Line of Credit Demolished

Mark this date in your calendars…I have finally paid off my line of credit.  While readers out there are either a) jealous or b) don’t care, I am definitely proud of this moment as it has been a burden ever since I purchased my house a few years back.

I had to switch some money from some savings accounts (like my Property Tax account…better top that one up fast before the next bill comes in, or the account for paying back my parents…I better hide for the next few months from them!) but I figured it was a smarter move to use some money in savings rather than accumulate any more interest.  I cringe at thinking of looking at how much interest I have paid over the past few years on the line of credit.  I suppose I should do it to shock my system into not letting my debts get out of hand.

I definitely picked up a few tips along my way of trying to be fiscally responsible and I thought I would write them out for those who are interested.  Telling you what worked for me may not work for you, so keep that in mind and find the right thing for YOU.

– I recommend visiting www.lifehacker.com periodically and pay attention to their money saving tips.  You can search by themes so click on the Money theme to look at their suggestions.  One of their suggestions really helped me out in the past six months.  For the longest time here is the scenario I used:

Put $125 a week into Savings Account.  Once the total hits around the $500 use it to put on the line of credit (or pay off the parents when they phoned wondering where their money was).

This seemed like a good plan, but it wasn’t working.  For example, when the savings account would hit around $500, my mind entered “I have $500 cash now!” mode and if I wanted to splurge a little, then I just took the money out of savings and put the rest onto my debt.  So instead of $500 going to the line of debt, $200 managed to survive.  Not a good scenario.

Life Hacker gave me this great idea of putting my automatic withdrawals directly towards my debt and not into a savings account.  Mentally, instead of being disappointed with myself in the fact that my line of debt wasn’t going down all that fast (part and parcel with the fact that I was spending savings on material goods), I began becoming happy when every week went by and I saw my line of debt go down by $125.  Sure, my savings account stood at 0.50 but who cares?  The line of debt was going down!

It may not work for everyone out there, but it sure worked for me.  I literally was happier every time I saw the number decrease…I started working hard at making sure I wouldn’t need to take money out of my line of credit.  I rolled coins, I watched my spending outside of home, I didn’t use my credit card.  Which brings me up to my next point…

– Credit Cards: I used to use my credit card for EVERYTHING so I could accumulate some Aeroplan points.  This scenario is great if you pay your credit card off with whatever you have in your bank account RIGHT AWAY.  My problem was that I would end up not paying it off right away, then have a large bill at the end of the month that the bank account couldn’t cover and so I would just pay the whole thing off with the line of credit.  Note that this is actually a really smart thing to do because it’s a heck of a lot smarter to not have your debt sit on a 20% interest credit card instead of a 8% interest line of credit.  Remember that the first step in becoming fiscally responsible is to realize the person you are…don’t fool yourself into thinking that you’ll pay that credit card off ASAP and before the month’s interest kicks in.  Just put it on the line of credit before you let the credit card bills pile up.  Of course, if you can manage to pay off the credit card every time you use it, or manage to pay it off by the end of the month with your bank account cash, then by all means, do so (and bravo!).  In my case, it messed up my finances and that’s how my line of credit never went down.

Back to the credit card story, I finally realized that using it to rack up Aeroplan miles was costing me more than I made so I halted that operation, settled down with a budget and budgeted myself a cash amount that I could carry in my wallet during the week.  Mentally, I had changed my thought process to know that whatever was in my wallet was what I had to spend for the week.  It is quite the life changing experience when you see your money go down so fast but it does make you think twice before saying “YES!” to when your buddies are going out for a bite to eat after work when you only have $40 in your wallet and you still have to get gas for the car sometime this week.  This was definitely a good step in my direction to paying off debt; having cash in my wallet and not depending on my debit card.

– Paying Yourself First – A tip I picked up from The Wealthy Barber (which Maren introduced me to).  The Wealthy Barber is truly an amazing read.  I even pull it out from time to time when I have life changes…for example, years ago, the parts about mortgage payments or saving for kid’s education didn’t really mean much to me but I know it’s there when I need it.  I also peruse it once a year to get myself back on track with some of its ideas.  I gave this book to Eric for his birthday a few years back but I don’t know if he ever got around to reading it.  Eric, I know you are reading this and if you haven’t read it yet, give it a try.  I love it.  It is a little outdated though…they quote some pretty amazing interest numbers for bank accounts that hearken back to the days where you would get 10% in a bank account.  The numbers are off, but the processes they speak about are not.

One of the processes is the ‘pay yourself first’ process.  We all know we have monthly/yearly costs.  So plan ahead for them!  For example, I know that I property taxes due every year so I have an automatic withdrawal from my bank account to my ING Direct Savings account for $100 every paycheque.  The first year I had my house, I got dinged with a $1000+ bill (thank the Lord for a line of credit!) but the next year I had planned ahead for it and when the bill came, I had the cash in an account (with a little extra over to spend on…me!).

Sure, you’re thinking that this is a major annual expense that I’m thinking about but what about the smaller expenses that creep out of nowhere?  Let’s talk about some strange things I save up for:

– Driver’s Plate Renewal: I know that each year around my birthday (boo, hiss!) I need to fork out $80 for my driver’s plate renewal.  For some, $80 is a drop in the bucket, but to me, $80 out of my wallet right around my birthday where I know I’ll be going out to have a few drinks hits the wallet hard.  So now I have an automatic withdrawal to take money out each paycheque to save up for the $80.  I get 26 paycheques in the year so that’s $3 a paycheque that I take off (now the logistics of this aren’t that simple since I don’t have a gazillion savings accounts…I kind of merge them together into one for small things like driver’s licenses, gym fees, etc.).  What’s $3 from a paycheque?  NOTHING.  But what is it around your birthday?  It’s an awesome feeling of not having to dig into your wallet for $80 but simply transfer some funds from the savings account.

– Gym Membership – I recently joined the gym with Vero and now that I am done paying off some debt, I will ramp up the gym membership account.  So I know it costs $350 for the year so divide that by 26 paycheques: $13 a paycheque.

– Christmas Gifts – The first year I moved into my house, I ended up having to use my line of credit to buy a lot of my Christmas gifts.  This was quite the silly move on my part and in hindsight, maybe it’s a little smart to talk to the family before the holidays and say “Listen, I’m a little strapped for cash, how about we tone down on the spending this year?”.  Besides, Christmas is about meeting up with family and friends and watching a good National Lampoon’s Christmas Vacation on Christmas Day.  ANYHOW, after that mishap, I knew that I would have to put some money aside for Christmas gifts every year.  Luckily for me, my Canada Pension Plan and Employment Insurance payments end around the month of October so there’s a little extra cash on my paycheque.  I automatically set up an automatic withdrawal to my Christmas Savings Account for the months leading up to Christmas and stop the automatic withdrawal in January.  It has helped out immensely over the past two years and I definitely recommend it.  Heck, you KNOW that you’ll need money around the holidays, why don’t you prepare for it?

There are TONS of little things that you know will need some payment in the future…magazine subscription renewals, website hosting renewals, etc.  It’s a smart thing to pay yourself first on these items and you won’t notice it hit you as hard when the time comes to get these things purchased.  Sure, it may seem a little intense for some people to save for EVERY LITTLE THING, but the way I look at it is if you know it’s coming, may as well prepare yourself for it.

What does the future hold for me and financial matters?  Well, I still have some debt to pay off from some gracious people who have given me some ‘interest-free’ loans who definitely need to be paid back.  The money that has been going to the line of credit will be automatically switched to paying them back.

Of course, everyone’s ultimate goal is to have money lying around for a day where something out of the ordinary occurs; you need new tires, you need a new car engine, you need a new furnace…ideally I would like to get to the point where I have savings accounts with money in each of them for these types of emergencies but we’ll see about that one.

I think it’s also a smart idea in the future to look at the type of person I am and prepare.  For example, I *know* I go to concerts.  So maybe there aren’t any coming up right now, but I can still save up for it.  A measly $10 a week would help me immensely in the long run for saving up for concerts.  Plus, if I don’t use the money by the end of th year, I can leave a little nest-egg to prepare for the next year of concerts and use the remainder to pay off some debt.

Oh, before I forget, let’s not forget birthdays!  $20-$30 per person you want to buy birthday gifts for…that’s some money you could save for it you really wanted to.  But I suppose that doesn’t make too much sense because odds are, you have a birthday to celebrate every month so it doesn’t make too much sense to put money away just to use it again in the month.

After I pay off the debt, I’ll up my RRSP contributions again and then start having pockets of savings.  It’s still a long process, but I feel that the one thing that really helped me is realizing I had a problem with it.  Once I’ve realized it, I could get on the path of fixing the problem.

That lesson works with anything I suppose.  😉

In the end, I’m sure you all have your own tips to share, or know of what works and what doesn’t work for you.  I think the main issue is to realize that if you are in debt, make sure you really look at what you are doing to pay it off and realize when something isn’t working.  Saving money to pay off debt is great, but it’s not so great if every time you save a little cash it goes back to do something entertaining before paying off that debt!

Also, don’t kill yourselves over debt.  Life isn’t about sitting at home for 8 months while you pay off some debt.  Do half of the payments over 16 months and live life a little.  Wait, did that just go against everything I wrote about?