Written by Douglas Hoyes, December, 2008
Every week I meet with and talk to a few dozen people with financial problems, and I am hearing an increasing number of first hand stories about the problems the average person is having staying financially afloat. Here's what I'm telling them.
The world has changed
Gone are the "good old days" of 2007, when you could:
For better or for worse, we now live in the "credit crunch" society.
Not only is it impossible to get a zero down, zero interest car lease, but some car companies no longer offer car leases at any price! They have stopped leasing. To buy a car today, you need cash, or really good credit to qualify for a loan at 12% interest!
Mortgages are much more difficult to get. We are rapidly returning to the days when a 25% down payment was standard for a house purchase, and that means that many people who could have purchased a house two years ago cannot purchase a home today.
As the economy slows, extra shifts and overtime at work are gone. I know meet many people who are now on "work share", where they work two or three days a week, and draw unemployment insurance during their down time. Overtime is a distant memory.
For years we used our houses as an ATM machine. We would build up credit card debt, then re-mortgage our house to pay it off. I recently met with a couple that did that five times in the last five years. They tried again last month, and the bank said "no". Their incomes have fallen, and their house value has decreased, so it is no longer possible for them to re-finance and repay their high interest credit card debts.
The world has changed. Incomes are falling, jobs are less secure, house prices are falling, and credit is less available. Even worse, it will probably take many months, even a year or more, for the financial world to get back on track.
So, how can you survive this economic crisis? Here are my top five tips for surviving this economic crisis:
1Reduce your debt
This is critical. If you have debt, you are not in control: debt means the bank is in control. You must take immediate steps to reduce your debt. Read more on how to reduce debt.
If you have a big mortgage payment, car payment, or credit card payment each month, and you lose your job, you will quickly fall behind, and risk losing your house and car.
If you have no debt and lose your job, your only worry will be finding another job. You won't have to worry about making payments and losing your home and car. With no debt, you can weather this financial crisis.
2Learn to live without credit
This is a hard one. If you are 40 years old or younger, you have probably used credit cards your entire adult life. You have probably never paid cash for a car, and you may just assume that it's normal to only have a 5% down payment on a new house.
Here's a challenge for you: talk to your parents or grand parents and ask them if, when they were young, they had a credit card. They will probably tell you that no, they paid cash for everything, including cars and houses. That meant they didn't buy a new car every three years, and they lived in a small house, but they also didn't have any debt payments.
Living without credit means making a budget and planning what you want to buy, and then saving money to do it. It's a drastic change for those of us who are used to buying now and paying later, but the savings in interest payments are worth it in the long run.
3Simplify your life
Living without credit means simplifying your life. If instead of a 5% down payment on a house you will now need 25%, you will probably buy a smaller house. That's fewer rooms to furnish and fewer things to buy, which makes your life simpler.
Review every dollar you spend every month, and ask yourself: "Do I really need that?" For example:
I'm not suggesting we become hermits and give up our cars and houses. I'm not even saying credit is bad. What I am saying is that if we can learn to live with less, our lives will have less stress, and we will have less debt to worry about.
4Start working on Plan B
It's possible that your world hasn't changed yet, but the world around you has changed, and eventually your world will change too.
What will you do if you get down-sized at work, or if your hours are reduced? What will you do if you can't lease another car when your current lease expires? What would you do if you couldn't sell your house for more than the amount owing on the mortgage? What if the economy does collapse?
While these are not pleasant things to think about, starting thinking about them: start making a "Plan B". You need a plan for the following:
5Reduce your expenses
Every month I meet with dozens of people who have gone through a job loss, or a marriage break up, or even medical problems that have forced them to cut their living expenses to survive. Here's my final tip:
Don't wait until you have to: cut your expenses now. Use the extra cash to pay down debt, or to build up some savings.
Think about this: If you earn $2,000 per month and it costs you $2,000 per month to live, you have no margin for error. If you can reduce your expenses to $1,800 per month, you have some "wiggle room"; missing a day of work won't destroy your monthly budget. Here are some easy strategies for cutting expenses:
Here's the point: the world has changed, but you are still the boss of your own life. You can set your own destiny, so make a plan to reduce debt, use as little credit as possible, and plan for the future.
What do you do if you are already drowning in debt, and cutting expenses won't help? You need professional advice, so e-mail us or give our debt help line a call at 310-PLAN (that's 310-7526, no area code required in Ontario) and ask us whether a consumer proposal or a personal bankruptcy is necessary to deal with your debts.
There are options, but you are the boss, so only you can make the call, so if you are burdened with debt, make the call today.