Canadians’ household debt climbing to new heights. Why are Canadians acquiring so much debt and ignoring lessons from the USA’s sub prime debacle? Cheap, easy money is addictive! Besides, history would suggest that when housing prices fall and interest rates rise many people will have no problem using the victim card and blaming financial institutions, businesses, the one percent … everyone, but themselves.
Let’s look objectively at the size of this problem as reported over the past three years: (more…)
How do you budget when mired in debt? You know you have reduced to the limit; fluff is gone. Still, your financial adviser tells you budgeting is the certain, orderly path to debt freedom. How?
Try this three-tiered budgeting approach to emerge from debt gradually, with a strong foundation:
Money management is lifestyle management; so to succeed you must adjust your lifestyle. Take a few steps back before you start advancing; but understand that the journey could be long and slow.
This is the most difficult place to live. Deep in debt, unable to do what you want, persuaded you have sacrificed completely, you know today’s expenses exceed your income; Be cautious!
The sacrificial living level means spending, including debt repayment, below your income, consistently. It means reassessment of needs and wants to focus on “must haves” only. To start, you need to review the previous three-months’ spending. Second, track spending for one month. Third, set a goal to adjust your lifestyle to the level your income will support.
From this review, list items you must have to survive, to be ethical, and to be legal. These items alone will be in your sacrificial budget:
Basic groceries (eliminate pop, chips, junk)
Essential health care
Many people’s sacrificial budgets exclude these items:
Pets (This is tough to do, and highly personal)
Paid entertainment: cable, satellite
Folks will tell you to use coupons. Be cautious; use them for needed items only. Don’t let them drive your spending.
If you own your home and the market value exceeds your mortgage, consider selling it, repaying debt, and starting over. Next, rent and save at least 20% down payment to buy a home. If your mortgage is more than the market value of the home, work with your financial institution to get help, don’t walk away.
Sacrificial living can be lonely. Consider joining an accountability group, Bible study group, or other small group. Accept your condition; don’t grumble. This is an opportunity to learn, grow, and later to help someone in your current position. Keep a journal to record progress, challenges, and set backs.
Time spent in this phase will depend on your attitude, commitment to it, and your indebtedness. Living here will be inconvenient and challenging because you must sacrifice and forego conveniences.
When the fridge, washing machine, or other appliance breaks, you can’t spend to fix or replace it. Your mantra must be: I cannot afford more debt; I am at my limit. I must be patient, humble, creative.
As you become comfortable — realistically, less uncomfortable — living at this sacrificial level, your attitude to spending will change. You will notice you need fewer clothes; you will eat out fewer times; and you won’t follow the crowd to upgrade.
When do you graduate from this stage? When you accept and can live consistently, though uncomfortably, in your income, including repaying debt, and you repay consumer debts.
This second level is where you want to build a solid foundation. It is where you fix a sustainable lifestyle without borrowing. For everything except a home, pay cash, or use a credit card and pay the full monthly balance.
To your sacrificial budget, add specific discretionary items ensuring total expenses are less than 85% of regular income. Save another 10% of regular income in a capital fund to replace items with a life longer than two years, and for major repairs. Build this account to buy big-ticket items without debt. In the first year in this level, save the remaining 5% of regular income for emergencies.
This is the level you want to operate even in difficult times. The key is to be steady in the good times, and avoid splurging. Most of all, be passionate about living at this level. You must decide when to spend always; never allow cheap financing to seduce you.
Supplemental Ah; the good life. You’re confident you are maintaining a steady spending level. You are planning major discretionary spending, such as big-screen TV, boat, or hobby items, and paying for big buys from your capital fund.
In the supplemental phase, you add “nice-to-haves” without incurring debt, and without using funds saved for earlier phases.
Debt causes loneliness and inconvenience; still, it could start permanent, invaluable lifestyle-control lessons.
Getting out of debt can be frustrating, and time-consuming. The three-tiered budgeting path will help to minimize frustration and time; it is effective. Try it; the solid foundation is invaluable.
Like the rest of society, Christians continue to accumulate debt to buy stuff to satisfy various wants. The Bible provides key passages that each of us needs to heed. Among other things, it teaches us about God and money. Daily, we should recall Luke 12:15 (NIV): Then he said to them, “Watch out! Be on your guard against all kinds of greed; life does not consist in an abundance of possessions.” Powerful, relevant words from Jesus to each of us. Applying them and heeding messages below will lower debt. Do you agree? Try it!
Folks don’t surrender every area of their lives to Messiah Jesus, don’t follow His directions, so they get lost. They acknowledge in their heads He owns 100%, but won’t allow him to handle more than a tithe, 10%, though that’s not today’s Biblical giving standard (2 Corinthians 8-9).
Folks believe Jesus sees as they do, so they don’t believe, or trust Him to do in His time what they can’t see, and what He promises (Matthew 11:28).
Folks don’t realize they must bear effects of their poor choices. They blame others–government, financial institutions, parents…
Folks don’t distinguish wants from needs; don’t realize Jesus supplies needs, banks supply funds for wants–at a cost. Instead of going to Jesus, the Owner, and waiting for Him to satisfy needs, in their time, they go to financial institutions for funds.
Folks don’t accept what they have, who they are, and where they are as the base to build on. They don’t accept their incomes should set living standards and their spending limit. Most of all, contrary to popular unbiblical teachings, they don’t accept that Jesus promises eternal life, not material wealth.
Folks don’t give thanks in all circumstances (1 Thessalonians 5:18). They become victims, wallow in circumstances, focussing totally on them–missing what God prepared for them.
Folks are impatient. Rather than save regularly to buy stuff, they respond to merchants’ enticements, borrow and dig deep holes. So, they don’t plan for the predictable, and are surprised when they need to replace the fridge, stove, car, or to pay their children’s post secondary education.
Folks are proud. In an emergency, they panic and define “needs” incorrectly as monetary. Rather than be humble, seek help from their “brothers and sisters” to satisfy a transport need as they wait to see what the Lord prepared for them, they borrow to fix the car now.
Folks don’t creep before they walk: using a small or no down payment, because others are doing it, they buy a house that produces a mortgage they can’t afford.
Folks don’t plug holes to stop leaking expenses. They don’t know their spending patterns, so they don’t realize how much they spend eating out, for utilities, using cash at ATM’s, and on other small items.
Why do so many folks have difficulty with budgeting? Intellectually, they know a budget is a useful tool to help handle finances well. But they don’t use it? Why?
My informal studies and experiences point to reasons captured in these five words I call the DAVID effect:
No budget means you don’t know how much money you waste–credit card interest charges, ATM fees, and so on. And, of course, how much you spend at Starbucks, Tim Hortons, or other similar place. Truth is freeing, and if you knew your waste, you might have to change your behaviour! Ouch; maybe eat out less, or get rid of cable, satellite, grown-up toys!
Still, one day you must face the truth; why not start today?
Though many folks don’t understand what a budget is, they know it entails accountability. And they want to do what they want to do… now! Seductive, cheap credit means many folks spend irresponsibly with no need to account when they spend–that’s what they think. They forget 100% of funds belong to God, and one day they must account to Him (Romans 14:11-13).
We are a society of victims. We eat junk food and then blame the junk food provider. Today, we can choose from so many reasons to justify irresponsible behaviour:
I don’t have time; though each person has 24 hours.
The bank made me borrow.
The Government must help me.
Sadly, society accepts “deflection speech” as normal, and doesn’t call anybody to account. Look at your behaviour and ask the Lord to convict you of irresponsible acts.
People believe a budget is a strait jacket that controls them. Yet, nothing could be furthest from the truth! A budget is a freeing tool you control. A budget is merely your best estimate of resources–time, talents, money–needed to do a specific goal. The false view freezes folks so they don’t know how or where to start. Why not start here?
Often, I hear: ”You are disciplined, but I am not.” My answer: Second Peter 1:3 tells us His divine power has granted us everything we need for life and godliness. So, since handling finances well is according to God’s will, Christians have no excuse but to accept, with God’s help, we can start living a life that glorifies God. Recall, Christians have the Holy Spirit as teacher and guide. The Holy Spirit will give us the discipline we need to do a budget and follow it. But, we need to start living as Christians in every area of life, and be less selfish.
To stay on top of finances we need to work with a budget. Christians are God’s stewards and have access to Him to help us do this. Christians have no valid excuse to not work with a budget. Jesus, speaking about discipleship, says: “Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?” (Luke 14:28).
Sure, many are single parents who must work and look after kids; some have high stress jobs with long hours. Still, God knows this, and when we work with Him, He will guide us to all truth.
On June 15 2009, the Bank of Canada said, “surging household debt is emerging as the greatest risk to Canada’s financial system.”
According to Vanier Institute of the Family’s 2009 Report, issued February 2010, “from a household perspective, there will continue to be high unemployment for sometime, income growth will remain weak, and there is an urgent underlying need for many families to repair and/or strengthen their household balance sheets… For far too many, there is too little income, too much spending, too little saving and too much debt.”
In May 2010, a report titled “Where is the Money Now: The State of Canadian Household Debt as Conditions for Economic Recovery Emerge” by the Certified General Accountants Association of Canada (CGA), stated, “the level of debt adjusted for inflation and population growth shows a continuous upward trend over the past two decades, as well as in 2008-2009. In fact, if household debt was to be evenly spread across all Canadians, each individual would hold some $41,740 in outstanding debt in 2009, an amount 2.5 times greater than in 1989 … Rising debt continues to be primarily caused by consumption motive rather than by asset accumulation.”
There is good news and bad news about the household debt trap. The good news is, it is accepted generally by policy makers that Canadians are carrying too much debt. The bad news is Canadians aren’t heeding warnings. Also, we do not hear much about the need for Canadians to start lifestyle changes to lower debt. Here are a few suggestions.
First, understand that to reduce debt, folks must reduce spending, which could mean lowering living standards. Increasing income doesn’t address lifestyle issues, and usually is a temporary fix.
Second, each household needs to work with a spending plan. Without such a plan, folks will spend funds they don’t have. And as the CGA report highlights, Canadians are taking on debt primarily for consumption items. Pay special attention to housing costs. If you might not be able to cope with at least a two percent point rise in mortgage rates, look at all options to deal effectively with housing in the near term, including selling and renting until finances are in order. Seek God’s guidance in all areas. It is fine to rent when you don’t have the capability to own … really; it is!
Third, folks should … (a) work to repay credit card and other consumer debts, then (b) start a Capital Fund, to pay for non-routine spending; in Canada, using the Tax Free Savings Account (TFSA) as the savings vehicle. (c) after you establish the Capital Fund, start working on paying extra funds against your mortgage (d) unless your employer contributes to your pension plan, defer setting aside funds for pensions until you repay your mortgage.
I believe we are at the brink of a personal financial crisis. Many folks will have to face consequences of buying unaffordable homes, and using seductive financing to buy consumer items! Still, it’s never too late to stop debt accumulation and start needed lifestyle changes!