Six years ago, I was making minimum wage, living with my parents and drowning in over $20,000 of student-loan and credit-card debt. Still, that didn’t stop me from shopping. For years, I lived on the edge—spending every dollar I made, and more. Sound familiar? It likely does: According to the Canadian Federation of Students, the average debt load for a university graduate is over $30,000.
The money I owed held me back from the life I wanted for myself. I felt stuck, and I desperately wanted to change—I just didn’t know where to start. Debt and money were topics my friends didn’t talk about. I was too embarrassed to bring it up with my parents, and with no support system, I felt discouraged and overwhelmed. I would always tell myself I’d figure my finances out “next month.” But next month became the month after, and I never got around to it.
Then one morning I realized that I didn’t have enough money to take the bus to work. (Seriously.) I had to ask my then-boyfriend to loan me the change. It was that humiliating, desperate moment that made me want to change my life forever.
So I came up with a plan to turn my finances around and pay off all of my debt in just 12 months. If that sounds extreme, that’s because it was—and it worked. One year later, I was completely debt-free. Here’s how I did it.
1. Add it all up
The first step to taking charge of your money is figuring out how much you owe. Then, take a look at what you’re spending.
To start paying down more debt, Alison Griffiths, author of Count on Yourself, and host of W Network’s Maxed Out, recommends the 10 percent solution. Start by separating your spending into two categories—fixed (things that don’t change from month to month, such as rent and car payments) and variable (food, clothing, entertainment).
“Normally, you can’t change the fixed portion of your expenses, but you can aim to cut 10 percent out of everything else,” she explains. (The idea is that, by spreading the savings across a few different areas, it’ll seem less intimidating.) “For many families, this can > free up anywhere from $200 to $400 a month.”
With the extra money you’ve found by trimming down your expenses, you can begin tackling your debt. But where to start?
One option is to pay down the loan with the highest interest rate first(typically your credit cards), but this approach doesn’t work for everyone—especially if this is where you owe the most. Another approach is to tackle the debt with the smallest balance first. Some people prefer this strategy because they see results sooner, which motivates them to keep going.
I went with the first option because the thought of paying over 20 percent interest on purchases I couldn’t even remember making made me feel sick to my stomach. (If you have a lot of credit card debt spread over several cards, consider talking to your bank about consolidating your debt into a line of credit with a lower interest rate.)
2. Break the paycheque-to-paycheque cycle
Have you ever counted the days until payday, wondering how you were going to pay rent, or charged groceries to your credit card, knowing you wouldn’t be able to pay off the balance by the end of the month? Trust me, I’ve been there.
According to a 2011 survey from ING Direct, one in two Canadians are unable to save an extra $25 a week—mostly because they’re unwilling to commit to small changes, says ING president and CEO Peter Aceto. Sometimes we think that saving a few dollars won’t make a difference, but it can literally change your life.
For example, you might easily save $25 just by going for drinks or dinner one less time each week. That adds up to $1,300 in savings in just one year. Put that $1,300 toward your retirement—at a 5 percent rate of return—and in 30 years your $39,000 in savings will have grown to $91,989.02 in the bank. That’s almost $53,000 earned in compound interest!
Once I understood how interest could add up, I started looking at different ways to save money on a daily basis. I started walking to work instead of taking the bus. I bought no-name brand items, packed my lunch every day, and began clipping coupons for groceries.
3. Write out a budget and stick to it
Over the years, I’ve wasted thousands of dollars on clothes, bags and accessories I don’t even have anymore—just because I thought I deserved them. Then there were the weeks I had to live off ramen noodles or borrow cash from my roommates to buy groceries because I constantly spent my money on stuff I just couldn’t afford.
This is where a budget can help. “You absolutely must know your after-tax income down to the dollar, you must build a budget that reflects your actual expenses, and you must track your spending,” says Kerry Taylor, author of 397 Ways To Save Money: Spend Smarter & Live Well on Less. (Like me, she got serious about her finances when she graduated from university with over $17,000 in student loans.
Financial experts often talk about the “latte factor”—the idea that all you need to do to get ahead is be aware of the little things. But if it’s the little things that make your life more enjoyable, there’s no reason to stop entirely. Budgeting is not about deprivation; it’s about making clever choices so that you spend money on what you really want. For example, I travel a lot, so I can’t live without always having something to read on my Kindle. Each e-book costs about $10, so in order to afford a few each month, I’ve reduced the amount of cash I spend on eating out.
4. Pay yourself first
While budgeting is a terrific idea, it doesn’t always work. Many people can’t be bothered with logging every single expense into a spreadsheet, so they end up quitting before they ever see results.
If this sounds familiar, try a pay-yourself-first strategy instead, and set up a monthly savings plan where your money gets automatically transferred from your chequing account into a savings account each time you get paid. Because the transfer is automatic, you’ll never “forget” to manually transfer the money, and you also won’t be tempted to spend it either.
This leaves the rest of your funds to be spent on everyday expenses. At the end of the month, if you have any left over, you can tuck it into another separate savings account, one you can spend on anything you want.
In my case I do both: A portion of my pay gets automatically transferred to savings each month, then I create a budget with what’s left over. I also track every single purchase I make, so I’m more aware of where my money is going. (I know, I’m pretty strict.) By the end of the month, I almost always have more money left over to top up my savings.
5. Save your savings
Think of the last time you used a Groupon or shopped around for cheaper car insurance. Then think about what you did with the money you “saved.” Chances are, you turned around and used that “savings” to buy something else instead. In theory, you’ve stretched your dollar further, but it’s not considered savings unless you actually save the money. Next time, try putting it into the highest interest savings account you can find. (True, the rates are pretty paltry right row; the best I’ve come across is 2 percent at Ally bank and 1.5 percent at ING Direct.) You can also stash cash in a Tax Free Savings Account for long-term, non-retirement related expenses; unlike an RRSP, withdrawals aren’t taxed.
Six years ago, I would never have imagined I’d be where I am today. By getting out of debt and taking an active role in managing my money, I’ve totally changed my life. Not only am I saving for early retirement, but I’m also travelling often, and I just bought my very first home in Vancouver. Now I decide where my money goes, and that’s just how I like it.