Dealing with Debt – A Family’s Story (Part 3)

Susan had just helped Kathy find enough extra dollars in her monthly budget to cover her mortgage payments. But that wouldn’t solve all of Kathy’s issues.

What else could Susan do?

Susan informed Kathy that most advisors focus on recommending proprietary products, regardless of what the client’s circumstances are. Susan instead prided herself as someone who fixes clients’ most pressing financial issues, and for many individuals, their biggest obstacle is debt.

Budget Mindfulness

The process Susan wanted to walk through together with Kathy was relatively simple - but not necessarily easy. Susan encouraged Kathy to become more mindful of her spending. Kathy thought, “what does ‘mindful’ mean in the real world?”

Susan said, “track where you spend your cash!” The rationale behind tracking someone’s spending and what makes this method successful, is that people perform better when they closely track their actions.

Think about pedometers and Fitbits – those are just two examples of how the fitness sector has embraced technology to help individuals achieve their goals. The weight loss industry has preached for decades about keeping track of calories to aid people in losing weight.

As well, any self-help book or business leader would advise that you need to have goals, targets, and a plan to achieve those goals and targets. Achieving goals is rarely easy – if it was easy, it wouldn’t be much of an achievement! It isn’t necessarily laziness that prevents people from reaching goals; rather, people are busier than ever, and goals tend to fall by the wayside. Budget management and tracking spending are just additional, less-than-enjoyable, habits to be ignored.

With that in mind, Kathy agreed to complete the process. Susan provided Kathy with a gift certificate to a local coffee shop to encourage Kathy to grab a coffee sometime and check out a helpful online resource. Susan sent Kathy a link via email, and advised her to take her time as she answered the online questionnaire. Susan estimated the process would take about 30 minutes.

Budget Breakdowns

The next day, Kathy was able to set some time aside to check out the resource and complete the process. Luckily, both of Kathy’s daughters had soccer practices at the same time and wouldn’t be home for hours. With Susan’s gift certificate, Kathy treated herself to the most expensive and unhealthy coffee she could buy and sat down to input her information.

The whole process took about 30 minutes, like Susan said it would. After Kathy was done, a report was generated that broke down Kathy’s spending. It was pretty much what Kathy had expected, but there were a couple of items that caught Kathy’s attention.

First, there was a $200/month charge to her account from a gym that she thought looked odd. Although she rarely attended that gym anymore, she still planned to start going again.

But why were the charges that high? She thought the monthly charge should be closer to $50/month. After Kathy investigated a bit further, she learned that the gym was still charging her a babysitting service - even though her kids haven’t needed childcare in over a year.

The other charge that Kathy noticed was a $50/month magazine subscription that she felt she no longer used, so she decided to cancel it.

The following Saturday morning, Susan and Kathy sat down at Susan’s office to review the results. Susan congratulated Kathy on completing the process. Susan said that many clients never complete the process. Rather, they continually procrastinate and still face the same debt issues day after day.

Invest or Debt Reduction?

Susan noticed that Kathy had a monthly contribution of $200/month to her TFSA. Kathy said the teller at her bank encouraged her to start it about a year ago. Susan advised her to stop it immediately and withdraw the amount she had and direct it towards her debt.

Susan said it didn’t make good financial sense to invest her funds into a TFSA where she earned only 2% while she was paying more than 7% on her line of credit.

Susan advised further that when Kathy became more financially stable, she should consider putting money towards a TFSA, but that it shouldn’t be used as an emergency fund account. Emergency funds are short-term in nature, which means your investment options should only be short term.

This basically means they should only be in savings accounts which pay very low interest. Susan showed Kathy that even though she’d pay taxes on any investments not held in a RRSP or TFSA, the 2% tax on a very small amount wasn’t that onerous.

Susan added that Tax Free Savings Accounts are a bit of a misnomer. TFSA accounts can be invested in more than just savings accounts; stocks, ETFs, mutual funds, individual bonds, and structured notes are some of the investment vehicles available.

“Not bad”, Kathy thought.

Between Kathy and Susan, they found an additional $400. Kathy figured that was the equivalent of two shifts working as a waitress.

Debt Consolidation

Susan also recommended that Kathy consider consolidating her debt, so they investigated a few possibilities. Susan mentioned that she was not an expert in this area, but she would refer Kathy to a member on her team to investigate what could be done. Regardless, she was confident that Kathy would be able to lower her monthly debt repayments by a significant amount.

The next day, Kathy met with Lisa, a mortgage and debt expert who was also a member of Susan’s team. After Lisa inputted the Kathy’s numbers into a software program, she determined that Kathy's monthly interest costs could be lowered by over $400/month.

Between the $400 they found earlier in unnecessary expenses, and the debt repayment reduction of $400, Kathy had now reduced her monthly expenses by $800!

Kathy was ecstatic, but she was also a little annoyed with herself that she didn't take the time to examine her expenses months ago. The next step to complete the process was for Kathy to fill out a few forms, which took only about 30 minutes.

Kathy thought with her newfound $800, she could probably quit her job as a waitress. However, once she checked with Lisa and ran the numbers a bit further, she decided to keep the job. Lisa helped show that by working only two shifts a month for the next two years, Kathy would be able to shave off another three years on her debt repayments.

Kathy thought this made sense and agreed to follow through with this plan.

A New Lease on Life

As Kathy walked out of Susan's office, she began to dream of the freedom of having no debt. It had been a long time since Kathy had felt that way. Thoughts of trips with her friends, retirement, and more time with her daughters began to drift into Kathy's head.

When Kathy picked up her daughters from soccer practice, her daughters asked her why she was so happy. Kathy wasn't sure how to respond, but only said that she had finally taken care of a problem that had been troubling her for a long time.

---

So, there you have it!

What had seemed at first like an insurmountable challenge ended up being a manageable hurdle. It took a confrontation with unpleasant feelings, a chance on a friend’s advice, and some hard work, but Kathy now has a plan of action to get out from debt and on top of life.

The essence of this story was to help show you that debt happens to all of us. But no matter who you are, there are ways out of debt. Talking to a professional who specializes in debt reduction is a great starting point.

I want you to trust me – we’re not here to help only the rich. We’re here to help you, with whatever financial challenge you’re facing.

If you have debt issues and you’d like a second opinion, please feel welcome to reach out to my office. I’d love to help you achieve your goals. It’s what I’ve built my career on.

See you soon,

Brent Misener, Misener Wealth

Brent Misener is a Financial Advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. Statistics and factual data and other information are from source Raymond James Ltd. (RJL) believes to be reliable but their accuracy cannot be guaranteed. Information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is provided as a general source of information and should not be construed as an offer or solicitation for the sale or purchase of any product and should not be considered tax advice. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member - Canadian Investor Protection Fund.