So You're Young and in Debt, Now What?

There comes a point in everyone’s life where whatever money we have is just not enough.

Particularly when we hit post-secondary education, marriage, home-ownership, parenthood, grandparenthood, and the list goes on and on and on.

But being young, we’re at an advantage. Except of course when it comes time to pay the exponentially growing cost of tuition.  Believe me when I tell you that school debt is just the least of your worries.

In fact, school debit is considered “good debt”, according to money guru Gail Vaz-Oxlade. With such low annual interest, we’ve got other things to worry about. Like those evil credit cards that carried the cost of our textbooks, ridiculous hourly rates for parking, and maybe an outfit…or three.

Here’s a little anecdote. When I turned 18, my mother suggested I start building credit for myself. When I applied for a credit card, the bank asked me if I was going on to post-secondary education. When I informed them I was beginning university that September, they gave me $5000.00.

Do you see anything wrong with that story?

Nothing?

The problem is that I said, “the bank gave me $5000.00”, instead of “the bank lent me $5000.00”.

And that, precisely, is the problem with young people and debt. The reality is that too many young people view credit as part of their income; money that was given to them. We forget that while we might have all this money available to us today, we’re going to be paying that back tomorrow, and the day after, and the day after, and the day after that.

If you’re young and in debt, here are a few pointers on how to not let debt consume you.

Start saving as soon as possible.

Its important to get into the habit of putting money away, even if you are currently in the process of paying off debt. Some people’s logic is to pay off debt first, then start saving. This sounds like a great idea, but we are all prone to unexpected expenses, and without an emergency fund, we end up using credit for emergencies! That often lands us right back where we started.

If you can put away just $25 or $50 every paycheck you’d be surprised what you would have in just a few months. While saving for the first time can be very hard, you get accustomed to living on a few bucks less each time. Chances are, this money would have been spent on frivolous things like McDonalds or drinks at a party.

Tip: Have a set amount of money automatically deducted on your payday and put into a separate account so you won’t have to depend on your self-discipline.

      Come up with a realistic repayment plan.

Going online and doing some number crunching helps to map out what your repayment future will and should look like.  With a credit card cost calculator, you type in the total amount owed on each credit card, along with the annual interest rate, and the calculator will tell you how long it will take you to pay off using your minimum payment, and then it will tell you how long it will take to pay off using a different monthly payment.

If you have an idea of how long you want to give yourself to pay it off, you have the option of entering how many months you intend to pay your debt off in. It will give you a monthly figure, and if you can work that into your budget, you’ll be debt free in as short as you will allow yourself to be.

Tip: For a good credit card calculator, try: http://www.debtcanada.ca/budget-calculators/credit-card-payment-calculator

 Don’t worry.

Debt can be a pretty scary thing, but letting it intimidate you and stop you from living your life is pointless. Instead, be proactive about your debt. Challenge yourself to get it paid off in one year or two years, or however long you need.

If there’s anyone who knows the sacrifices that must be made in order to pay off debt, it’s me. Remember that $5000.00 that the bank gave me? I’m still paying it off 4 years later.

The first two years were the hardest because I was so down and out about being in debt that I ended up drowning myself in my own misery. But after doing a lot of research on money-saving, I felt a little more empowered to take a different approach to my debt.

Perhaps the highlight of my financial life so far was when it came time to renew my credit card earlier this month. I kindly declined the bank’s offer to reactivate my Visa for another four years.

It was a hard decision to make, especially when the voices in my head kept asking questions like, “But how are you going to pay for parking?” and “How are you going to buy stuff online?”

But I made it anyway.

Tip: Never miss a minimum payment on a credit card! No matter how much debt you have, if you can prove you are responsible enough to make your monthly minimum payment on time, your credit rating will not be jeopardized by the money you owe. All the bank wants to know is that they are still making money off of your minimum payments.

The stress that can come from not being in good financial standing can do a lot of wear and tear on our bodies, our minds, and our overall wellness. But being in good financial standing doesn’t mean not being in debt.

It means doing something about it. 

The Young Person's Guide to Financial Freedom

I recently came across financial stability.

I don’t define this as being rich, having tons of excess cash, or having tons and tons of gold from Oliver the Cash Man. Instead, it just means that I am able to pay my bills before their due date, buy something when I want it, and have money left over for a rainy day.

Part of this process has been becoming a lot more realistic about my expenses, a lot more realistic about my income, and finally, planning for the future.

This three step process is one that I have been practicing for a while, and have encouraged others, especially young women looking to take reign over their finances, to try also. Here is the three step plan in detail, and perhaps your guide to becoming more financially stable, with a reserved tank of funds for all of life’s expenses.

Before diving in, you have to figure out your monthly income. If it varies from month to month, work out an average from your last 6 months of pay. Once you have a solid number to work with, things become much easier.

1. Calculate your expenses, and be realistic.

Your expenses are pretty much anything you spend money on. This includes your bills, which are your needs, your variable expenses, which are most often your wants, and all the other miscellaneous things you pay for in between.

According to financial guru Gail Vaz-Oxlade:

50% of your monthly income should go to your needs monthly.

25% of your monthly income should go to your wants monthly.

10% of your monthly income should go towards savings monthly.

15% of your monthly income should go towards your debt monthly.

For instance, if your monthly income is $1000.00, you should spend up to $500.00 on things like insurance, your phone bill, your groceries, and rent, if you pay it. If you find that you spend more than 50% of your income on needs monthly, it’s time to rethink, and recalculate.

Can you really afford to live on your own, or is it time to get a roommate?

Is your phone plan too expensive?

Despite these expenses most often being fixed, there is always an alternative, and there is always a solution.

2. Be more realistic about your income.

I recently started working in a cheque cashing store that offers payday advances. You would not believe the amount of people that depend on payday loans to survive until their next payday. This illustrates a huge discrepancy between what the individual is making, and what they are spending.

If you are not making enough money, and have to fill the gaps with credit, loans from friends or family, or payday advances, you need to do something about it. This means finding another job that pays you more, working more hours, or getting another job that will put an extra couple bucks in your pocket per month. By depending on credit to give you what you don’t already have, you are entering into a spiral that can be very detrimental, and very hard to get out of. The interest rates are lethal.

The best thing to do is make more money, rather than look for ways to just have more money, because in the end, you will have none.

Or, if you do have money, it’s never really yours.

3. Plan for the future.

This is actually my favorite part of budgeting. It allows me to look at my future with hope and confidence rather than with sadness and frustration, which is the case for a disheartening amount of people.

Planning for the future isn’t necessarily opening an RRSP at the age of twenty, although if you can, you really should. Planning for the future is as simple as being aware of your bills and their dates one or two months ahead of when they are due.

For me, I have a Windows Excel spreadsheet. In the far left column, I write down all the categories I could possibly spend money on, things like travel, gas, insurance, clothes, entertainment, food, even a category for “miscellaneous” things that don’t fit into any category!

The columns at the top are the two weeks I have with each paycheque, and beside the date I put how much money I have to my name in total. Beside each category, I write down what I have spent every night before I go to bed. I call it “updating my finances”.

In the far right column, I write down whatever bills I have due that month. For instance, my phone bill is usually about $100.00/month, so I put that in red ink in the “Phone Bill” column. When I pay it, I change the red to green. It’s much easier on the eyes. I also write down what events are coming up that might cost a bit more money than usual, or a birthday that might require a gift, that way, I budget for these things, saving me the headache of being unable to afford to go out with my friends for a night, or buy a gift for a friend I really wanted to simply because I “had no money”.

Ever since I started writing down what bills I have due at the end of this month or next month, it has encouraged me to split the payments throughout the month instead of waiting until they are all due at the end, leaving me with no money for everyday life.

The three step process of results for this three step process of financial planning, you ask?

1. I have a lot more extra cash.

And by extra, I mean cash after I go shopping. Cash after I pay my bills. Cash after I go out to dinner. Being more aware of your money really helps to stop you from spending it all at one time, and all in one place.

2. All my bills are paid on time.

In life, you have to meet deadlines, whether it is for assignments, submissions, or finishing a book to bring it back to the library on time. Some of the most important deadlines you will have to meet are the financial ones; the ones that go on your financial credit report and determine whether you are a risk to creditors, landlords, and employers. Being able to meet and honor deadlines is being an adult.

3. I am less stressed about money.

I used to sit in my room and just stress out about paying this and that and constantly feeling like I never had enough money.When I realized that it wasn’t a case of not having enough money, it was simply a case of spending it on the wrong things, I felt richer. By knowing what portion of my money goes to what, I know what portion of my money I have for recreation and entertainment, and I can spend within that limit. I also get the added comfort of knowing that I am still saving, knowing that I am still paying my bills, and essentially, knowing that everything looks bright.

So there it is guys.

Some people spend their lives and their money obsessed with Nikes and Jordan’s; a pair of shoes that could pay a bill, or be tucked into a savings account. A pair of dunks won’t pay your mortgage when it’s time to buy a house. And surely, if all your money goes to shoes and clothes, you won’t even have a down payment. Is it really worth it in the end? You might look like the coolest guy on the block for the time being, but really, you're just poor and cool. Think about it.

While it is important to enjoy your money, it is much more important to make sure you have money to enjoy.

Happy savings!