It's a common complaint: "We earn good money but somehow end up dipping into our line of credit every month. How can we reverse this trend?" n For a month, get receipts for every expense over $1 and put them into envelopes labelled with your various spending categories. Include notes on pieces of paper to cover fixed or automatically paid expenses like mortgage and utility payments.
At the end of the month, review all the envelopes (having written the totals on the front) and receipts. List the spending categories in order of priority.
Compare the overall total with your after-tax, after all other deductions (take-home) income. Assess each expense: need or want? Needs come first, then wants.
Trim each category (starting with the lowest priority expense category) until you balance your budget - that is, outgo equals income. Include an amount to pay down debt on a monthly or ideally weekly basis.
n Once one debt is gone (start with the most expensive), then add 75 per cent of that payment to paying off the next most expensive debt. From the remaining 25 per cent, have half automatically transferred every payday into an RRSP or other savings-investment program. Have the other half automatically transferred into a "spend and enjoy" account.
To reinforce the debt reduction program, stop using your credit cards (e.g. freeze them in a block of ice) and arrange to have a sinking cap put on your line of credit - that means, as the balance goes down, so does the borrowing limit on your line of credit.
To really cut back expenses, you could eliminate one or more major items - like a second (or third) car, expensive hobby, outof-town holiday, and so on. People make these decisions based on which is more painful: the constant and often increasing debt, or giving up the spending "want" (versus need). In serious cases (e.g. one doctor and family with take-home pay of $350,000 a year who regularly spent $400,000 a year) people have actually moved to less expensive housing.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]
