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We’re 78% of the way through 2023.  If you pay for anything, at all, anywhere, you’ll agree that prices have gone up. 

If you have debt, that price has gone up too.

As a group, Canadians are pretty comfortable with debt.  Especially debt against our houses.  For a long, long time, borrowing on a line of credit was cheap, seemingly easy money.  And since our house prices only seemed to go up, what’s the harm?  Where’s the risk?  Why wouldn’t you borrow to get what you want today instead of waiting?

78% of the way through 2023, if you have borrowed on a line of credit, or you have a large mortgage, you are getting more familiar with the risks.  And the discomfort.

This is one of the places where net worth and cash flow collide in our thinking.

For a long time, low interest rates meant that you still looked good on paper, even with a mid-six figure mortgage.  And your cash flow felt fine.  But it wasn’t long-term fine.

Now that your payments have doubled or tripled, your cash flow isn’t fine.  It doesn’t matter that your net worth still looks okay/ good / great.  You need to be able to make those debt payments AND buy groceries, pay for your car and buy winter boots for everyone in your house.

If you’re feeling cornered by your debt and are looking for a way out, start with the steps below:

How to fill in your financial picture with facts:

• Understand your net income.  This is the amount that lands in your bank account every pay period.  This is the amount that you have available to cover ALL of your expenses.

• Organize your expenses into two broad categories- fixed and variable.  Focus on fixed right now.  Get a sense of your variable, it that’s helpful for you to move to the next step, but if you’ve tried this before and walked away, you are behind on payments or money is keeping you up at night- find your fixed expenses only.  You’ll see how variable comes out after the next step.

• Calendar out your net income and your fixed expenses- when and how much comes IN, when and how much goes OUT.  Do this in whatever format works best for you- print a calendar sheet and get a pen, use an online calendar.  If you are feeling overwhelmed by payments- you need a visual. Don’t shortcut this step.

• Now you know how much of each pay cheque is already spent (fixed expenses) and how much is available for variable expenses (these are also necessary, but we often have some flexibility in how much or when we spend in this category).  Move the money that’s available for your variable expenses to a separate bank account.  Note: you can keep track of this amount on a spreadsheet, in an app or another way that makes sense to you.  A separate bank account is the fastest ‘check’ on where you’re at with your variable spending.  For some people, the cost of an additional bank account (most frequently heard objection) is a small price to pay for financial stability.

• Make pro-active choices in your spending.  Now that you know what’s coming in when and how much is scheduled to go out and when, you can start making adjustments.  If you don’t have enough to cover both your fixed and your variable spending, you will need to make some hard choices.

There’s much written and recorded about lowering your fixed expenses- think ‘cancel your subscriptions!!!’ conversations.  Often, it is difficult to significantly lower your fixed expenses without large lifestyle changes.  Most of our fixed payments are connected to a big lifestyle choice- where you live, what you drive and stuff you own and need to maintain.  It’s worth going through the list to see what’s available to reduce or eliminate, but be prepared that this may be nibbling at the edges of your situation.  If cancelling a $20 Netflix subscription solves your debt problem- congratulations.  It likely won’t.  It may give you the motivation to work further and find more reductions- congratulations!!

If you need a big reduction in expenses- it is time to look at selling your home, switching out your car.  Be aware that these are both difficult transactions- emotionally and financially.  More and more car loans are 8 years long.  If you are 5 years in to an 8 year loan, and you need a lower payment, selling your current car won’t clear the remaining loan amount.  And you’ll need to find something else to buy.  Investigate before you do either of these- know the costs so you’re aren’t moving from high payments to new high payments. 

For most of us, the variable expenses are the ones that we have the most control over- both in timing and amount.  These expenses can also be hard to decrease.  If you are spending more than you are making, you need to make adjustments while you still have some control of the situation.  If you are spending as much as you are making, you have some time to figure out how to make more or spend less in the next 12 months to 3 years.  If you are spending everything that you’re making, you don’t have anything to save.  Sounds obvious, but lots of us miss the implications of this.  How are you going to replace your car?  Repair the car you have?  Maintain your house?  Manage a layoff from work without taking on new debt?  That’s a brief list of the short-term expense spikes that affect many of us.  Long-term, how are you going to stop working?  Preview of a future post- selling your home isn’t an answer to this question.  At least, not an answer that you’re going to like.

For the next 4 weeks, spend time with the 5 steps to filling in your financial picture:

1. Understand your net income
2. Organize your expenses into fixed and variable
3. Calendar out your pay deposits and your fixed expenses
4. Calculate and move your variable money to another account
5. Make pro-active choices.  You now have the knowledge to spend within your pay periods!