My number one financial goal this year is to clean up my balance sheet. A balanced budget and less debt means less stress and more (financial) freedom. Worthy lifestyle goals indeed. To get and stay in the black, I devised a three pronged plan involving bringing my consumer debt down (all the way down to nothingness); developing a proper budget that doesn’t rely on credit cards for irregular and unexpected expenses; and creating an emergency cash reserve.
Carrying consumer debt is not only expensive, but it can also damage a person’s joie de vivre with completely unnecessary stress and strain. If I’m ever going to achieve my long term financial goals (which include luxuries like designer shoes, extended travel and working part time), then I definitely have to eliminate this bloodsucking debt. A few interesting facts will help keep me on track.
(1) Buying something at 50% off is such a good deal that paying by credit card suddenly seems reasonable. However, a card with a 20% annual interest rate means that a $50 purchase actually costs $104 (50*1.204) , if carried on the card for four years with no payments- suddenly its not such a good deal. Unfortunately, I’m quite sure that I have done this a few times. Purchases added on to card with a high balance already, while only making minimum payments plus $10 or $20, are charged the full rate until paid off.
(2) It doesn’t take long for smallish purchases to add up (I know from bitter experience). And once they do, it is painful to pay off, and dips into my monthly budget tying me to it. I far prefer the freedom of no monthly payments, except possibly for my car and mortgage or rent.
(3) The joy of the purchase fades almost immediately. That sweater I had to have may even sit in my closet barely worn.
Creating a budget that takes into consideration unexpected and irregular expenses seemed daunting at first, until I realized that I have lots of credit card history to draw from. In the past, that’s how I paid for such unexpected expenses as getting my hair done, buying new work clothes (a necessity), buying new work out clothes (for health, also a necessity), birthday presents, car repairs and travel costs for out of town trips (hotel and meals, but not gas, that would be crazy). Looking at my past credit card statements it became clear that I need to set aside more of my monthly income for these known, but irregular expenses. The best way to do that is to pay off my consumer debt so that I don’t have monthly debt payments to make! Another, less palatable option came to mind as well - spending less. I will try to avoid that if at all possible. I can make day trips instead of overnight trips, saving a considerable sum there. I don’t need new clothes for some time now as I already have a closetful. I’m also good for shoes, coats and workout clothes, darn it. I recently extended my car warranty, so my car repair expenses are covered for a few years as well. I will still pay for birthday presents by credit card when I buy them online to be delivered directly, that’s a convenience and money-saving step. However, in order to avoid the dreaded build up of principal, I will be sure to pay for those purchases on top of my regular monthly payments.
The first two debt reduction strategies make a lot of sense, but why bother with an emergency reserve when interest rates are so low? Wouldn’t contributing to my RSP or pension plan make more sense? Only in a world where I will never need to use an emergency fund does that strategy make sense. Otherwise, I would find myself increasing my monthly expenses (by using credit to pay for things like rent and food - ouch) at a time when I’m already strapped for cash. How much do I need? Most Financial Planners recommend a minimum of three months worth of expenses, more if your source of income is seasonal or unsteady. Now that I have dollar amount to aim for, I need a plan to save for it. Adding a monthly bill to my budget, to be paid to my savings account, is the answer.
Goal planning experts tell me that I should reward myself once I have accomplished a difficult step while on the road to reaching a greater goal. I think I’ll reward myself with a little shopping. Ok, I’ll settle for a sangria. But once I get there - I’m setting my monthly cash aside for my more self-indulgent spending goals (yes Christian Louboutin!).
By Julia Lawr,
Canadian MoneySaver contributing editor
No comments:
Post a Comment