Today we start a new Moneyproblems.ca Tip of the Day series on Setting a Course to Be Debt Free. My name is Douglas Hoyes, and I’m a credit counsellor, consumer proposal administrator, and licensed bankruptcy trustee. Every day I meet with people who want to be debt free, but don’t know where to start. In this series I’ll show you the process to become debt free. We start with a simple question: Why would I want to be debt free?
In some cases debt is a wise financial strategy. Most of us would not be able to buy a house unless we borrowed money (through a mortgage) to buy that house. (You can read more on the debate between good debt and bad debt).
However, in many cases we borrow more than we can afford to repay, and debt becomes our most serious money problem. We think a mortgage is “good debt”, but we must also remember that a house is not an investment in the traditional sense, so serious thought must be given before making that financial commitment. The problem with debt is that it limits your financial flexibility. Here’s a simple example:
Joe has a job, and earns $2,500 per month. He has paid off his house and his car, so he has no mortgage or car loan. It costs Joe $1,500 per month to live (for food, utilities, and transportation), so he has $1,000 per month he can save, or invest, or spend on whatever he wants. He has maximum financial flexibility.
Fred also has a job, and also earns $2,500 per month. Unfortunately for Fred, he is paying $1,000 per month on his mortgage, and he’s paying $500 per month on his car loan. That only leaves Fred $1,000 per month to live, and that’s not enough. Fred’s debt has made life impossible; he can’t make all of his payments each month.
That’s the problem with debt: it limits your financial flexibility. If Joe were to lose his job, he would have to find $1,500 per month to survive. He could probably survive on Employment Insurance, or find a lower paying job, and he’d be fine. If Fred lost his job, E.I. would not come close to covering his living expenses and debt payments; he would be in serious financial trouble.
Debt has robbed him of his financial flexibility.
Now that we agree that excessive debt can cause financial problems, tomorrow we will discuss the process for Setting a Course to Be Debt Free.