I will list my favourite books at the end of the post but you can also get them for free from your local library. This is what I did. As you know we could not afford buying them…
Since it is just a beginning of our journey, I will only be providing a general idea of what we have done and are planning on doing at this moment. We will be posting updates once a month reporting on our progress.
Why do we do that?
I am sure we are NOT the only ones who is struggling with the lack of budget planning now. If we can help ourselves and even just one more person to get back on track, we will consider our mission accomplished!
Also, since we have now spilled it out, it will help us to stay accountable on our actions.
You will be our main auditor 🙂
So, these were the steps we have taken so far
Had a meeting with our financial advisor in the bank. It is a free service provided by our bank.
It was a great meeting in terms of getting a better idea on what our issues are. The advisor was very supportive and offered us a number of options. He had helped us to eliminate a few monthly payments by changing our bank program as well.
But he is not the one to do the homework, right? So, he gave us a few tasks that we were supposed to do. No, we were not supposed to report back to him. He is not a parent or a supervisor, right? He is just an advisor. The rest is all our own responsibility.
Do you agree?
So, here how and what we did.
Calculate your total debt
This part is relatively easy. You just check your bank/credit cards/line of credit/loans statements, and sum it all up. At this moment, the mortgage debt was not part of the picture.
Our total came to $61,460 broken down below:
$ 26,460 on credit cards
$ 18,000 Line of credit
$ 17,000 Car loan
Calculate your monthly income vs. expenditures
Calculating the income was not hard, as we both are on the more or less fixed pay. We know how much we are making each month.
Calculating the expenditures though was not as easy as the previous step. We went through a couple of months collecting all the receipts for each and every single payment we made. Whether it was a $3 bill or a $300 bill. You don’t want to miss any of them.
It is a very important step to do. However, if you for whatever reason are not ready to do that, you could also calculate an approximate amount you spend each month. BUT, if you are serious about getting rid of debt, and building your path to financial freedom, I highly recommend you do not estimate but calculate each and every penny you spend!
We found it was easier for us to just pay for everything with a debit card for a month. Then go to the bank account online and calculate the numbers from there. If you have any direct billing set up as we do, it is easier to see it all at glance there.
Some of the expenditures are fixed, such as mortgage or rent, car loan payments, insurance, TV/Internet services, etc. Whereas, the others are considered variable. For example, food, power and water bills.
Doing all that, we have once again realized that each month we were spending more, that we were making. 🙁
Yes, more of the bad news….
But! now it was the time to change it!
Time to build your strategy based on the above
Since our credit card debt was so high and there was no way we could pay it off all at once on our own, the interest charges were simply overwhelming. Our advisor recommended us to consolidated that debt into a line of credit and pay it off. The problem that we already had a line of credit with our bank, and they were not ready to increase a limit on it, as well the interest charge on the line of credit was high as well (7%) so that would not be helpful.
So, he told us we could contact the bank that we borrowed our mortgage from and to explain our whole situation to them and what we are trying to accomplish.
So we did.
We had contacted the mortgage bank and they asked us to provide them with a huge list of financial statements and proof of employment. We sent all the documents requested and got an appointment with the financial advisor there.
Note: The debt consolidation option is not liked by many people. Their main concern usually is that if you take a loan to pay the debt off, you will quickly accumulate it all back as you will still be using the credit cards.
This is not what we did!
The mortgage bank had agreed to provide us with the line of credit with one condition.
We had to cancel all credit cards we had! And the line of credit we had with our bank.
And we said Yes. Yes, we agreed to do that. That is a total of
But you might be wondering one thing now.
What about the car loan?
Our monthly payments for the car a pretty high. We do have a nice newer-ish car, and we like it. Not that we like it just because it is new and we like it (I know it sounds weird). But also because we only have one vehicle. And it (the vehicle) has been working great for us.
What do I mean?
We garden. As gardeners, we do need to once in a while transport plants, soil, compost, woodchips, etc. With our car, we have been able to do that all.
So, it is not just a sentimental feeling we have towards the car. It is also a practical aspect as well.
To be absolutely honest with you, we did go to our car dealership to find a smaller and cheaper vehicle. Taking into consideration our needs, we decided to keep ours. For now.
If our situation is changed at a later point, we may reconsider our decision.
We also decided not to include the car loan in the debt consolidation, as the interest charge on the car loan is much lower (1.49%) than the interest charge on the new line of credit (3.7%), and we only have 2 more years to pay it off.
We will just keep on paying it every month as we have done it until now.
If you are in the same situation, you probably want to know what’s next. You have done your calculations. You know how much you owe. You know how much you can afford to spend each week or month.
Now you just need to commit and do stick to that amount. This is what we are going to do. We have had so many wants. But now it is time to only account for the needs.
So, here is the beginning of our way back to the financial freedom
We need to be realistic. We are not saying we will pay it all off within a year or even two. That would be ideal, but we don’t want to set up goals that we cannot reach.
$61,460 / 24 months = $2,560.83/month
If we add all other monthly expenditures (mortgage $2,000; car, house, medical insurance $450; property taxes $300; phones, TV/Internet $365; utilities $100), it all comes to $3,215/month.
That is before other expenditures like food, Alan’s swimming and breakdance lessons, etc.! So, adding another $2.5K seems to be just a bit too much 😉
So, we are having a rough idea on the timing, and we also have a lot of ideas how to make it all work.
Because this seems to already be such a huge post, I will be sharing them with you very soon. If you don’t want to miss our update, and do want to get lots of budget planning and money saving tips, please subscribe to our newsletter.
In the meantime, as promised, some of the books to check on. Remember, you can always try and find them in the library, but you may still want to have some of these at home. I will review them all in a separate post as well.
Please, if you have any good books on budget planning and debt management that you are dying to share with us, do it in the comments below 🙂
If you are at a similar point in your life and want to find a support or an accountability group, let me know. I am planning on starting my own closed group for those of us with similar minds and goals 😉
By the way, the beautiful images on this post are the courtesy of the Pixabay.com.