Creating a Budget and Plan to Have All of Your Debt Paid Off Within Five Years or Less

Budgets that work take time and effort to create and it is this time and effort that prevents most of us from creating one.  I am ashamed to say that I was a financial advisor, and I created my first balanced budget at forty-nine years old.  My previous budgets were never accurate, and expenses were always approximated. I used credit to help with any shortfalls, and that is NOT a budget!  Your budget must be balanced using only the after-tax money you bring in (not your gross annual salary), and you cannot utilize any credit (credit cards, line of credit, overdraft).  Up until I turned forty-nine, money just came and went like ebbs and flows.  I sort of had a budget, but it was “flexible” and when there was no money (which was all of the time), I would simply whip out one of my many credit cards, it was never a problem.  At one point in addition to my mortgage I actually had access to over $100,000 in three credit cards, and a line of credit of $60,000, earning only $55,000 a year!  I could buy whatever I wanted.  I would bring out my gold travel credit card and feel so important and prestigious!  All the while there was $27,000 owing on it at 19.99% interest! 

Having a budget has been life changing and has made this immensely difficult journey to be debt free much easier.  A budget tells your money what to do and I work off a budget where every dollar is accounted for, so at the end of every two weeks my budget balances to $0 and I know where every dollar has gone.  A budget simply answers the question:

Where is all of the money going?

A budget allows you to see and be in control of where you are spending every penny.  It tells you what you can afford to buy and also what you can’t afford to buy.

I’m not going to lie, creating my budget was not rocket science, however living on it and sticking to it has been an incredibly difficult challenge.  Living on a budget may be the hardest thing I have ever done, especially because there is no relief from it, and it must be done over a very prolonged period of time.  Now living on a budget today is a piece of cake but it took a lot of practice. If you have never lived on a budget starting one and living on it takes more discipline than you ever thought, you had which is the reason why so many people don’t have one.  This is where this part of the journey gets really hard, and there is going to have be a shift, not only in your spending but also in your mindset and lifestyle.  The key lesson to understanding and mastering living on a budget is that it is not at all about math; Budgets are about choices and having control over your impulses, your wanting, your sense of entitlement, your ego, your desires, and your humility, that will all need to be sacrificed in the name of a balanced budget.

When my husband and I first started this debt free journey, it took us four months to come up with a budget that actually balanced.  That means that all of our bills and expenses were paid with the income that was coming in and we were not going into debt with every pay cycle.  In my first budget we were $3,359 short per month from what we made to what we spent!  Within four months we were able to balance our budget and within the year by continually cutting our expenses we also found money to pay our debts and eventually freed up enough cash flow that $900 was getting applied to debt each month.  It took a great deal of work and daily discipline to get our budget to balance.  Even now I still work on our budget trying to find cheaper ways to save money just for fun!  To think I wasted all that extra money for all of those decades.  It is not magic, it's simply about being intentional, and learning to be aware of where your money is being spent.  

This is the part of the journey where friends and family start to call you frugal or cheap.  This is where you must cut back and say "No" to yourself and “No” to your kids and “No” to your family and friends and pets and anything or anyone that you love, so you can repay those to whom you are already indebted to.  

When you live without a budget life is chaotic and expenses are surprises that pop up when we least expect.  We treat ourselves freely to whatever we want and inevitably turn to credit to satisfy our you are worth it inside voice.  I know I’ve been there and lived there for decades!  It is very scary when you know you are going to run out of money before your next pay cheque and living on a budget completely takes that fear away.  I feel a budget is the most important part of getting on track and makes the impossible possible, by giving direction to your money.  There are a lot of great apps and programs out there for budgeting, but for me the most effective way of managing my own budget is to write it down on paper which is really what prompted this book.  Nothing else came close to seeing the actual black and white of the numbers on paper.  After over four and a half years of living on a budget I am intimately acquainted with our money and our cash flow and am still constantly looking for ways to cut expenses, even though we are more in control of our money than we have ever been in our lives.  What I love most about having the debt free journal is going back, flitting through the pages and seeing the progress we have made.  It is my favorite book that I own because we essentially wrote it together and it really documents our debt free journey.  I feel so proud of us and of how far we have come.  The budget becomes the daily reminder that you can look at, touch, and become accountable to.  It’s very easy math where your after-tax income must equal your expenses.  It is really no more complicated than that, but it definitely is a mental and behavioral game, much more than it is a math problem.

Budgets are nowhere in our culture.  Even when they are, they never seem to balance.  Look how the government runs huge budget deficits.  Global News ran a story by The Canadian Press on September 25, 2020, announcing that Canada’s federal deficit hits $148.6 billion amid the coronavirus pandemic.  That is a lot over budget!

Creating a budget can be a heart wrenching process because it magnifies one’s irresponsible lifestyle and spending.  It can make you feel sick, and is an in-your-face reality, because no one wants to admit the mess they have created.  Until you get to that point and moment of despair, going into debt each month might not even prompt you to want to make any changes or stop you from going out for drinks with friends.  The responsibility lies solely on your shoulders and no one but you will know if your budget balances or not.  There have been many products created to help us greatly with being able to live well on no budget.  Credit cards and line of credit being the most popular choices.  I can guarantee that once you create a budget and live on it, you will wonder how you ever lived without one.  

In a budget you must examine where you are spending your money, and you must cut back and adjust your spending habits and lifestyle, so you do not exceed your net income.  You must think of yourself as President of your own business.  Can you balance your books each month?  Cutting back in life has connotations of failure and of being poor and it’s a hard pill to swallow, especially when we live in a world of features, excess, extras, and bonuses.  Economical, being cheap, being frugal and living below means have negative connotations so you will have to get over that!  

For budgeting to work you are going against the grain of society and you must shift your focus and mindset entirely to living below (or significantly below) your means in order to free up enough money to accomplish four primary tasks:

1.      Pay your bills,

2.      Pay off your debt,

3.      Save for emergency and known future expenditures,

4.      Pay down your mortgage so you will be mortgage free on, or before retirement, and

5.      Eventually invest in your goals and retirement savings.

Looking back now on that first budget in 2019 and realizing we were overspending on average each month by $3,359 doesn’t even seem logical.  How did I not see this before?  Those were the black and white of our numbers.  How had I been a banker for over a decade, yet our budget did not balance by a lot!!

Like most addicts I lied and cheated myself each day.  Like an alcoholic that drinks a bottle of vodka and fills it with water, my favorite trick was to overspend using my credit card and then pay off my credit card in full each month using my line of credit and withdraw enough extra money each month from the line of credit so that I could deposit it back as a minimum payment. This gave the impression I made my minimum monthly payment, and that it wasn’t showing as late or missed.  By doing this I managed to maintain a high credit score during those years despite the debt I was carrying, as I was essentially robbing Paul to pay Peter.  I was not paying down any debt whatsoever and was constantly accruing more debt!  The only catch with living like that is that eventually when the line of credit was maxed out, I would have to refinance my mortgage, and that worked great as long as interest rates were low and house prices (and my equity) continued to increase.  That plan can only last for so long.  I thought I was so clever, but I was only cheating myself!

I know I am not alone because Statistics Canada published that by the end of November 2020, households had added $108.0 billion to their outstanding mortgage debt while simultaneously shedding almost $8 billion from non-mortgage debt since December 2019.

 Statistics Canada Trends in the Canadian mortgage market: Before and during COVID-19 Release date: February 17, 2021

So, creating and living off the budget is the hardest part of this journey and is where you look in the mirror at your naked self.  Some of you might never start this process or skip it, and if you do start it, you might never finish.  This is where you decide how sick you are of living paycheck to paycheck, and how scared you are as you get older, worrying if you are going to be living in poverty in retirement or not.  This part takes sweat and time and commitment.  Everything depends on this step.

Allocating Money for Your Budget

As a starting point to setting up a budget you will need to allocate your net (after-tax) income into basic categories.

This first exercise is to look at your net (after-tax take-home pay) and have it equal your expenses 100%.  If your expenses are higher than your net income, you will continue to go into debt each month and your budget will not be balanced.  I am providing you with percentages that serve as a general guideline for expenditures, however there is no right or wrong way to allocate funds.  You may want to cross-reference these recommended percentages as a starting point for your own budget.  The idea is that the net income balances to zero towards your monthly expenses each month.

If your housing and transportation is taking up 70-80% of your net income it will become clear that you need to make drastic changes to either reduce these expenses or increase your income.  Housing, food, utilities, and transportation are key allocations to start with.  What is important is that you understand and come up with distribution amounts that work for you and your family.  I did not include school tuition or childcare into expenses just due to the age this journal is geared towards, however if you are in your twenties, thirties, forties or even in your fifties, this may be an expense you are still dealing with, and you may need to budget in accordingly.  If you are self-employed, I would suggest prioritizing a percentage of your income aside for income taxes.

If you find yourself with excess income or a cash surplus after the money has been allocated, then I would recommend applying that to debt repayment. The entirety of your paycheck must equal 100%.

30% Housing (principal, property taxes, and interest)

10% Utilities

  9% Insurance

10% Food

10% Transportation (including car payments, gas, maintenance)

  1% Recreation and personal spending

  5% Giving and Being Generous

  5% Bank fees and interest (credit cards, loans, lines of credit)

10% Debt repayment

  5% Savings for emergency (while you are paying down debt only)

  5% Sinking Funds

  0% Daycare/Nanny/childcare

  0% School tuition/books/education

  0% Income Taxes (if you are self-employed or paid additional income taxes in previous year)

  0% Child support/Spousal support

As an example of using net (after tax) income of $5,000/month, the allocated percentages expressed as a dollar value would be:

 $1500 Housing (including rent or mortgage (PIT)principal, property taxes and interest)

$  500 Utilities (gas, electric, cellphones, Wi-Fi, cable, cell phone, etc.)

$  450 Insurances (home, auto, life, disability, critical illness)

$  500 food (groceries, toiletries, eating out, coffee, pet food)

$  500 Transportation (including car payments, gas, maintenance)

$    50 Recreation and personal spending (clothes, gym, vacation)

$  250 Giving and Being Generous (Tipping, gifts, donations, etc.)

$  250 Bank fees and interest (credit cards, loans, lines of credit)

$  500 Debt repayment (debt repayment only)

$  250 Savings (emergency fund)

$  250 Sinking Funds

If you are renting or have a large mortgage, more of this budget may have to be allocated to housing and for this category I would not suggest going higher than 35% of your net income.  If you have a large vehicle payment that may also be over 10% of your net income and I would not suggest that being higher than 15%.  I have noted food as 10% but you may need to go as high as 15 or 20%.

You must juggle the net income you have without relying on credit.

Breaking down the allocation of budgeting can be a real wake up call to how much our lives are costing us, and I have found starting a budget this way immediately shows key places where we may be overspending.  It also helps to prioritize what is most important and where we need to change the allocation of spending our hard-earned money.  The percentages can be adjusted over time for any of the categories and once you have paid off your debt (10%) that money along with your bank fees and interest (5%) will be reallocated to go towards building your emergency fund (5%) (equivalent of six months expenses).  Once you have that saved then all of those funds (20% of your net income) will be reallocated to go towards paying down your mortgage and then take that same 20% to saving for retirement once your mortgage is paid off.  Take it one step at a time and don’t try to juggle more than one ball at a time.

Two categories that often get missed are cash withdrawals and bank charges and interest.  They are the most overlooked and invisible expenses in our cash flow.  Cash generally disappears and nobody ever knows what happened to it.  As soon as you break a $10 or $20 the notes turn to loose change/dust!  If you do like to carry cash to spend on coffee or lunch then you must budget it in, either as a cash withdrawal expense, or as food expense; you decide.  Bank charges and interest, overdraft fees, over limit fees, line of credit and credit card fees and interest are rarely seen as expenses we pay each month however they can add up to tens of thousands of dollars.   I have seen time and time again clients note the $10 minimum payment owing on their credit card which did not cover a fraction of the actual interest that was charged that month.

Some financial institutions charge a fee just for the privilege of having overdraft attached to your account, whether you use it or not, even though they also charge approximately 20-30% plus, in interest should you actually need to use your overdraft.  Ensure you note all of the interest and bank fees (statement fees, using another bank’s ATM fees, bank draft fees, etc.) not just your monthly account fee.  The ultimate goal is to reduce your banking fees and interest paid down to $0 or as low as possible!  When you have no debt and are not paying interest on any debt, all of that money is yours to keep, save and invest.

The only exception to this where I don’t note the interest in budgeting would be a mortgage payment which is comprised of a principal and interest payment (P&I).  I allocate the full amount of the mortgage payment under housing expense.  As an example, if your mortgage is $920 a month that is the number I use.

In the budget allocation scenario above, I have inputted $500 in debt repayment which may seem extreme if you are currently only making only the minimum payments on your debt, however even as a simple calculation with no compounding $500 X 12 months= $6,000/yr x 3 years = $18,000 in consumer debt.  Quoting statistics from Equifax Canada Q2 2022, the average consumer debt (excluding mortgages) in Canada by age show people between 46-55 owe on average $32,155.  As a result, you may need to extend the amortization of paying off your debt from three to five years $6,000 X 5 years = $30,000.  If there are two of you and you both have vehicle loans, and each have credit cards this debt may be double.  If you have car loans, credit cards and a line of credit it doesn’t take much for that number to be reached.  

If your debt can be paid off in a year or two using these ratios, then by all means get it paid off sooner!  For my husband and I applying nine hundred to twelve hundred dollars a month, to our debt over four years was one of the hardest things we have ever done.  That amount took a very large part of our income, and every day was a grind.  It was satisfying to pay down the debt, but just seeing that money leave our accounts after working so hard for it, and not having bought anything recently to justify the loss of cashflow was very difficult.  On top of that, living frugally in a downsized home, selling everything we weren’t using, not buying anything, as well as staying in and cooking every night challenged us mentally.  I do understand how difficult this is going to be for you.

My husband and I have found that donating five percent of our income to giving and being generous even while we were paying off debt brought us great joy and happiness.  Despite our financial situation of being in debt there are so many less fortunate people (and animals) than ourselves and being generous is a reminder of that.  We are lucky and many are not.  Whether that is tipping more, randomly giving to deserving people and people down on their luck, paying for someone’s lunch on the street, or groceries, or giving to an organization giving your money directly to those less fortunate will feel amazing.  When we didn’t have money to donate, we volunteered time and did lawn cleanups for seniors living in their homes who were unable to care for their gardens themselves.  Volunteering costs nothing but time.  If the giving must be reduced to 1% to start, then try to give a little time in lieu of money.

Basic Steps to Creating a Budget

Step 1: Print six months of statements and itemize each expense to a category.  Average your monthly expenses and net income to form a clear picture of your cash flow and spending.

a. Expenses

The only truly accurate way to start budgeting is to print six months of your statements and line-by-line place each expense into a category of where money is being spent.  A suggestion of the statements you want to print are:

·       Mortgage/secured line of credit statements,

·       Car and/or loan statements,

·       Tax statements,

·       Credit card statements, and

·       Line of credit statements.

From here statement by statement and line by line I placed each expense into a category.  If I didn’t have a category, I would put it into a category that was the closest fit (as per the allocations I provided to you), until I had completed each item. Every penny and every expense must be accounted for over the past six months, and I recommend six months, as it does give more of a realistic view of your total spending.  I created my budgeting categories into an excel spreadsheet.  This is tedious work that may take a weekend or two to complete.  For me it physically hurt to see the numbers.  It put that pit in my stomach as I started to see the waste and abuse that past reckless spending had on our lives.  Five dollars, ten dollars, forty dollars, all added up to thousands of dollars!  I think of all of those hundreds of times I treated myself when I was actually hurting myself and my future.  Keep going with each and every single item until you are complete with all of your statements.

I am attaching a budget template for expenses, based on the categories I have outlined, but you can create new ones if you don’t have one that fits a particular expenditure.  Add up each category individually and divide that number by six, and that is your average spending each month for each category, over the past six months!  You will quickly realize it will answer your questions about where your money has been spent!  This is invaluable because it puts into perspective the past waste and sloppy habits in our lives.  If you skip this step and only do a budget based on future spending it will not have the intensity of your lifestyle habits this exercise should be having on you.  This step is about shocking and shaking you to the core!  The vacations, clothes, eating out and mindless spending is acknowledged to illustrate the impact they have had in your life.  Of note you may have certain months of the year like December (Christmas) or June (Summer) where you may spend more money so keep that in mind and ensure categories for vacation and Christmas are funded from your sinking funds (to discuss later), when you have the budget to do so.

b. Determining Net Income

I would also use the same process to determine your net income over the past six months.  If you are full time or salaried use your after-tax take home pay (net pay) and not before tax (gross pay).  This is very important that you use your net income because this is your actual take home income from your employer after deductions.  Many declare they make $100,000 a year and spend like they make $100,000 a year but in reality, take home $75,000 a year or less due to income taxes and deductions.  If you had to pay additional income tax in the previous year, then speak with your payroll department about having additional taxes taken off, or you will have to allocate for future taxes in your budget.  One way to do that is to take what you paid last year in taxes and divide that by twelve and save that amount in a separate tax account each month. 

Determining your net income can be an easy number to calculate, if you are salaried or are paid hourly and work full-time consistent hours.  If you have a direct deposit for your payroll or are depositing cheques into your account, use these deposit amounts as your net income or you can look at your last year’s T4 to see your employment income.  If you contribute to an RRSP or pension program where your deduction is taken directly from your pay, I would leave it as is, and try to balance your budget with the net income you are already receiving.

If you have fluctuating or part time hours, use your last two years T4’s and either average these or take the lower of the last two years.  Subtract all of your deductions and divide that number by twelve to calculate your net monthly income.  Another way would be to add up your net income deposits over the past six months from your bank statements and divide by six to give you a starting point.

If you are self-employed your income may not be consistent.  In this case I would suggest either averaging your last two years’ tax returns or taking the lower income of the past two years.  For either option you will want to note both your gross (before tax) income, and the total amount you paid in income taxes.  Subtract your gross income from the income taxes to give you the net income for the year and divide that number by twelve to get your monthly income.  You may want or need to set aside extra money in your emergency savings (twelve months of expenses instead of six), if you are expecting lean months or years ahead. 

If your income does fluctuate don’t over project, or your budget will not balance.  If your income is not enough to cover your expenses even after cutting, you will have to earn more income from a second source of employment, work overtime, or try to find additional work, or cut your spending.  You must approach a Whatever it takes attitude in order for this to work. The priority must be a balanced budget not using any credit.

It took my husband and I four months to get our budget to balance so things may not align immediately.  We had to sell a lot of things to pay down debt to get a balanced budget.  We cancelled subscriptions, lowered our insurance premiums and cellphone expenses by shopping around for cheaper plans, we stopped eating out and started meal planning and significantly adjusted our food budget, I stopped going to the mall, stopped buying clothes and knickknacks and going to the home improvement stores.  You will find your lifestyle will start to change in different ways and it may take a few months to get your budget to balance so be patient and be good to yourself.

Monthly Income

Net employment income 1 (after tax income (your paycheck))

Net employment income 2 (afert tax income (spouse/partner your paycheck))

Self employment income (Gross/Before tax)

Part time income (job 1) if you have 2 part time jobs list them separately

Part-time income (job 2)

Part-time income (job 3)

CPP/OAS

Child Support

Employer Pension

Rental property &/or business income

Canada Child Benefit

Investment Income

RRIF/LIF/Annuity Income

EI Income

Total Income

Expenses

I would suggest entering each expense line by line using your six months of statements.  You can use an excel spreadsheet or a general ledger book or plain lined paper to complete this!  I have listed the general categories below, but you will want to create additional columns under each main category to breakdown more detailed expenses.  I use the table below to give you an idea of how to format the spreadsheet.  You may note the month and date of the expense in the far-left column. Once you are completed add up each column and divide it by six to give you the monthly average you are currently spending under each expense.

Housing 30%

• Mortgage/Rent

• Condo fees

• Property Tax

• Lawn Care/Snow Removal/House Cleaning

• Home Security 

• Lawn care/snow removal/house cleaning

Transportation 10%

• Car Lease

• Car loan payments

• Gas Transit

• Parking/Tolls

• Maintenance

• Vehicle license and Registration, Repairs and Maintenance

Food 10%

• Groceries

• Toiletries

• Pet food

• Dining out/restaurants

• Take out (skip the dishes, uber eats, drive thru, etc)

Debt, Bank fees & Interest 10%(Using debt snowball apply 10% of budget to lowest balance until paid off)

Bank Fees, Taxes and Interest 5%

• Loan interest

• Bank fees and overdraft fees and interest

• Credit card interest and annual fees

• Lines of credit interest

• Income Taxes (if you are self-employed or had to pay taxes in the previous year)

Emergency Savings 5%

• RSP Savings (keep what you are currently contributing)

• (TFSA) savings (put your emergency savings in a tax free savings account of 3-6 months expenses)

Utilities 10%

• Gas/water/sewer

• Electric

• Sewer

• Garbage/recycling

• Cell phone

• Internet

• Subscriptions (netflix, prime, disney, sirius, etc)

Personal 1%

• Goals and Dreams

• Memberships (sports & leisure)

• Smoking, Booze,

• Clothing, make up, hair, grooming, etc

• Entertainment, concerts and movies

• Magazine subscriptions

Insurance 9%

• Home Insurance

• Car Insurance

• Life Insurance

• Disability Insurance

• Dental Insurance

• Health Insurance

Giving 5%

• Church

• Charity

• Tipping

• Random generosity

• Gifts

Sinking Funds 5% 

• Home renovations, home improvement, decorating

• Pet (vets, daycare, grooming)

• Vacation

Other

• Daycare/Nanny

• School tuition, books and student fees

• Child Support

• Spousal Support

• Cash withdrawals and unaccounted funds

 Total Net (After Tax) Income

 Total Expenses

 Monthly Deficit or Surplus

If you have to use credit of any kind you can’t afford it!

   Death by a Thousand Cuts as your budget must balance!

Step 2:  On the allocation spreadsheet you will note the monthly deficit or surplus by subtracting your net income from your monthly expenses.  If you have a deficit your expenses are higher than your income.  This is where you will have to start making tough decisions about where to cut your budget.

It is up to you how you choose to cut expenses.  If your budget does not balance, I suggest cutting all of the things that are luxuries such as eating out, magazine subscriptions, apps, entertainment, sports, cable, getting your nails and hair done, clothing, vacation, etc. as your income must equal your expenses.  Reduce your emergency savings, down to $25, if you have to but not to $0 as you must get used to saving and having money available.  The numbers can be very shocking and seeing the expenses can be a very difficult realization to recognize this is all you can afford without relying on credit.  It was shocking to realize we were overspending by over $3,300/month!  Seeing this certainly was a very humbling experience for us, and those feelings continue to endure today as we remain committed to saving and living on our budget so that never happens again.

Any money you have saved towards future vacations or fun that is already sitting in your savings account, should be reallocated.  Earning 1-3% of interest of money sitting in cash savings when you have debt that is costing 7-30% doesn’t make sense.  We started with an emergency fund of $2,000 with items we sold around the house, and built it up from there saving $50 biweekly to start.  We ended up using our emergency fund a few times, for a vet emergency, and another for a car repair.  We had to start savings from scratch again and again, but that is what it is there for, and at least we did not have to utilize our credit cards for an emergency expense.

Your budget is a living breathing animal, and it needs money in order to survive!  With practice you get better and better at this exercise.  Even now and sometimes just for a fun challenge we will save on our grocery budget for a week by $50 by using up all of the food in our freezer or pantry that we have had for a while.  We will have a no spend weekend or week, and my husband and I will eat very simple meals like soup and nice cheese bread, or sandwiches in lieu of big meals.  We do a lot more things for free as well, like going for walks and taking nature pictures or taking a thermos of coffee to a bench by the water or having a potluck with friends.  You will start to amaze yourself with how much you can do for free and how much better your quality of life improves as you feel less stressed and more relaxed.

Step 3: Break down your budget as to how you are paid.

Once you have your allocations set and know your monthly expenses you will need to set up a budget.  Set your budget up for how you are paid, so if you are paid monthly, set up a monthly budget.  If you are paid weekly, biweekly, or semi-monthly set up a semi-monthly budget 1st-15th and 16th -31st.

I have attached a sample semi-monthly budget for a couple earning $3,163.96/net biweekly income.  They are coming to the end of their debt free journey.  Semi-monthly is my preferred way to budget as it breaks down the month in half.  Because groceries are purchased each week, set up a grocery expense as weekly. 

If you are paid biweekly, for two months a year there will be three pay periods.  For these months I also suggest adding your biweekly expenses that will also show up three times in the month, to your budget.  With biweekly payments you may also have two months a year with triplicate car loan or mortgage payments in that month.  The budget will need to be tweaked, and any excess funds allocated to that biweekly cycle (outside of biweekly payments and groceries) can be deposited onto the debt or into your emergency fund or sinking fund account.

I cannot stress enough how important it is to align your bills with your income.  If your mortgage is weekly and you are paid biweekly change your mortgage payment to biweekly on the day you are paid.  This also should apply to your car payment and any other regular payments you have.  Small adjustments like this can make a huge difference to assisting you with staying on budget.

Again, apply KIS (keep it simple).

Sinking Funds

Allocate money for future expenses you know are coming.

A category that often gets missed in budgets is sinking funds.  This category is where I used to get into the most debt.  Sinking funds are not emergency funds but rather known expenses that may not come up every month but certainly will come up at some point each year.  A way of budgeting these would be to treat them as a regular expense, pre budgeting what the total cost will be for the year, and then setting the money aside in small regular amounts for when you need it at a later date. 

You can open up a high interest savings account with your financial institution and rename it ‘Sinking funds’.  Most of these savings’ accounts offer free and unlimited online transfers so you can online transfer the allocated money from your chequing account to your savings account for future use.  You also may choose to open separate no fee savings accounts for each expense in your sinking funds and rename them for what you are saving for.  Some people may prefer to take their allocated sinking funds money out in cash and put that designated money into cash envelopes, although I do not recommend this.

An example of these expenses would include:  

1. Home Renovations/Home Improvement/Decorating,

2. Pet (vets, daycare, grooming, toys),

3. Vehicle repairs & Maintenance,

4. Goals, Dreams and Hobbies,

5. Vacation,

6. Christmas and Birthdays,

7. Future known expenses (Dental as an example).

 Now the thing to remember here is that the number one main focus is having enough money for shelter, food, transportation, utilities and paying off debt.  Eliminating luxuries like vacations may have to be a reality for a balanced budget as it was for us.  You can still budget for these things, but you may have to scale right back to $0-100 in the beginning to get the debt paid down first.  An example I could use would be Christmas.  For four years our Christmas present budget for my husband and I was fifty dollars each, so only one hundred dollars in total for both of us.  This was the same for birthdays as well!  We would have tons of fun purchasing stocking stuffers from the dollar store or at secondhand shops and we might buy small sale items throughout the year.  We made it fun and had a good laugh unwrapping gifts, and this can force you to become very creative and resourceful!

As a general rule it probably costs 1% per year of your house’s value to maintain it properly.  For example, a house worth $300,000 probably costs on average $250/month in maintenance, ($300,000 X 1%= $3,000/yr./12 = $250/month).  This could include furnace filters, light bulbs to needing a new window, a new roof, insulating your attic, paint, replacing a door, renovations and upgrades, a new sump pump, upgrading electrics, plumbing, lawn care, a new furnace or air conditioner, etc., as there are hundreds of things needed to maintain a home.  Setting aside money knowing your home requires continual repair and maintenance is a great habit to get into, especially to avoid future debt.  You don’t have to spend that amount of money each month, but if you know you need a window for $2500, you will save $250 per month for ten months and then purchase it with cash.

In the very beginning in order to get our budget to balance I had nothing allocated for sinking funds and would cut our budget for food, fun and emergency, if sinking fund money was needed (vet bill and car repair).  Once the debt was paid off, we were able to reallocate money into the sinking funds for a future weekend trip to Toronto and Christmas/birthday expenses, some future dental work and saving for two new screen doors for the house.  Sinking funds are an important part of the budget but some categories (like vacations and renovations), may not be necessary until the debts are paid off.

If you don’t have enough available in your budget until you can get it balanced, don’t panic and be mindful of places in your current budget where you may have to cut if something comes up.

Again, (and I can’t say it enough), the trick is not to not need to rely on credit when a known expense arises.

An example of what Sinking Funds (that are incorporated into the sample budget on next few pages) could look like:

Estimated Yearly Expense

Biweekly (/26)

Vets:                                                                        $900 $34.62

Christmas and Birthdays:                                 $1000 $38.46

Goals and Dreams:                                              $950 $36.53

Car Repairs (2 cars):                                           $1700 $65.38

Vacation:                                                         $2000 $76.93

Dental Expenses:                                              $4,011.28 $154.29

Home Repairs (1%/yr of value of home)   $300,000 X 1%=$3,000 $115.38

If you have a fixer upper or a larger project you want to do like a new roof or appliances, etc, then allocate more of a percentage to this category.

Total $521.59 (bi weekly)

The Monthly Budget

Although it takes some work to get the budget set up, once it is in place there are very few changes that need to be made to it.  On the following page you will find a monthly budget broken down on a semimonthly basis.

This particular couple are coming to the end of their debt free journey and have a few months remaining before they are debt free except for their mortgage.  He is paid weekly, and she is paid biweekly.  For this particular month she is paid twice, and he is paid four times.  

I wanted to highlight some key features as you review this budget:

·       Net income (take home pay after taxes and deductions) is used.

·       Notice the breakdown of how sinking funds are used. From 1-15th sinking fund contributions are $123.58 and from 16th -30th are $398.01.  Their sinking fund budget for the month is $521.59 and they have chosen to allocate funds this way.

·       Total Net income at the top of the spreadsheet equals Total Savings plus Total Expenses for each semimonthly period.  Your budget must be balanced without relying on credit.

·       Groceries are a weekly expense.

·       Mortgage, credit card, line of credit payment, gas, random giving, sinking funds and recreation and personal expenses are all biweekly payments.

·       Regular Mortgage payments are $450.27 biweekly and property taxes is $180 monthly.  As a result for this month: $450.27 x 2 = $900.54 + $180 property taxes = $1,080.54 + $500 ($250 bi weekly are being put into a mortgage prepayment account as clients can only make one pre-payment per anniversary year on their mortgage) = $1,580.54. Even though the $250 biweekly payments are not being applied to mortgage principal at this time, they are still going to be applied to the mortgage at a later date in the year.

·       Investment contributions are noted biweekly. If you don’t have enough money, try to start with $25 and get used to saving.  Allocate as you are able to.

·       Car and home insurance, cellphone, Disney channel, gas, TV Electric, property tax, Netflix and life insurance are all paid monthly.

·       Updated balances on savings are noted biweekly.  Clients have already started to save for their emergency fund and for their mortgage prepayments as they plan to make a lump sum payment on their mortgage in addition to their principal and interest payments. Outside of their mortgage they owe less than $1,050 on a 0% credit card and $839.49 on their line of credit they are paying $700 per month on.  This is how they have chosen to allocate their money and are very mindful of their money.

·       For cellphones, gas, auto and home insurance, gym memberships, savings, and cash.  I suggest inputting expenses for each person so you can more easily compare ways to examine costs and cut expenses.  Example don’t use $200 gas (use $100 gas car A and $100 gas car B).  The only exception to this is if you are bundling on cellphones.

• Budget money for fun.  If that is ice cream cones or a day at a waterpark or a camp site for a couple of nights or some movie tickets.  You cannot entirely deprive yourself of fun and a life while you go on this journey.  Going out to our local beach for the afternoon or for a nice walk, or drive or visiting with friends, or stopping by our favorite coffee shop for a flavored are things we enjoy doing for very little cost. 

• If you have a quarterly bill (like our rented hot water tank) I will pay it semi-monthly online in small increments. ($40/quarter ($40 X 4 times per year / 24 (12 X 2) semi-monthly periods)) = $6.67 semi-monthly.  Budgeting these expenses as regular ones allows us to keep our budget and spending consistent.

  The Monthly Budget broken down Semi-Monthly

  January 1st – 15th   January 16th – 30th

Income: (After tax)

Paycheck biweekly #1 $1696.00 $1696.00

Paycheck weekly #2 $733.98 $733.98

Paycheck weekly #2 $733.98 $733.98

Total Income $3,163.96 $3,163.96 

Savings:

RSP & TFSA ($50 each) #1 $100.00 $100.00

RSP & TFSA ($50 each) #2 $100.00 $100.00

Emergency Fund $200.00 $200.00

Total Savings: $400.00 $400.00

Expenses:

Store Credit card #1 $100.00 $100.00

Bank MasterCard #1 $0 $0

Bank Visa #2 $0 $0

Mortgage (Principal & Interest) $450.27 $450.27

Line of Credit #1 $350.00 $350.00

Bank Fees & Interest $0 $ 18.99

Mortgage Prepayment $250.00 $250.00

Car & Home Insurance $340.75

Electric $201.01

Cellphone (joint plan) $177.41

Property Tax $180.00

Gas (Car 1 $50/Car 2 $50) $100.00 $100.00

Disney Channel $ 13.00

Netflix Channel $ 18.63

Groceries $200.00 $200.00

Groceries $200.00 $200.00

Union Gas (home) $88.00

Life Insurance #1 $33.17

TV/Internet $145.95

Life Insurance #2 $ 38.88

Giving $125.00 $125.00

Sinking Funds $123.58 $398.01

Recreation & Personal Spending/Fun $100.00 $100.00

Savings+Expenses=Income

Total Savings: $400.00 $400.00

Total Expenses: $2,763.96 $2,763.96

Total Income: $3,163.96 $3,163.96

BALANCES ON DEBT

Mortgage Balance (1.99%) $48,440.09 $48,026.74

Store Credit Card #1 - 0% $1,150.00 $1,050.00

Bank MasterCard #1 (19.99%) $0 $0

Bank Visa #2 (19.99%) $0 $0

Line of Credit #1 (10.85%) $1,169.00 $ 839.49

Total Debt $50,759.09 $49,916.23

BALANCES ON SAVINGS

Investments RRSP#1 $78,783.66 $81,801.11

Investments RRSP #2 $22,555.71 $23,564.28

Emergency Savings 6 months X $5000 (Target $30,000) $950.00 $1,150.00

Mortgage prepayment ($250) Target $10,500 $750.00 $1,000.00

Total Sinking funds $4,100.00 $4,753.01

Total Savings $107,139.37 $112,268.40

 One of the hardest things that I had to master was creating a budget that was in line with our net monthly income.  Most all budgets are set up monthly but it’s not always the easiest way to calculate, especially if you are not paid monthly. 

In the Budget Allocation provided, net monthly income is $3,163.96 times two which equates to $6,327.92 monthly.  You will have two months a year when your net income will be paid three times in a month.  If you are paid weekly, you will have five months a year when you will be paid five times, and the rest of the months you will be paid four times.

Another mistake would be to calculate your monthly income based on an annual basis, so income would be $3,163.96 biweekly X 26 biweekly pay periods = $82,262.96 years/12 months = $6,855.25 monthly income which wouldn’t be accurate for this particular month.  I suggest setting up each semi-monthly period, adding the extra pay, only in those two months when that money is actually received, and not to the average your annual income into twelve months.  Do the same if you are paid weekly.

Asset Allocation as Per the Above Budget

 I used the estimated allocations to create and estimate the budget but calculated the actual amounts paid to each category.  Having a budget and telling your money what to do will clearly illustrate if you are overspending or underspending in certain categories.

Income: $6,327.92

Estimated Actual Dollar

Housing (principal, interest, and taxes) 30% 24.97% $1,580.54

Transportation 10% 3.17% $200.00

Food 10% 12.64% $800.00

Debt 10% 14.22% $900.00

Bank Fees, Taxes and Interest 5% 0.30% $18.99

Emergency Savings 5% 12.64% $800.00

Utilities 10% 10.18% $644.00

Recreation and personal spending 1% 3.16% $200.00

Insurance 9% 6.53% $412.80

Giving and Being Generous 5% 3.95% $250.00

Daycare/Nanny/Child-Care 0%

School tuition/Books/Education 0%

Income taxes (self-employed) 0%

Spousal Support 0%

Child Support 0%

Sinking Funds 5% 8.24% $521.59

Total 100% 100% $6,327.92

Step 4: Continue to monitor/adjust accordingly.  Your budget is customized to you so you will need to adjust and tweak it.  Once you have the numbers averaged for each category you can write the amounts in the Current columns.  In the Balanced column in pencil write where you think you could cut expenses to balance your budget and to be more in line with your allocated spending percentages.

I have attached a budget template for income as well.  The idea with the budget is that you hope to bring in more income than you are spending.  If you are spending more than you are making you will either have to cut back on your spending or earn more money.  Really difficult decisions have to be made and lifestyle may have to be drastically altered, especially in the beginning stages.  

Living on a budget and below one’s means is not for the faint of heart.  It is about giving up stuff today for a better tomorrow.  Ego and entitlement must dissolve, and your lifestyle may have to be downgraded significantly.  You may have to look less successful for a while or maybe forever, but who cares if it means a more financially secure future.  Again, this is a choice and if it was easy, we would all be financially secure.

 You must balance your budget!

If you can’t pay cash, you can’t afford it.

As I say over and over again, if your income does not equal your expenses, you are going to be going into debt.  As a result, your budget must be balanced to $0 each month.  From our budget I had to get down to business and start cutting.  The basic expenses (mortgage, utilities, taxes) we couldn’t cut, but for everything else we cut until we balanced.  It was a very humbling experience to realize what we could actually afford to buy without getting into debt and truly was a wakeup call to what living within our means looked like.  Getting used to our ‘new normal’ was a reality check and pretty earth shattering to our lifestyle.  I want to provide you with some tips for lowering the expenses of common categories like what we did:

 ●       Cut Expenses:.  Keep reviewing and keep chopping!  Challenge yourself to lower other expenses as an ongoing exercise.  Cancel subscriptions wherever you can.  Don’t try to squeeze luxuries into a budget.  This is a budget focused on debt repayment.  Luxuries will have to wait.  If you have to paint your own nails or dye your own hair, then do what you have to do to get your budget balanced.

 ●       Make more money:  Getting a second job, a better paying job or work overtime.  Find a side gig like teaching music, tutoring, babysitting, delivering pizza, landscaping, or cutting grass, open an online store to sell your art, crafts, and hobbies, etc.  I opened up an online store for my art and art supplies, and my husband started a landscaping business cutting lawns on the weekends.  I also got a part time job for a year working weekends and one night per week.

 ●       Sell stuff:  Go into your garage, attic, basement, storage locker for things that you own that don’t fit, you don’t use, or you don’t like or need.  There are lots of online selling platforms like Facebook, Kijiji and Varage sale amongst others.  We sold everything we did not use from stereos, tv’s clothes, furniture, tools.  If we hadn’t used it in two years, we sold it!  Ask yourself if you have used or worn something within a year?  If not, it is probably junk just lying around the house. 

 One Saturday afternoon my husband and I decided to challenge each other to a contest about who could earn $100 first.  We each selected a few things and put them on Facebook marketplace.  He had chosen some plastic adult collectables lying on a shelf in the basement collecting dust.  I laughed so hard and commented that no one was going to buy that junk!  Within four hours he had made over $200.  I chose to sell two wicker chairs sitting in the basement that we had not sat on in three years.  I sold those the next day for $200.  He won the contest, but we both won, and it was amazing to make $400 from selling stuff that was just lying around not being used. 

 ●       Get a better paying job:  Both my husband and I were working jobs we were underpaid for.  Somewhere along the line we hadn’t given ourselves enough credit for what we brought to our roles.  We were both working jobs and earning lower incomes, so each night we looked for better jobs until we found them.  It took me a year, and we redid our resumes, I upgraded my schooling, and my husband got recertified.  We aspired to want more and took some online courses, read business books, continued to learn, never feeling like we were stuck.  Keep applying for promotions or jobs in your field within your company or at other companies and ask for more and sell yourself for a higher salary!

 ·       Stop Eating Out:  Stop eating out and save as much as you can by eating in and meal planning.  If you want to eat out, limit yourself to once a week or once a month or special occasions only.  We would go out once a month for breakfast on a Saturday or Sunday morning.  Eating breakfast was cheaper than lunch or dinner and we would only eat somewhere if we received a coupon in the mail.  Soon we stopped doing that, as I could cook a much nicer omelet at home for significantly less than the forty dollars we were spending.  We saved and went for dinner when we hit major debt milestones.  Friends gave us gift cards to our favorite restaurants for Christmas and birthdays.

 ·       Groceries & eating out (reduced from $1600/month to $800/monthly)  Being tired is the great excuse we give ourselves to grab fast food.  Fast food is easy and perceived as cheap and is delicious and fast!  Instead of going home after work and making dinner and cleaning up the kitchen and doing dishes, I would go through a drive thru on the way home.  I had worked so hard that day!  I deserved it!  The only problem is that if you do it every day and multiple times a day it will erode both your health and your finances.  I’ve been guilty of spending hundreds of dollars a month on food for years.  Eating out whether that be fast food during the week or going out with my husband or girlfriends on the weekend.  It adds up and it is not difficult to spend four hundred dollars a week on take-out food and eating out.  I would buy groceries and eat out all week, throwing out all of the fresh food that had gone bad!  Now in our house nothing goes to waste.

Try buying your groceries and preparing food for the week on a day off and save thousands of dollars a year.  I grocery shop once a week but split up the food preparation twice per week, usually on Sunday and on Wednesday night instead of doing the entire week in one day. 

If you must take a calculator grocery shopping, take one.  Don’t budget $100 and spend $250.  Be realistic about your food budget and take your allocated grocery money with you. Leave wanted items for the end and only add them if they are in the budget, otherwise tell the cashier you changed your mind.

Our grocery budget of $200 a week includes grocery food, pet food and cat litter, eating out, toiletries (shampoo, make up) and household cleaning supplies (laundry, cleaning).

●       Meal Plan. Cook your own meals and have enough food for breakfast, lunch, dinner, and snacks. I would suggest cooking larger amounts of meals and dividing them for lunch and dinners throughout the week:

 1.      Cook a big batch of rice and stir fry fresh or vegetables or roast a large pan of potatoes that you can mix with a main dish all week.

2.      Cook a lasagna, hearty shepherd’s pie, or large spaghetti for nights when you are tired and just want to heat dinner up.

3.      Buy cheaper cuts of meat and cook stews and chilis in the slow cooker.  Using your slow cooker is an amazing way to walk in the door after a long day at work and have a delicious hot, hearty meal waiting for!

●       Try new recipes (Books, magazines and online) with simple ingredients.

●       Buy a large frozen dish like a meat pie or casserole and divide it up for lunches for the week.  The portion cost may be $2 or $2.50 instead of the $10-15 you would spend eating out.

●       Buy no name. Many stores have generic brands that sell exactly the same food for much less.

●       Buy on sale.  If it is not on sale don’t buy it.  Buy discounted/reduced items (every section of the grocery store usually has a place where they discount food).  We only buy food, including meat and bakery that has been discounted and our grocery bill is made up of only about 5% of items that are not on sale (usually milk, cream and eggs).

●       Shop at multiple stores with multiple sales.  Shop flyers and sales. Download apps for coupons but only buy it if you need it and not just because it is on sale.

●       Go meatless or add some meatless dishes to your menu.

●       Eat more soups, sandwiches, and omelets.  Invest in a sandwich maker for hot sandwiches as a warm hearty lunch alternative to a fast-food hamburger.

●       Buy frozen fruits and veggies, especially if your vegetables usually rot in your fridge.

●       Buy fresh fruit or veggies in season or grow your own and buy small quantities more often to keep them fresh.

●       Buy larger sizes of food you regularly eat or use for discounted prices.

●       Dare I say, Pack your own lunch.

●       Make coffee at home.  We invested in a coffee grinder, a nice coffee maker, two great travel mugs and a thermos.  We bought nice quality coffee and save hundreds of dollars a month.

●       We perimeter shop (all of your basics are on the perimeter of the store, veggies, meat, dairy, bread). Challenge yourself to go down as least number of aisles as possible.

●       Use a smaller cart or basket and take a list.  I used to go into the grocery store countless times for one thing like milk and come out with fifty items spending eighty dollars!  For whatever reason you go into the store, come out with just that.  Grocery stores have thousands of impulsive items so be wary of these and overspending your grocery budget.

●       Bake from scratch or use prepackaged kits, instead of buying readymade cakes or muffins.  I can go out to a coffee shop and buy one brownie for four dollars, or I can buy a tray of readymade brownies at the grocery store in the bakery section for ten dollars, or I can buy a brownie mix for three dollars and cook a dozen of them at home.  Find the choice that fits best within your budget.

●       Use up all the food you already have in your freezer and pantry before buying more.

●       Do not always buy at eye level, look around on lower shelves for cheaper priced items.

●       Cook enough food for dinner, so you may have leftover lunches for the next day.

●       Stop eating out.

●       We drink so little liquor that I include it in our grocery budget.

●       With whatever money you don’t use in your grocery budget save it to stock up for future pantry and staple items that go on sale (canned goods, shampoos, toilet paper, etc).

Hydro

●       During the summer months if you live in a hot area buy blackout shades to keep your house cooler and spend more time in the basement.

●       In the winter keep the house cooler and wear warmer clothes.

●       Have the attic insulated.

●       Get an energy test and see if and where you are losing heat or cool air.

●       Do not keep fans, lights, and TV’s on in rooms that aren’t being occupied.

●       Unplug unused appliances.

●       Do your laundry, water grass, wash car in non-peak hours.

●       We bought two Amazon fire sticks for $45 instead of renting cable boxes through our cable provider that was costing us $25/month. Never stop asking how you can reduce your fees with your providers.

Storage Locker

●       Get rid of it!! Sell or give away all of your junk. Have a garage sale. Sell stuff online. If it’s in a storage locker you are not using it. 

Reduce Your Banking Fees

●       There are many banks and Credit Unions that offer free unlimited bank accounts that are priced based on your dealings with them.  If you have a mortgage of a certain balance or are making a regular contribution to savings, many places discount your fees to low and no fee accounts.  There are also many online financial institutions offering no fee unlimited chequing accounts.  Look into a free bank account or reduce the features in your account to one with no or very low fees.  Paying $14.95-$30/month for a bank account, or $179.40 - $360/year is unnecessary, especially when there are so many financial institutions charging nothing for these.  People scoff and laugh at me when I bring this up but investing $360 each year over ten years earning only 3% is $4,520.80 and investing just that amount over twenty years is $9,963.51.

●       Look at your bank statements!  I have come across hundreds of people who don’t look at their monthly statements to see what they are paying in fees.  I recently had a young man visit me who was paying $65/month in fees because he was using his savings account as a chequing account and getting $1 charge on every withdrawal.  Are you in the right bank account for your needs?

●       Look at your monthly expenses on your bank statement.  I met with an elderly man that was living on CPP and OAS and was struggling to make ends meet.  He was spending $40/month on insurance that covered him to have his body transported back to Canada if he were to die outside of the country.  He didn’t own a passport and had no plans to travel.  When I reviewed his bank statements with him, we came across this monthly charge, and he didn’t know what it was.  We looked the company up online and called in to ask and he had the insurance cancelled immediately.  If you don’t know what the charges or companies are that you are paying fees on, then call!

●       If you are 60-65 ask about no fee banking for seniors.  

●       Consolidate your banking. I see so many people juggling two to five different financial institutions. The mortgage is at one bank, the chequing account another, a line of credit somewhere else and a car loan somewhere else. Keep it simple and consolidate your banking wherever you can.

Take off overdraft. Once you are on a budget you will not need it and it is impossible to incorporate into a budget.  Overdraft is for people that don’t budget and is not worth the monthly fee of $5.00 or more + 20% - 30% interest rate charged to use it.  I cannot stress this enough, close your overdraft! We have been trained to be lazy with our money.  You can almost hear the mob boss saying, “Don’t worry ‘bout it, we’ve got you covered”.  With a balanced budget you should be able to keep overdraft well in check.  I remember the fear I had of closing my overdraft after living in it for years, worried I might need it and since we started living on a budget, we have never come close to needing it.

●       Credit Card Annual Fees (Reduce your credit card fees to $0 or as low as possible).  Are you actually using the features on your high fee and high interest credit card? Look into a no fee credit card.  

●       Take your credit card information off impulse apps.  Right now, as I write this, I have four items in an online store cart.  Things I saw and wanted or that I thought would make nice gifts.  The old me would have had my credit card attached to the app and just bought them without thinking.  The new me will ponder and make more thoughtful and purposeful decisions before making a purchase.

Transportation

·       Carpool.

·       Stop driving friends around.

·       Sell your very expensive car! Buy a cheap car with no payments.

·       Bike ride, walk or take the bus if you can.

·       If you don’t need a 6- or 8-cylinder vehicle buy a 4-cylinder vehicle.

Cell Phones

●       Shop around for the best plans.  Let your carrier know you are thinking of leaving and ask for their best rates to keep you.  I was loyal to my cellphone company for over twenty years and called them to ask for a cheaper plan.  They wouldn’t make any changes to my plan and said I was in the cheapest plan. After making a few calls I was able to reduce my monthly bill by $120 a month, and get more services and faster service, switching to a new provider.  Initially my spouse and I each had a separate cellphone bill and used separate providers with the cellphone expense in our budget going in as two separate expenses.  Right now, our cellphone bill goes in once as we have found the best deal by bundling together under a group plan, saving over a hundred dollars a month.  It may take some time to consolidate your plans or switch providers, as you may be locked in a plan and unable to make immediate changes.  Put the date on your calendar of when your plans expire and then shop around for better rates and family bundle if you can.

●       Do not get the latest and greatest phone and get locked into a long-term expensive plan.  Look after your phone, get a good protective case, and make it last as long as you possibly can.

Insurance

●       Talk to your insurance provider to do an insurance needs analysis. Make sure you have enough insurance and shop around for the best rates.

●       Look at your loans and lines of credit and your mortgage insurance.  Shop for ten-to-thirty-year term policies depending on the amount of debt you are looking to insure.  Bundle life insurance, home insurance, car insurance together for a discounted rate but don’t forget to review and shop around each year to compare coverages.

●       Never cancel insurance for the sole purpose of saving money.  Insurance is important and should be incorporated into your budget just like a regular expense.

●       Install apps that your insurance company offers for discounts on driving responsibly by monitoring these apps.

8.      Clothes and Gifts

●       Just stop going to the mall and stores. Stay away so you won’t be tempted. Shop for groceries in stores that only sell food and leave your credit cards at home.

●       Go through your closet and look at every single item of clothing you own.  Sell what you do not want, what does not fit, what you don’t need, like or never wear for whatever reason.  Use consignment stores or sell online (Facebook marketplace, Varage sale, Kijiji).  If you have not worn an item of clothing for a year or more get rid of it.

●       If your clothes are ripped, stained, or have missing buttons, clean and repair them.  Look after what you have and wash and iron your clothes and honor them.  Set yourself some personal challenges like going a year without buying anything new.

●       If you do need an item of clothing buy it at a used, vintage or consignment clothing store.  We buy all of my husband’s work pants at second hand and consignment stores for a fraction of what he would pay for new.  

●       Try something new like Project 333.  Which was started by Courtney Carver who wore 33 items for 3 months. https://www.instagram.com/project333/?hl=en,

●       Do a clothes swap with girlfriends and implement no spending months for clothes.

9.      General Tips

·       If you use shopping as entertainment and find impulse items you like, put them on hold for twenty-four hours.  This will prevent you from impulse shopping and will help you to decide if you really want or need it.  If you tend to buy things online take the credit card information off your apps and put items in the CART, but don’t buy them immediately.  Come back the next day or in a couple of days and make the decision then, and only if it is within your budget.

·       For every item you bring into your home remove just as many out of your home.  Are you replacing a broken item or just buying more stuff?

·       For your cash spending carry cash in five-dollar bills.  Counting out one hundred dollars cash in twenty, five-dollar increments is a lot more painful than counting out five twenty-dollar bills, two fifty-dollar bills or using your debit card to tap.

• Use coupons and apps.  I hesitate on this a little bit because I have tended to overspend using coupons in the past buying more than I need or products I don’t usually use at an overall added expense.  We use coupons more now for going out on occasion to eat and take advantage of flyers, sales and in-store promotions more than coupons at the grocery store. I always check to see if there is an app or promotion prior to making a purchase.

Take your credit cards out of your wallet and keep them securely with your passports in a home safe or safety deposit box.

 Don’t stop looking for ways to cut! It’s going to be death by a thousand cuts to balance a budget!

Paying off debt sounds so easy, but our debt free journey took over four long and painful years.  We slipped a few times, had some setbacks, but we got there.  Having patience and keeping focused on your goal of being debt free will help.  Rewarding yourself with something small each time a new debt is paid off will also help.  I went through times of feeling like my debt repayment was never going to end and every two weeks putting five to six hundred dollars or more towards debt was really painful.  What had that debt even bought I couldn’t tell you!  It was our debt though and we had to own it and pay if off!  For over four years we lived a completely different lifestyle and mindset to not only what we were used, but also to how our friends and peers were living.  Not being able to go out to dinner, go on tropical vacations, buy a new car, get my nails and hair done, go to concerts or go away for the weekend, and buying shoes and clothes or things for the house on impulse were completely absent from our lives and that was by far the most difficult adjustment.  We kept the focus on our goal and then one day it happened, and we were debt free.  I’ll never forget the morning, waking up wide eyed on payday at 4:45am and making the last payment on our line of credit was just a fantastic feeling.  My husband and I physically jumped for joy, and I cannot explain the jubilation we each felt and how the sacrifice over the past four and a half years made it all worthwhile! It was a pretty special moment and one that I never thought possible.   

Collections

When you have a loan or debt with numerous missed consecutive payments you may be vulnerable that the lender of that product may write off the debt and sell it to a collections company.  Prior to sending a debt to collections the lender would usually make numerous attempts to try to reach out and if there are no payments or partial payments made and if there is no reciprocation, or if an agreement cannot be met prior to writing it off, the debt will be sent to an internal collections department or a separate collections company. 

The worst thing one can do is not have contact with the original lender when you realize you cannot make a payment.  Communication is key and letting them know you are in a cash flow crunch may give you an opportunity to prevent your debt from going into collections.  I see time and time again so many people paralyzed in fear and feeling too embarrassed to pick up the phone to let a lender know what is going on.  At this time, you still may be able to skip a payment or refinance or renegotiate the terms, so payments are manageable.

Once the debt is in collections there is nothing staff at a lending institution can do to assist you, and you will need to contact collections directly, as that debt is no longer with the original lender.  Generally, the phone number, name of the collection agency, the client’s account number with that agency, and the amount of debt that was written off will be noted on the credit bureau.

A derogatory of unpaid collections will stay in your credit bureau for six years.  Depending on the size of the debt in collections you may be sued or a lien will be put on the title of your home and you may be on the receiving end of phone calls and letters, although a collections agency is not allowed to harass you. 

In lending, one of the criteria that a lender looks at is Character and paying your bills on time, (not being late and not having collections), is a factor in determining if someone will qualify for future lending, and if so, what those rates will be.  The more risk, the higher the rate, especially when you borrow on an unsecured basis (not using any collateral to back the loan) and sometimes, even on a secured basis you may pay a higher interest rate if you have a low credit score.   

If you do have items in collections, you will need to pay those items off prior to being able to borrow money.  Financial institutions generally do not lend to anyone currently in collections, (unless you are looking to consolidate them), so you will need to self-source the funds, sell something, or save to pay off this debt.  Once you have paid the debt off you will need to provide a letter from the collection’s agency providing proof the debt was paid off.  You will want to keep that letter in a very safe space as you will be required to provide proof that it was paid for as long as it stays with your credit bureau.  Providing proof, the collection item has been paid off may not ensure you will be approved for future lending (depending on that institutions policy), as it is the quality of your application as a whole, and the reasons why you fell into collections that will determine the approval decision.

I have met with many clients who do not pay off their collections due to the principal of the matter. They may feel they were overcharged, or fees weren’t disclosed, or it was an ex-partners debt and not theirs, or the vehicle was repossessed so they are not paying what was owed, and there are countless other reasons.  Not paying collections only hurts the client so it’s a difficult and personal decision if you are going to decide to either pay off that debt or not pay if off, based on principal. 

Debt Snowball Method

The first option to pay down debt would be to use the debt snowball method.  This does not involve consolidating your debt, but rather leaving it exactly as is and tackling each debt individually from smallest to largest.  With this comes a sense of urgency to pay the debt off as quickly as possible due to the high interest rates you are paying on credit cards and loans. 

In the debt snowball you make the minimum payments on all of your debts except the one with the smallest balance by applying the allocated amount of debt to this and once that is paid off you move on to the second debt.  You continue to do this until you have worked your way through each debt and until they are all gone.  I very much appreciate the principal of the debt snowball, and this was the method we used to pay off our debt.

The first step is to list your debts from smallest to largest starting with any debt that is in arrears such as unpaid income taxes and property taxes, back child or spousal support, collections, or any sort of cash or money store loans.  These bills need to be paid urgently and you would want to put these specific debts at the very top of your list in that order. 

Next you want to list all of your remaining debts except for your mortgage from lowest to highest balance.  These would include personal loans from friends and family you have not paid back, car loans, lines of credit, and credit cards.  Your mortgage is not included in this list however secured lines of credit are!

There are many that argue that you should list your debts from highest interest rate to lowest interest rate, but by paying your smallest debts off first you are able to celebrate powering through the majority of your smallest debts quickly.  

Debt Snowball

Debt Balance Interest Rate Minimum Payment 

 Debt Amortization Chart

Another tool I really enjoy using are the debt amortization charts.  You can easily print these using your financial institution’s online calculators for loans and mortgages.  I have attached one for the loan previously discussed, based on monthly payments.  Print the debt amortization chart off, and each time you make the payment you can highlight the line until the entire loan is all paid off!  Tape your loan amortization chart to your wall or your fridge where it will serve as a constant reminder of what you are achieving.  The amortization chart helped the most with our biggest debt, which was our line of credit.  It kept us going and we could celebrate each time a line was highlighted.  Having $30,029 owing on a line of credit and being able to see the end date easily illustrated there would eventually be an end to the debt. When I created our amortization chart for a line of credit (which only offers a variable interest rate) I used a rate that was two percent above what we were currently paying to protect us should interest rates increase. 

Something fantastic happened to my motivation when we paid down debt using an amortization chart, and that is with each payment we could see what we were paying in interest, and from that came an awareness that once the debt was paid off we would be eventually saving that amount in interest.

The Canadian Government has many financial tools for you to use at www.canada.ca/en/services/finance/tools.html

Amortization Chart

($943.77 monthly for $30,029 debt at 8.2% over 3 years)

Period Payment Principal Interest Balance

0 $0.00 $0.00 $0.00 $30,029.00

1 $943.77 $738.57 $205.20 $29,290.43

2 $943.77 $743.62 $200.15 $28,546.80

3 $943.77 $748.70 $195.07 $27,798.10

4 $943.77 $753.82 $189.95 $27,044.28

5 $943.77 $758.97 $184.80 $26,285.31

6 $943.77 $764.16 $179.62 $25,521.16

7 $943.77 $769.38 $174.39 $24,751.78

8 $943.77 $774.64 $169.13 $23,977.14

9 $943.77 $779.93 $163.84 $23,197.21

10 $943.77 $785.26 $158.51 $22,411.95

11 $943.77 $790.62 $153.15 $21,621.33

12 $943.77 $796.03 $147.74 $20,825.30

13 $943.77 $801.47 $142.30 $20,023.84

14 $943.77 $806.94 $136.83 $19,216.89

15 $943.77 $812.46 $131.31 $18,404.44

16 $943.77 $818.01 $125.76 $17,586.43

17 $943.77 $823.60 $120.17 $16,762.83

18 $943.77 $829.23 $114.54 $15,933.60

19 $943.77 $834.89 $108.88 $15,098.71

20 $943.77 $840.60 $103.17 $14,258.11

21 $943.77 $846.34 $97.43 $13,411.77

22 $943.77 $852.13 $91.64 $12,559.64

23 $943.77 $857.95 $85.82 $11,701.69

24 $943.77 $863.81 $79.96 $10,837.88

25 $943.77 $869.71 $74.06 $9,968.17

26 $943.77 $875.66 $68.11 $9,092.51

27 $943.77 $881.64 $62.13 $8,210.87

28 $943.77 $887.67 $56.11 $7,323.20

29 $943.77 $893.73 $50.04 $6,429.47

30 $943.77 $899.84 $43.93 $5,529.64

31 $943.77 $905.99 $37.78 $4,623.65

32 $943.77 $912.18 $31.59 $3,711.47

33 $943.77 $918.41 $25.36 $2,793.06

34 $943.77 $931.01 $12.76 $937.37

35 $943.77 $937.37 $6.41 $0.00

36 $943.77 $896.11 $3.73 $0.00

Debt Consolidation

To debt consolidate or to not debt consolidate. That is the question!

From your budget allocation you can calculate the percentage of net income you should be starting with to pay down debt.  In the sample case shown in the balanced budget, 10% of net (after tax) income was allocated to debt repayment.  The priority with this method is ensuring your debt will be paid off within five years or less, so you may need to increase the percentage of your net income to debt so it will be paid off within that timeframe.

Now I’m going to receive criticism for saying all of your debt should be paid off within five years, but there is urgency for getting this done and delaying the time will also delay saving for an emergency fund, paying down your mortgage and saving for retirement. It is short term pain for long term gain.  If you are in a shortfall position where you don’t have enough income allocated for the debt to be paid off within that time, then you will either have to earn more money or cut into other areas of your expenses to make this budget balance. 

In the previous sample of the budget, I had allocated 10% of the net monthly budget of $6,327.92 towards debt repayment which would be $632.79.  The clients in this case were able to cut other expenses and pay $900/monthly, or 14.22% of their net income towards debt as per their asset allocation budget.

When considering your budget, you may want to look at the possibility of consolidating all of your debts into one loan and there are a few options you can utilize to accomplish this.

Debt Consolidation Loan

Debt consolidation loans are used to consolidate debts on credit cards, higher interest rate loans, and money/cash stores.  They are offered by financial institutions as an unsecured or secured loan.  An unsecured loan does not use any equity, such as a house or vehicle as security, and the interest rate is generally based off a pre-determined grid of various factors including how much you borrow and the quality of your credit score.  Debt consolidation loans may be amortized over a maximum of five years or less, and the lender will usually require you to bring in your last statement from all of the products you are consolidating.  The lender will prepare closure letters that you sign, and they are mailed out to creditors once the loan has been advanced.  Although the bank will require you to close all external credit that you are paying off, they usually allow the credit you have with them to be paid off and remain open.  Now there is nothing preventing someone from going out and getting more credit in addition to the loan, but this is really done on an honor system and is something you should not want to do if your intention is to pay off debt and focused on staying debt free.  Most financial institutions cap a limit on how much they will lend to any one person on an unsecured basis of somewhere between $20,000 to $35,000 (depending on that company’s policy), so you may have more debt to consolidate than they are willing to take on.  They may take security such as a vehicle to secure the loan and lower their risk, but that is only if the vehicle is nearly new and doesn’t already have a lien on it.  Some institutions will take an investment as security as well (as long as it is not a RRSP, RESP and depending on the institution a TFSA).  Generally, the funds have to be in cash, or in a term deposit with that institution in order for it to be used as security, and those funds are then noted as being used as collateral for the loan, so you will not have access to them until the loan is paid off.  Some banks will allow you to secure a nonregistered (not in your RRSP, RESP and sometimes TFSA) stock or mutual fund, however they may require a 2:1 ratio meaning $20,000 in investment for a $10,000 loan to allow for variances in the investments value over time.  You may also secure the loan using your home (talked about later), depending on the amount of debt you have and the quality of the application. 

These unsecured debt consolidation loans can actually be very difficult to get, especially if there is financial distress, such as no emergency savings, low or no net worth, poor credit score or poor credit repayment history and high debt servicing ratios.  A financial institution is taking on riskier, unsecured debt that is someone else’s risk (external credit) and is transferring it to them, which may not be very appealing, especially if there is dodgy repayment history or unstable employment or income.  Most of these loans do not have an application fee, and are fully open, meaning you can pay them off or down at any time without a penalty.  They are offered at fixed or variable rates, however sometimes the rates can be nearly as high as the debt you are trying to consolidate (as they are priced according to risk).  These high rates always seem to be a big surprise to a client, who seem to expect these loans to come with very low interest rates they can easily get approved for with no problem!

Many people like the young man previously discussed, ask for lines of credit to consolidate debt however financial Institutions as a general rule do not offer lines of credit to be used as debt consolidation loans.  If you do have an existing unsecured line of credit, it would make sense to utilize this to pay off your credit card and high interest rate debt if the rate on the line of credit is lower than what you are currently being charged or offered through your credit card or loan.  You may think “well duh…”, but I have witnessed many clients owing tens of thousands of dollars on a credit card paying over twenty percent interest while having a line of credit with an eight percent interest rate and a zero-balance owing.  Many times, if you do not use a product for a year or two it will go dormant and you may forget or not be able to see you have it through your online banking until it is activated, so be aware of what products you own and ensure you can see them and know the rates you are paying.

I am providing you below with approximate monthly payments for various amounts of debt and interest rates.  You will not know the interest rate your financial institution will offer you for a debt consolidation loan until you apply for one and a credit bureau is pulled.  The grid below will give you an idea of what those monthly payments would look like using various interest rates for either a three- or five-year amortization.  19.99% is used to compare what you would have to pay with a credit card as this is a common interest rate although some of them are as high as 24.99% or even higher.  When you are borrowing on an unsecured basis the higher the quality of your credit score the lower the interest rate you will generally pay which can save you hundreds of dollars per month.

Monthly Payments on Loans Over 3 years (principal and interest only)

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 

7% $308.77 $617.54 $926.31 $1,235.08 $1,543.85 $1,852.63

8% $313.36 $626.73 $940.09 $1,253.45 $1,566.82 $1,880.18

9% $318.00 $635.99 $953.99 $1,271.99 $1,589.99 $1,907.98

10% $322.67 $645.34 $968.02 $1,290.69 $1,613.36 $1,936.03

11% $327.39 $654.77 $982.16 $1,309.55 $1,636.94 $1,964.32

12% $332.14 $664.29 $996.43 $1,328.57 $1,660.72 $1,992.86

19.99% $371.58 $743.17 $1,114.75 $1,486.34 $1,857.92 $2,229.51

Values on table are approximate.

Monthly Payments on Loans Over 5 years (principal and interest only)

$10,000 $20,000 $30,000 $40,000 $50,000 $60,000 

7% $198.01 $396.02 $594.04 $792.05 $990.06 $1,188.07

8% $202.76 $405.53 $608.29 $811.06 $1,013.82 $1,216.58

9% $207.58 $415.17 $622.75 $830.33 $1,037.92 $1,245.50

10% $212.47 $424.94 $637.41 $849.88 $1,062.35 $1,274.82

11% $217.42 $434.85 $652.27 $869.70 $1,087.12 $1,304.55

12% $222.44 $444.89 $667.33 $889.78 $1,112.22 $1,334.67

19.99%$264.88 $529.77 $794.65 $1,059.53 $1,324.42 $1,589.30

Values on table are approximate.

Mortgage Refinance or Blend and Extend Mortgage

The most popular way by far to consolidate debt is by refinancing your mortgage and using your primary residence as a way to secure the cheapest rate possible into your existing mortgage.  This is either called blending and extending or a mortgage refinance.  From working as a financial advisor with a financial institution, I have done more of these than I care to mention.  In theory they are a very effective way of paying down a considerable amount of debt at the lowest possible interest rate, providing you keep your amortization as low as possible. 

There is usually a cost of approximately $1,000 -$1,500 to refinance your mortgage depending on what offers that financial institution may have at the time.  This cost includes the appraisal, legal work and either increasing the lien or discharging the current one and putting on a new lien, if it is needed to accommodate the additional debt.  When financing a home for collateral mortgages, financial institutions used to register a charge on title for your primary residence for the amount of the mortgage, but over the years this has changed to lenders registering a charge of the appraisal value, and now most institutions will register a charge for 125% of the appraised value.  This is so in later years if you wanted to refinance your mortgage yet again for a higher amount, you could do so without having to pay legal fees to increase the lien amount.  For conventional mortgages a lien is put on the home for the mortgage amount and when it is paid off you can have your mortgage discharged from your title.  If you wanted to borrow money again you would have to apply to do so. For a mortgage refinance you can borrow up to 80% of your home’s appraised value, and for secured lines of credit you can borrow up to 65%, less any mortgage amounts you have outstanding.

A mortgage refinance or blend and extend is taking your existing mortgage (rate, current balance, and remaining term), and blending new money or debt with the current rate of a new term that is either as long as, or longer than what someone has remaining on their existing mortgage term.  As an example, if you have two years left of your existing term then you could refinance the new and existing debt into a two-, three-, four- or five-year term.  The crucial mistake people make with this is to take debt like car debt or large credit card debt and consolidate that along with their existing mortgage into a brand new twenty-five-year amortization.  The great thing about refinancing is your cash flow increases substantially like magic, as you can consolidate large amounts of debt into small payments over a very long period of time, however it can come with devastating consequences, as you may never pay that debt off and if interest rates were to continue to rise, the amount you will pay over a long period of time could be exorbitant as your terms come due, and you have to renew into a much higher rate.  It is financially devastating to take a debt that could be paid off within five years and instead of implementing a plan to have it paid off quickly people choose to consolidate that debt and their mortgage balance all back up to twenty-five years.  I would suggest if you went this route and you have significant debt, to refinance with an amortization that will have your mortgage paid on or before age sixty or sixty-five.

Of note, some financial institutions and mortgage lenders do not offer mortgage refinancing and will make you pay out your existing mortgage in its entirety, (penalty and all) to take on a completely new mortgage.  Some mortgages do not allow any annual prepayments or double up payments or have very limited amounts you can prepay.  Know your options and the expenses prior to moving ahead as not all mortgages are made the same.

I recently met with clients in their mid-fifties, who I had just refinanced into a new mortgage of $400,000 over twenty-five years.  The process of refinancing them had not been easy as they had demanded to refinance her new vehicle, credit card and line of credit debt into the mortgage.  Very early on in the initial conversation they let me know they were not open to discussing any other options other than to refinance.  These clients had no pension or RSP’s and were living paycheck to paycheck.  They had also wanted to buy a hot tub and build a deck, but they did not make enough income to be able to accommodate this request, despite taking their mortgage amortization back up to twenty-five years.  I asked them about their retirement plans and what retirement looked like for them and they immediately took on a deer in the headlight’s appearance, sitting there motionless with their eyes and mouths wide open, and completely still.  After a bit of discussion, they shared that their plan was to work for as long as possible (no set age or date), then sell and downsize their home.  From the appraisal we received for the purpose of refinancing, the home was worth $620,000 and they were hoping to buy a home for $300,000.  They did not have a clue about what a home of that value would look like or where it would be located.  They joked that maybe they would win the lottery and they could just pay off the mortgage and stay in their home.  It was such an abstract idea, and their retirement plan was nonexistent and based off a fantasy of winning the lottery to make everything right.  Sadly, there was no intent on either of their parts to start saving and unless they made some lifestyle changes there was not enough money (despite the refinance), to save.  They asked me what I would do if I were them about trying to save some money towards retirement, and I suggested they start a budget and explained this process adding they may have to look at immediate actions such as cutting back on expenses, earning more income, and even selling the new car to free up cash flow to pay off debt.  She looked at me for about ten seconds and replied, “Well, I’m not going to sell my car, I just bought it”, and the discussion was over as they both got up to leave.  Despite this conversation, and once the refinance process was complete, they informed me they had booked a trip to the Caribbean with friends for a week. 

Comparing the Numbers

Below is a chart of some scenarios for a proposed mortgage refinance.  The current mortgage is $250,000 and the client would like to consolidate debt and add $75,000 onto the mortgage.  The mortgage would now be for $325,000 into a 5-year fixed rate term at 6.09%. To keep things simple, I am going to pretend the clients are renewing into a 5-year term which is at the same rate they are currently in.  

I have three proposed scenarios:

·       Column 2: Keep the amortization the same at 10 years and increase the monthly payment to $3,610.47,

·       Column 3: Extend the amortization back up to 25 years freeing up $1,513.68 ($3,610.47 - $2,096.76) each month in cash flow,

·       Column 4: keeping the monthly payment the same as they originally had of $2,777 per month and increasing their amortization to 14 years 9 months, and

·       Column 5: Adding the debt as a second mortgage over 10 years.

The primary number that people look at when assessing their options is that magical monthly payment amount.  How much is this going to affect my cash flow today? In reality the magical numbers that people should be looking at is the amount of interest they paid at the end of the term and end of the amortization, as that is the true cost for them to refinance.  Refinancing can be a great option if you are willing to be aggressive with your amortization and payments but if you are just looking to move debt to get the lowest possible payment it would not be a recommended approach.  

I cannot stress enough the importance of ensuring you are debt free as soon as possible.  This way you can start investing the equivalent of your mortgage payment into retirement savings that will grow over time and provide you with income.  Another benefit would be, so your retirement income is not eaten up by mortgage payments. 

Original Original Original Original Second

Mortgage Mortgage Mortgage Mortgage Mortgage

+ $75000 + $75,000 + $75,000 Only

Mortgage $250,000 $325,000 $325,000 $325,000 $75,000

Frequency Monthly Monthly Monthly Monthly Monthly

Rate 6.09% 6.09% 6.09% 6.09% 6.09%

Amortization 10 years 10 years 25 years 14 years,9 months 10 years

Monthly payment $2,777.29 $3,610.47 $2,096.79 $2,777.00 $833.19

Interest Paid $83,274.52 $108,257.09 $304,036.73 $165,603.62  $24,982.22

Balance owing at

end of term (5 years)$143,607.85 $186,690.58 $292,338.50 $244,863.01 $43,082.17

Interest paid over

the term (5 years) $60,245.25 $78,318.78 $93,145.90 $86,483.01 $18,073.57

Second mortgage

If you have a conventional mortgage some lenders will allow you to add a second mortgage component onto your home.  You may have to stay with the existing mortgage lender you are currently with to do this as rarely do mortgage lenders like to be in second position if they are not already in first.  Sometimes there is a minimum amount of at least $25,000 lenders will allow you as a new mortgage, so if you have debt for less than that, you may not be able to set up a mortgage.  The fees to do this would also be approximately $1,000 for the appraisal and a change to the lien amount, (if needed), so please make sure it makes sense financially to do so.  This could still save you thousands of dollars in interest depending on how much debt you have compared to the rates you are currently paying, and the ones being offered.

These days a collateral mortgage is what most financial institutions issue.  This is where one charge is registered on the title and from there you have a limit of what you may borrow up to.  For a mortgage you may borrow up to 80% of the appraised value less the existing debt, and for the home equity line of credit the maximum you can borrow is 65% of the appraised value less the existing debt.  You essentially design the credit under those limits.  With collateral mortgages some financial institutions offer up to 3-5 lines of credit components, and 3-5 mortgage components and even credit card components.  In many cases you may not even need to do a credit application for additional credit, as they approved you for the limit when you originally opened your collateral mortgage, however most financial institutions will want a full application and an appraisal redone for any newly issued or refinanced credit.

Beware of lenders and brokers that want to give you more money and credit than what you may need.  Ensure your amortization will have you being mortgage free on or before retirement as many lenders will automatically give you a new twenty-five-year (or even a thirty year) amortization automatically.  It is important that you design a mortgage that is right for you.  I have always stressed to clients to design their mortgages based on a worst-case scenario and fund it taking immediate advantage of any prepayment privileges such as doubling up the principal and interest payment.  If you design your mortgage this way and an emergency were to occur, you could bring it right back down to the lowest payment, if need be, without having to refinance it, however, check with your financial institution, as some lenders may not allow you to decrease your payment once it is increased.  Another way would be to make a mortgage pre-payment equivalent to 10-20% of the original mortgage amount either each calendar year (January), or mortgage anniversary year (date your mortgage funded) if your mortgage lender provides this option.  Getting people to implement this strategy of applying these additional principal payments to their mortgages can be a near impossible task, as many enjoy the freedom of additional cashflow, especially after being cash strapped for long periods of time by debt.  Again, not all mortgages are made the same with regards to the features and benefits they provide.  I have seen many people shop for the best rates and get locked into mortgage terms that offer no flexibility or features.  Halfway through their term if they need to make a change, it costs them tens of thousands of dollars to break their mortgage, so buyer beware and please be aware of the features and benefits of your particular mortgage.

Home Equity Line of Credit

A secured line of credit is exactly that; It is a line of credit secured by the equity in your home.  It allows you to access the limit of that line of credit with a minimum interest only repayment.  We call these the never-never plans, as the majority of people end up paying only the interest only payment, neglecting to pay down any of the principal.  These are offered at a variable rate of generally Prime + 1.00%.  Sometimes when a bank sets up a collateral mortgage to the maximum 80% loan to value and there is not enough equity for a line of credit component, they will still set one up with a limit of $1, and as you pay down the principal of your mortgage and eventually build enough equity for a line of credit, the limit will automatically increase.  This over time gives people access to an increasing secured line of credit limit at a preferred rate with an interest only repayment.  Many people utilize their secured lines of credit for home renovations or the purchase of a vehicle, cottage or business, etc., instead of saving or budgeting prior.  These have been utilized well for years as prime has been so low for so long, and in 2022 Prime 2.70%+1.00% =3.70%, but with this product consumers are very vulnerable to increasing interest rates as it is variable interest.  In 2023 there were ten rate increases within a one-year period and when Bank of Canada decided to increase the key interest rate many people found themselves paying significantly more for that cheap line of credit debt which jumped to prime being 7.20% and secured lines of credit to 7.20% + 1.00%= 8.20%.  Lines of credit are fully open and can be paid off or down at any time providing you have the funds to do so.  

Many times, what can happen is that clients utilize their line of credit limit to the fullest and at mortgage renewal time end up refinancing that balance into their mortgage (like I used to do).  It can be a never-ending cycle that is difficult to break without enormous self-discipline.  There is nothing worse than seeing clients with mortgages on their homes after living there for more than twenty-five years, owing more than what they paid for it so many years ago.  You do not want to get into the habit of using your home as an ATM machine and draining equity to buy stuff!  The whole goal is to be debt free as soon as possible and to NEVER get into debt again.

Deciding whether or not to consolidate depends on your intensity and commitment, how much the debt is, and if the savings in interest makes sense.  Again, debt can be so easily hidden, and many people have the mindset their consolidated debts were paid off, when in actuality that debt was simply moved to another product.

Consolidating debts can also be life changing, especially if you are struggling with limited cash flow every day and are stressed out having sleepless nights, and you truly are unable to balance your budget.  Whatever option you decide on, the ultimate goal is to get it paid off as quickly as humanly possible so you can be debt free and implement aggressive savings.  The most important activity here is to be intentional with the debt repayment within a specified period of time.  Know yourself and be very honest with how you will handle the debt repayment option you choose so it will be paid off ideally in three to five years or less.