This morning I heard a story on the radio about a young couple who paid off their mortgage in five years. Their story was part of a piece on rising household debt in Canada and how that will have an impact on families when interest rates start to climb. I suspect the reporter’s angle was to illustrate that it is possible to pay off debt, even significant debt, in a short period of time. It got me thinking.
Over the last seven years in my Rent to Own business I have seen a lot of troubled files cross my desk. You might argue, quite successfully, that I only see or hear about the difficult situations by virtue of the business I’m in and you’d be right. But boy are there a lot of them – families in tough financial situations – and they’re coming across my desk in ever-increasing numbers. There are certainly cases where families have had to take on high levels of debt to deal with personal crises such as a divorce, major illness, job loss or a forced move, however most of the time the financial challenges accrued or worsened as a result of one major culprit: overspending.
I recently interviewed a very successful financial planner for my Women’s Money Day video series and he boiled it down to this: Your financial success begins with one key number, your bottom-line cash flow. Take the money you bring in per month and subtract the money you spend. If the resulting number starts with a negative sign, you’re in trouble; you will never be free as long as you’re living with negative cash flow.
In previous posts, I’ve described this as corrosive debt, the kind that eats away at your buying power and slowly sucks more and more money out of your pocket.
I don’t think there is a single person who doesn’t know the importance of positive cash flow, otherwise referred to as spending or living within your means. So why don’t we all do it? What is it that causes families to entrench themselves in the financial quagmire of ever-increasing debt loads?
I’ve been wrestling with this question ever since I started to work with families with credit challenges, and after seven years of seeing who succeeds and who fails, I can tell you that it can often be reduced to one word: willingness.
The young couple in this morning’s newscast were pretty extreme in their approach to paying off their mortgage: they bought a house that is beneath their means (i.e. less house than they can afford), they took on extra jobs, they refused to spend on non-essentials and, by their own description, they pretty much didn’t have a social life for the better part of three years. Five years later they have wiped out their mortgage. From the sound of it, it wasn’t that they have super high-paying jobs either; they just made paying off their mortgage their number one priority.
Can you imagine being done with your mortgage in your twenties without an inheritance or a large gift from the bank of mom and dad? That’s amazing.
That said, I have no interest in martyrdom regardless of the cause. I like my friends and red wine and good food. I’d sooner count the blades of grass in my yard than go without a social life for three years so I’d hardly recommend that to anyone. If you’re willing to do it, more power to you, but as an approach it’s too radical to appeal to anyone beyond the hard-core, committed types.
The good news is that you don’t have to stop living to pull yourself out of debt. You just have to establish your priorities, plan your spending based on your income, and when you’re done, you’re done.
I can hear it now: “But Doris, you don’t get it. My son needs hockey lessons, my daughter has to play soccer and they both need piano lessons. Plus we have to visit our families and …. (insert your own list of needs here).”
I get it, we all want lots of things particularly when it comes to our children, but the reality is that there is only so much cash coming in per month and until you increase that amount, some expenditures may need to be cut.
Gail Vaz-Oxlade suggests that we sit down and openly discuss our financial situations with our children to bring them on board, especially when sacrifices have to be made. In this way, children will understand why we choose not to participate in certain activities. It’s not about having to decline a trip out to dinner, it’s about choosing not to do so for the sake of a bigger goal – financial solvency.
When thinking about what to cut, I suggest you keep Ramit Sethi’s advice in mind: Go for the big wins, not the small, inconsequential stuff. Sure, passing on that latte might make you feel like you’re making a sacrifice, but seriously, how much money will you save in a year, $100? If instead you choose to cut out cable for a year or forego any restaurant dinners in that same time-frame, you will net much more significant savings. Focus on items that will have a bigger impact; don’t nickel-and-dime yourself forward. Go ahead and have your latte.
This excuse appears to be a perennial favorite: It’s impossible because…. (once again insert just about any excuse). As I said earlier, it boils down to your willingness to tackle the problem. In 1998 I inherited a 6-figure financial hole and while I certainly did spend some time feeling pretty sorry for myself, sheer terror knocked me out of my stupor and gave me the kick in the backside that I needed. Two years later the debt was wiped out. I won’t tell you that it was easy, but it was doable with persistence and a willingness to make hard choices. If a broke widow with no reliable income can do it, so can you.
I’ll leave you with some words of advice that I received a long time ago: If, for a short while, you do what others won’t consider doing, you will be rewarded for a lifetime in ways that they can only dream about.
Until next time, Survive, Thrive and Grow.