Sunday, 4 May 2014

Get a Grip - Chapter 2


Get a Grip


"Don't tell me where your priorities are. Show me where you spend your money and I'll tell you what they are." - James W. Frick

So you've found yourself in a bit of a pickle have you? Don't feel bad, I know the feeling well myself. You're stuck in a relationship that just isn't right for you, and you feel trapped under a mountain of debt. There comes a point in all our lives when we feel we need to take stock, sit down and take a good hard look at what we've been doing and decide on a new path. This phenomenon usually occurs when we are at a low point, unhappy, depressed, or stressed and stretched to our limits emotionally and physically. Personally, I find that I have to take stock of my life every few years, and readjust my course before I carry on. It's not easy admitting where we have faltered or floundered, especially with our careers and important things that could effect our future happiness, relationships, and goals. Taking stock every few years, could save us from these pitfalls. If you feel like you're going in the wrong direction, stop, and turn your feet in the right direction. It might take you a while to get where you want to go, but if you are heading in the right direction, you'll get there eventually.

In order to figure out where I'm going I had to figure out where I am, what my monthly expenses are, and how much I can put onto my debt to pay it off in the next three years. To really understand your spending, download a couple months of transactions in your banking account and on your credit cards into a spreadsheet. Sort by description and start adding. The first time I did this exercise, a few years ago, I realized that I was spending hundreds on fast food - hundreds!! So I made some changes, got over my fear of the grocery store and that big white cube-shaped thing in my kitchen, and started cooking at home. I saved money and lost weight - BONUS! There are so many other things that we spend too much on, you'll see a pattern if you do this exercise, trust me. I'm about to do this exercise again, I'm afraid of what I'll find, but I know it will help me get a grip again on my spending. Ironically, I think I've been overspending on groceries now. I'm not very organized with my shopping, and I always end up having to make mid-week runs to the grocery store.

Another great way of tracking your spending is to hold onto your receipts. Sometimes a purchase at Wal-Mart, for instance, can be broken into different categories such as food, entertainment, and décor. Spend a little time at the end of each month adding things up into categories to see where you may be going overboard.

I try to stay away from stores like Wal-Mart  and Target because I usually walk in with the frugal intention of buying a razor at a "rolled back" price, and walk out with a cart full of stuff I didn't really need. It's like entering into an enchanted forest, you loose your senses and have encounters with floating happy faces who encourage you to buy six movies from the 1980s that you've already seen just because they are $5.00 each, and more throw cushions because they are just so pretty and reasonably priced, even though they will leave you with no more room left to sit on your couch. All these little things add up fast and you're left with your head spinning as you come down from your retail high at the cash register.

Take an inventory of your spending this month, where does your money go each month and what are your impulse purchases costing you?

There's another problem that we department store floozies create for ourselves, it's called deficit spending. When we go to the store with the intention of spending a certain amount of money but end up with a whole lot more at the cash, what do we do? We rationalize that this purchase can no longer come out of our grocery or entertainment budget because it is just too varied, so we put it on our credit card and into a category called 'let's pretend that didn't happen'. The problem is that, because of our guilt and shame over the silly purchase, we literally forget that it happened and do not make the note to put that money back onto the card within a month. Then what happens? Those fluffy and inexpensive throw pillows that are taking up all the real estate on your couch start costing you more and more money every month while you live in denial of the not so soft facts about your purchases.

Facts and Stats
What is your debt really costing you? Let's turn to one of my personal heroes, Gale Vas-Oxlade, to teach us a thing or two about what our debt is really costing us. I am such a fan of her no-nonsense approach to personal debt. On her TV show, Till Debt Do Us Part, Gale sugar coats nothing and tells couples the cold hard truth about where their debt will leave them in five, ten, and twenty years time if they don't start paying it off now. Most people think that using a credit card and paying the minimum balance is like renting to own. What we fail to realize is that only a small portion of that minimum payment is going toward the actual purchase. Since we are committing to break up with Johnny Debt, we won't be using our credit cards to make these sort of silly purchases going forward, so let's focus on how to get rid of the dead weight. Paying off debt in three years is a good time frame because it should be manageable, and any longer will cause what Gail refers to as Debt Fatigue and, me thinks, depression, which we all know just leads to more shopping!

Here is a way to calculate how you will pay off your debt in three years and also see what your debt is costing you monthly.

Let's start with the first card - and I know you have more than one - let's call it the Crappy Card. Your Crappy Card currently has a balance of $5,000 (I'm not judging you). Lookup the interest rate on the Crappy Card, I'll wait while you dig up your last bill that 'fell' behind the fridge. Now, let's say that the interest rate is a 18%, perform the following calculation: Balance times Rate divided by 100 and then divided 12. This will give you the amount that your debt is costing you each month (if you make no further purchases of course). In our scenario that number would be $75.00. Seventy-five dollars is being added to your balance every bloody month!! Ouch - I bet your minimum payment isn't even covering that seventy-five dollars, so how could we possibly think we are ever going to reduce our balance if we go on this way? To pay the interest and start bringing down our balance, we have to suck it up and pay more, it's that simple.

So now that we know what our debt is costing us, let's figure out how to calculate what our payment will need to be to get us all paid up in three years. Ready? Here we go. Take Your balance and divide it by his 36 (36 months in 3 years), now add your monthly interest to that and voila, your new monthly payment. Again, our scenario should yield a monthly payment of $213.89. This is a simple way to calculate your payments but it does not take into account the fact that your interest amount will gradually become lower. It will, however, act as a good guideline to getting you where you need to be and even a little faster as a bonus.

Below is a table based on our Crappy Card scenario that will give you the actual amortized amounts for getting us paid out in exactly three years which, as I said is slightly lower, and maybe a little easier to swallow. You can find a plethora of debt calculators online, this one is from The total amount of interest paid would be $1507.45. The total amount of payments paid would be $6507.36. That's $1,507.36 more than what we currently owe, and that is why interest is evil.

$5000.00 at 0.18 over 3 years.
Monthly payment= $180.76

So what if we just keep making our minimum payments? Let's take a look at how that will look. As an example, the bare minimum payment would be 2% of the total owing - in our case $100 for our $5000 balance on the Crappy Card. According to the Government of Canada's Credit Card Payment Calculator Tool, that would take us 7 years and a 10 months to pay off, cost us $4,311.18 in interest, and we would end up paying $9,311.18 for our $5000 debt. Not to mention the fact that we would just give up at some point and start piling it on again.


Credit cards are for borrowing, not for spending. Why didn't anybody tell me this sooner?
At, I learned about a little something (depressing) called Opportunity Costs - basically, it's the money that you went and purchased on a credit card and are now paying interest on when you could have foregone that silly purchase and put your money into something that appreciates, as in will gain money, like an investment portfolio plan or a home etc. They also point out the fact, on this website, that credit cards make us dumb (I'm paraphrasing). Having access to credit cards, as I've said time and again, gives us a false sense of security. We go buying things willy-nilly without thinking about the actual cost, if we were paying in cash, we wouldn't buy a quarter of the crap that we do. Think about your last ten purchases on credit. Seriously, go look them up - would you have paid cash that you will no longer have available to you in your account for even five of those items? The truth hurts sometimes, we're emotional spenders, you and I. We love our money and hate to part with it, but for some strange reason, we feel OK putting things on credit cards that will eventually end up costing us more. It's not just a local or national phenomenon either - look at Greece. They wanted to provide services to their people, and they did, but forgot the tiny detail of actually paying for those services. Interest added up and now all hell has broken loose over there causing ripple effects across the globe. Way to go Greece, way to go. They'll come back eventually though, hopefully better than before with lessons learned, just like you and I will too.

Here is a list of issues that getting into a relationship with a bad boy (credit cards) can cause:

Sucky Credit Score
Big Brother is watching and reporting you to the Credit Bureau. The more debt you have without increasing your salary the lower your credit score drops. Get in touch with Equifax or TransUnion to get your free credit score information. Free is going to be your new favourite word, I want you salivating like Pavlov's Dog every time you hear the word free, but more of that to come later in the book.

Getting Cut-Off
Similar to getting cut-off for drinking more than you can handle and making a complete ass out of yourself while drunk-texting your ex at the bar, the bank can cut you off too if your Credit Score drops. They can even force you to start paying them back by automatically withdrawing a preset dollar amount from your bank account monthly, similar to sticking their finger down your throat to get the booze back, catch my drift? Not fun.

High Interest Payments
The more you owe, the more interste you'll have to pay. Also, if you try to get a new card to play a little switch and bait with your debt, the new cards will come at a higher interest rate because the banks know you can't be trusted. But, they do trust you not to pay off your debt and to keep them in the business of screwing you out of your money.

Nobody Will Hire You
Going back to that old Credit Score one more time, be careful when looking for new employment with a higher salary to pay for your indiscretions, you might not get hired if they check your credit score. If your Credit Score sucks, they might come to the conclusion that you aren't as reliable as your resume says, and maybe aren't the type of person they are looking for after all.

THIS MONTH'S MANTRA: Drop it like its hot!

Get out while you still can! The time is now. I'm sure you've gone through trials in your lifetime, we all have, and therefore we know we are capable of enduring. We can do this and we can make it fun, I know you don't believe me right now, but you'll see. Once we do the hard work of scrutinizing our spending and calculating our debt repayments, and creating a budget, we can get to the fun stuff. But for now, roll up those sleeves and get ready to kick your credit cards and your debt to the curb.

Well, I did it. It was painful and humbling to see the way that I've been spending my money. I used four months' worth of data  (as described above) to discover were I've been blowing my budget. Here are my results:
  • Apparently I love to hate to love Wal-Mart, I've spent $1,711.55 at Wal-Mart over the last four months! That's about $425 per month. Ever since they added a grocery section, I stopped going to the grocery store regularly with my fiancé like we used to, it has thrown my shopping right off track. We talked and agreed to do our groceries at least every second weekend together at the grocery store like proper adults.
  • I spend an additional $175 in groceries per month at the actual grocery store monthly (for a total of $600 in groceries monthly - does that seem excessive to you?)
  • Coffee and Donuts - I spend on average $10 per months, not too shabby thanks to my drink coffee at work trick.
  • Dining Out in Left Field - I spend an average of $150 per month on eating out for lunch, with friends, or when I don't feel like cooking.
  • I also love going to the movies, I've spent $186.65 at the movies over the last four months (about $50 a month). I will go to the movies with anyone that asks, I love the movies, I really do!
  • Dress to Impress - I spend an average of $125 on clothes per month - in my defense, I needed a new bathing suit for our trip back in May and a great dress for an event coming up this month.
So what does it all mean? Now I have to compare my finding to the budget I setup for myself last year. I think I should have a drink first before I get started.

Conclusion: Because I budgeted $500 per month for groceries and food including restaurants, and another $100 for what I call my Sanity Fund for movies and clothing and hair, I've been spending on average $330 per month over my budget. That would explain why I have not been making a dent in my credit cards this year. Yes, I'm ashamed, but I'll get over it.

From my initial Get a Grip a while back, I started to suspect that Tim Horton's was putting crack in their steeped tea, so I quit cold turkey. Two positive things came from this: I stopped hemorrhaging caffeine money and also stopped eating donuts their massively addictive Timbits. I even wrote a break up letter to Tim Hortons on my blog. Instead I started buying Hazelnut flavoured instant coffee for work which satisfied my need for speed and my sweet tooth, and saved me about at least $40.00 per month!

There are a slew of apps out there that can be used to calculate debt repayments, just be weary of entering personal information, you are, essentially, putting that information onto the internet.

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