Reality Cheque

Test

Debt is something that frustrates me to no end. Not only have I been a student for the past four years, I have worked at one of the big five banks for almost as long. I carried a good chunk of debt for a while and I see clients of all ages come in to see me with tremendous amounts of debt. So it’s no surprise to hear that personal debt levels in Canada are on the rise.

Now here’s the thing about debt and credit in North America; we take it as a given. We expect to live our life using credit to buy things that we don’t have the money for yet. A friend of mine was an au pair (domestic assistant) in Germany last year. The house of her host family was about 2,000 sq. ft. and comparable to suburban Winnipeg home. The family didn’t own the home. They rented it for the equivalent of C$1,721 a month — essentially paying around $20,653 a year for this home. The reason? They didn’t have the savings to buy the home up front. So they rented because they didn’t want to take on all that debt.

Now, I realize this is not a very realistic situation in Canada, though it is a concept to consider nevertheless. I always imagined moving out of my parents’ house and buying a home, but I thought renting was a waste of money. Why would I want to pay money just to use something when I could invest in property? Well, the reason I shouldn’t is because I don’t have the capacity to handle that kind of debt load yet. Think of it like riding the bus because you don’t have the cash yet to buy a car.

Where the bigger problem lies is that a lot of people don’t pay enough attention to managing their money to take care of paying off past credit purchases. Here’s the reality check: you don’t own what you buy on credit until you pay it off. If you want to be smart about credit and building a good credit score for the future, pay it off immediately or at least as soon as you get your bill. Don’t be late, even by a day. It will show up on your credit report. Believe me; I’ll see it when you come in to increase your student loans. If it happens regularly, that lowers your chances to obtain credit in the future.

Many of us have student loans and lines of credit and a credit card; seeing as how we often need these to pay our way through school, this is perfectly fine. What isn’t fine is how you spend the rest of your money. This is why you need to look at the numbers and see where you are spending your cash. When working at the bank, I can see what goes on your debit and credit cards when you come in, but do you realize where your money is going?

I sure didn’t until September 2009, when I looked at three months worth of spending and saw that I was making about $1,500 a month but throwing away $3,000 a month! I spent double my paycheck every month on gas, food, drinks, movies, etc. It was no wonder that my outstanding credit wasn’t budging. I created a budget to pay down my debt and limited my expenses and now I have cut down my existing debt dramatically by sticking to my budget. I even have a healthy travel fund for after graduation.

By keeping track of what you spend, you’ll avoid wasting money on things you think you “need.” That word is used by consumers far too often and is a complete lie most of the time. Just because credit is available, it doesn’t mean you need to use it. Remember that it is not your money and you’re going to have to pay it back. Be smart about your money now and going forward. You’ll save yourself from headaches and worry by being conscious of your spending and prioritizing your financial needs.

Here are some money saving tips for you:
– Compare your interest rates and how the interest is calculated. Lines of credit typically calculate interest daily, whereas credit cards only charge you interest on the portions that you don’t pay off before the due date. This is calculated monthly.
– Make a budget. An excellent resource is Gail Vaz-Oxlade of the shows “Til Debt Do Us Part” and “Princess”. She has everything laid out for you on her website. Take the time to follow her instructions and you’ll learn more about your finances and spending habits.
– Pay with cash! The easiest way to avoid spending too much money is seeing it physically leave your hands and depleting in your wallet.
– Avoid ATMs. Only take out cash from your bank’s machines. Fees can add up quickly and are such a waste of your money.
– Start saving for retirement now. Open an RSP and contribute as little as $25 a month. In the long run, you’ll have to put away less money and end up with more than if you only start saving in 10 years. Don’t believe me? Google “compound interest”.
– Talk to your bank, they are here to help! I try to educate my clients as much as possible when they come in. Ask questions and learn. Money is such a big part of life – you want to know how to manage it.