Budgeting and Debt Management
What is Debt Management?
A debtor is anyone who owes a debt, usually money, to someone else, who is known as the creditor. All of us have been debtors at some point in time, even if for small amounts of money. Owing money is not the problem, it's how a person handles the debt that can become the problem. Proper management of your debt means that you pay all your debts on time and in the amount you have agreed to pay.
Financial trouble begins when those debts are not being paid when and how they should be. Then the creditors start looking for ways to collect their debt. This may be through claiming a security, if you put one on the debt, for example, repossessing your new car. If the debt is unsecured, the creditor can go to court to obtain a judgement against the debtor which orders them to pay. Often creditors will put the collection of the debt in the hands of a Collection Agency which takes a percentage of the debt collected and so is highly motivated to want to collect.
The wisest choice is to learn good money management skills so you don't have to deal with debt collectors.
Steps to Healthy Money Management
PLAN - for the future, major purchases and emergency expenditures.
SET GOALS - determine what your short, mid and long range financial goals are; what kind of position do you want to be in.
DEVELOP A REALISTIC BUDGET - determine monthly living expenses, periodic expenses and monthly debts. Follow your budget as closely as possible and compare actual expenses with planned expenses.
DON'T ALLOW EXPENSES TO EXCEED INCOME - avoid paying only the minimum on credit cards; don't charge more than you are repaying to your creditors.
SAVE - the usual target is 10% of your net income each month. Accumulate 3-6 months salary for an emergency fund. Put away funds for retirement by taking advantage of tax saving RRSP's.
PAY YOUR BILLS ON TIME - this is the best way to maintain a good credit rating. If you can't make your payment for some reason, contact your creditors to explain. If you need assistance with this contact Credit Counselling.
DISTINGUISH THE DIFFERENCE BETWEEN NEEDS AND WANTS - take care of your needs first; spend money on wants only after needs are met.
USE CREDIT WISELY - use credit for safety, convenience and planned purchases. Determine the total you can comfortably afford to purchase on credit. Don't allow your credit payments to exceed 20% of your net income. Avoid borrowing from one creditor to pay another.
KEEP A RECORD OF DAILY EXPENDITURES - be aware of where your money is going. Use a spending diary to assist you in identifying areas adjustments need to be made.
Figure out your budget! Click here
How Financially Fit are You?
from the Booklet "Managing Money" - Canadian Bankers Association
Do you think you're doing a good job of managing your money? Or do you feel your spending is out of sync with your income? To see what kind of shape you're in, take a few minutes to fill out this financial fitness test. Answer yes or no to the questions below:
- Do you usually pay your bills late?
- Are you using more and more of your income to pay debts?
- Are you paying your bills with money you had planned to use for other things?
- Are you paying only the minimum amount on your loans and credit cards every month?
- Are you at or over the limit on your credit cards?
- Are you borrowing money or using credit cards to pay for things you previously bought with cash?
- Are you using your savings to pay bills?
- Has a collection agency recently called about overdue bills?
- Have you put off visiting the dentist or buying prescriptions because you can't afford them?
- If you or your spouse lost your job, would you be in financial trouble immediately?
- Are you uncertain exactly how much money you owe?
HOW DID YOU SCORE?
Total the number of "yes"answers to determine your financial fitness.
0 : You're the picture of financial health. You're sensible about using credit and take budgeting and saving seriously.
1 - 2 : You're in good shape, but keep an eye on your budget and your financial priorities. Don't let credit use get out of hand and watch impulse spending. Find out how your expenses compare to your income.
3 - 6 : You could be headed for financial trouble. You need to get your spending under control immediately. If you don't have a monthly budget, draw one up and follow it. Put away your credit cards and cut out all unnecessary spending until you can answer "no" to all or most of the questions on the Financial Fitness Test.
7 or more: This is a wake-up call. You are likely in serious financial trouble and should get help.
Sit down and calculate your income and expenses. Once you have an idea where you stand, find a good financial counsellor who will help you identify the problem areas and put together a workable plan to get you financially fit. It may take time, but the pay off is worth it for your peace of mind and financial security.
LEARN MORE ABOUT CREDIT COUNSELLING
Click this link to learn more about the credit counselling services at HaltonFamily Services.
Additional Links on the Topic
Cost of Banking Guide
Consumer Connection
Ontario Association of Credit Counselling Services
Canada Student Loans
Centre for the Financial Services Ombudsnetwork
Financial Consumer Agency of Canada
Ontario Student Loans
Community Legal Education Ontario
The Young Investor
Trillium Foundation Drug Plan
