Looking for a plan to climb out of debt

In our Smart Money series, #MillennialMoney, the Star’s Ghada Alsharif asks people to record every penny they spend in a typical week. Then, using tips from a financial adviser, we challenge them to cut their spending the following week so they can save more money. Will they fail or succeed?

Elizabeth, 43, is a high school technology teacher saddled with $55,000 in debt and needs a plan to get out of the downward spiral.

The single mother to a 24-year-old who she still supports and who is living with her in a two-bedroom home on a lake in northern Ontario faces a massive hydro bill each month due to her location — more than $500 a month.

She makes $5,200 a month teaching and an additional $1,700 from her second job working at a restaurant. Her debt includes a $1,391 payday loan, a $13,000 Easy Financial loan, $14,921 in consumer debt and $41,000 in car debt.

“After living with someone and a broken engagement, I had a consumer proposal done four years ago,” Elizabeth explains. “I received a small inheritance two years ago after my mother passed away and paid off the consumer proposal — but my credit score was affected.”

Elizabeth’s credit score is low at 580, and she worries she’ll never be able to own a home. She currently doesn’t have a credit card and is fearful of getting one again because of her past as an impulse spender.

But not all hope is lost. We asked Elizabeth to share her monthly and weekly expenses with a financial adviser to help her set up a plan.

The expert Janet Gray, money coach at Money Coaches Canada

Financial planning is about looking at where you are (current situation) and where you want to go (goals). The middle part is the “how” (the strategy). It’s the time of contemplation and reflection on what your priorities and values are. What are you prepared to delay, pass up, or reconfigure?

I suggest starting with two things. Firstly, Elizabeth needs to get very clear on her goals. She should separate them into short term (less than 12 months), medium (one to five years) and long term (more than six years). She wants to reduce her debt (short term) and then save toward a down payment for a home. At her current rate of debt repayment, the high interest loan will be repaid in 24 months and the car payment will take 6.8 years to pay off. With Elizabeth’s new second job, she should be able to pay off the $55,921 of debt much sooner.

Secondly, Elizabeth must review each and every expense she has and divide them into “need to have” and “want to have.” Need-to-have expenses include housing, utilities, debt payments, groceries and transportation. Want-to-have expenses are discretionary.

Elizabeth doesn’t currently have credit cards, which means she is using cash or debit. To help increase her credit score, she can consider getting a “secured” credit card where she puts a deposit on the card and pays the outstanding balance as she goes. It’s lower risk for the credit card company and it helps to build her credit score until she is able to qualify for an unsecured card.

She can also create an emergency savings account so she doesn’t have to rely on payday loans. Elizabeth should be hyper aware of her spending so she doesn’t create new debt and plan to ultimately have at least one month of expenses in her savings account ($4,900).

Elizabeth should also review her spending on high tickets costs. Her rental costs are not just $1,500 monthly when she has to pay $500 month in heating costs and pay for snowplowing as needed. She may be further ahead to live in a $2,000/month rental and be more certain that there are no other costs. Is she able to go on Equal Billing payments (EBP) for her hydro so the payments are level month to month?

Elizabeth can benefit from putting a date in her calendar for a monthly review of the past month and upcoming months. This is not a “set it and forget it” exercise. It needs monitoring and adjusting as she goes.

Now that Elizabeth is more aware of where she spends her money, she might find it helpful to divide out her pay (on the day she receives it) into saving sub-accounts (often called E-Savings at banks). She should leave enough in her main bank account for rent and phone and other auto-payments. Once she has paid all the bills and savings, the remaining balance is how much she can spend until next pay day.

I applaud Elizabeth for taking this step. Getting started is the biggest hurdle but it gets easier.

Takeaways Knowing that she has a financial plan, Elizabeth said her “shoulders already feel lighter.”

“I will set these plans into motion,” she says. “It feels good to know that I can do this on my own, after working all these years. Finally, I will see some results in the positives moving forward.”