My credit-card bill arrived this week with a notice that states if I continue to make the minimum monthly payment on my debt, it will disappear.
In 72 years.
I’m sure that this notice was intended to send me running for a ledger book or a slide rule so I could re-organize my life and shore up my finances. It didn’t. It sent me to the corner store for a lottery ticket. I’m winning $30 million this weekend. Either that, or I’ve got 72 years to find some rich grandkids.
I was raised to believe that it’s smart to hold debt. Managing debt builds good credit, which leads to bright futures, and pre-approved mortgages, and upgraded credit cards with front-of-the-line service. Now I hold a sizable debt that isn’t owed to an academic institution or a mortgage company; it’s simply the result of some travel, a few pairs of shoes and a truly insatiable appetite. (You should see me with a Porterhouse and a deep dish—cake or pizza.)
My appetite is exceptional, but my debt is very average. I. Am. Canadian. A year ago, the Nobel Prize–winning economist and columnist Paul Krugman noted that for every $100 we bring in, Canadians sock away about $2.80. That’s less than half of what the average American saves, and that country’s been in a debt crisis for over four years. Canadians carry one of the worst debt-to-income ratios in the world.
According to Laurie Campbell, executive director at Credit Canada, the average Canadian spends $1.50 for every dollar he or she earns. At the height of the U.S. debt crisis in 2008, Americans spent $1.65. “We’re not at those levels yet,” she says, “but we should be very concerned.”
Campbell joins a chorus of experts who’ll tell you to pay yourself first: “You should have forced automatic savings that come out of every paycheck, or you’ll end up with no money at the end of the month.” After years of extensive research, I can confirm that this is true. Paying yourself first is a great approach.
Patricia Lovett-Reid, senior VP at TD Waterhouse, tells me that while it’s important to make the minimum monthly payments on all outstanding debt, when it comes to allocating any extra savings, “pay off the most expensive debt first—not the largest.”
What she’s saying is that the $10,000 at 7% on your line of credit can wait a little longer than the $8,000 at 19% on your gold card. If you can transfer the second debt onto your line of credit, do so. Lower interest means less compounding, which, when you’re in debt, can save your hide—or, at least, the vintage fur you were about to pawn.
Compounding interest is what happens when your interest starts charging you interest. Your monthly interest charge gets added to your debt, which makes your debt bigger, which prompts a higher monthly interest charge. It’s debt’s hamster wheel. Compounding interest is killer when you owe money, but it’ll change your life once you get in the black and start to save.
Here’s something else that’ll change your life—a receipt wallet. Place your receipts in here and give yourself a visual and tangible understanding of how much you spend each day. You’ll probably reconsider that muffin purchase. If you subsequently file your daily receipts into monthly folders, tax season becomes simpler. But don’t get self-righteous about this; your friends will resent you.
Your approach to getting out of debt needs to be sustainable, and you need to live while you do it. If you’re struggling with debt and life’s feeling bleak, this may not be the time to go cold turkey on the latte addiction. Maybe a few times a week you can brew your own coffee and froth up some soy with one of those hand-whipper things. (Good for the kitchen and the bedroom!)
Then, on the mornings when you really need it, go back to the coffee shop and trap the smell of the grinds in your clothes while you drink something unpronounceable and delicious. Don’t feel guilty. Don’t let this debt beat you down. Debt is your nemesis. Don’t let it win. Because you will rise out of it, like a phoenix.
And, if you’re like me, you’ll have the satisfaction of revelling in this glorious experience over and over again.
Hilary Doyle is a broadcast journalist who wrote and starred in CTV and BNN’s financial comedy series Stock & Awe.