Today we hear a lot of talk about the US economy approaching the so-called “fiscal scale”. What about your personal financial affairs? Are you on the fiscal scale as we head towards 2013? Canadians are overwhelmed with debt. We read monthly about the growing debt-to-disposable income ratio, which is now around the uncertain level of 164%.
Although the world and many in our country recommend our government for brilliant fiscal governance, few warn of unsustainable levels of personal debt. In fact, the head of our central bank, Mark Carney, accepted an appointment for a similar role in the prestigious Bank of England. Will his legacy here be of a hero or a villain? Will history show that he kept interest rates low for too long, encouraging many people to take on debts they could not afford?
In his honor, he, our finance minister and prime minister are warning Canadians of these dangerously high levels of personal debt. However, Carney can curb the rise by raising interest rates. Of course, higher rates will slow the current slow economic growth. However, I think that short-term pain is better than the likely collapse of personal finances that can occur if debt stays at current levels or grows.
What can Canadians do to avoid their fiscal scale? Let’s look at three vital steps.
- Accept that you are dangerously attracted.
- Set a mechanism in place to live with declining debt
- Develop a new vocabulary to guide your behavior
Accept that you are dangerously attracted
You cannot solve a problem unless you recognize it. Do you think you have too much debt? Your banker may tell you no; however, you can answer this yourself. Take action helicopter view. What are the emotional reactions of you and your family to your debt? Are you worried? Can’t sleep? If so, you have too much debt. Of course, look at the ratios, but this is the key barometer.
The emotional price of debt is the first and most significant price. If the debt is 10% of the income and creates problems for you or at least for one of your family, that’s too much. Still, you have to accept reality and decide to live with it, stop doing it, and start without a long lifestyle.
If you are a Christian, pass this emotional stress on to Jesus (Matthew 11:28).
Set up a mechanism in place to live with declining debt
People are impatient. We live in now community. Unfortunately, you’ve probably been in debt for a long time and you’re likely to get out for a long time. Accept this fact and learn to live with it.
Develop a strategy to live in debt. See how you got there; draft principles for the prevention of recurrence; and then write a financial plan – alone or with help. The plan should show concisely how, following your principles, you can be without debt for a certain period of time.
If you get into debt through impulsive spending, you can develop the principle of never buying without a list and budget. Also, when you feel you need to spend, you may want to wait 24-48 hours, during which time you would talk to your spouse or partner.
You will need to find what can work for you, decide if you need help, and try to get it.
Prepare a long meter and place it in your refrigerator. Monthly, while paying off debt, adjust the length gauge.
Develop a new vocabulary to guide your behavior
This sounds easy, it’s easy, and when you get it, it will be your most effective “debt control tool.” What you believe will decide how to behave. If you believe that emergencies happen and make you spend unevenly, you will not change your behavior. However, if you think that in addition to time, most “budget emergencies” can and should be planned by regularly allocating funds for their implementation, you will plan accordingly.
Your car will need repair. He will need new tires. Your furnace will go, etc. The question here is time. You don’t know when these potential budget breakers will happen. However, you know that they will appear, so create a capital fund, a rainy day fund, an emergency fund or any other means of saving for these foreseeable events. If you take this fact for emergencies and realize that to get there, you have to sacrifice today’s consumption, this is the beginning of your great victory over debt.
Another key change in vocabulary is to accept that you can’t manage money, you can only manage your behavior – a change from money management to lifestyle management.
With the entry of 2013, see your finances. You will find out if you are on the fiscal scale. Make sure you don’t need more money to cross, first you have to accept where you are. Then set a mechanism to live where you are while working off your debt. Then explore your vocabulary, beliefs and adapt them to reality.
Please step away from easy tempting lending and start moving away from debt.
(c) Copyright 2012, Michelle A. Bel