Debt-Free Forever

by Gail Vaz-Oxlade

  The single best way to move from reactive spending to planned spending is to use a shopping list.

  Shop with a List

  Grocery shopping is one area where people often overspend unconsciously. In the name of “feeding our family” (said in a serious and very deep voice), we toss stuff in our shopping carts without giving it a second thought. We buy cherries offseason for $10 a kilo. We buy mangos, star fruit, and avocados in the depths of winter. We buy organic. And we pay a pretty penny for all these choices.

  How much of what you buy is purchased on impulse? Boy, those hothouse tomatoes smell great, don’t they? If you don’t shop with a list, you’re leaving yourself susceptible to all the contrivances retailers have come up with to separate you from your money. Become conscious of what you’re buying and you can cut your grocery bill by 30%. If you’re currently averaging $1,200 a month, that’ll save you more than $4,300 a year.

  Get yourself a small notebook to keep your lists. You might use the front of the notebook for grocery lists and the back for your stuff list. Before you buy anything—clothes, a new TV, or paint to redo the basement—you must first make concrete your intention to buy by writing the item on your list. If something is not on your lists, you don’t buy it. No matter how good the deal is. NOTHING.

  If you have kids, shopping with a list will go a long way to demonstrating that you can’t always get what you want. Parents complain all the time that they can’t take their kids into a store without them wanting to buy something … anything. It drives parents crazy. And yet, when kids see their parents go into stores and buy stuff, seemingly with no plan, they learn from them that buying is the name of the game. Shopping with a list lets you demonstrate to your kids that your purchases are planned, that you aren’t simply reacting to the Great Deal or the Fancy Packaging. Shopping with a list demonstrates how to shop consciously.

  Keep a long-term list for things you want but don’t need right away. Maybe you’re planning on buying a treadmill so you can work out at home and save the $1,000-a-year gym membership. First you put it on your list. Then you save the money. Then you buy the item.

  GAIL’S TIPS

  You can use Lists for all your needs. Let’s look at a Clothing List to see how this would work. First, list what you must have in your wardrobe: number of shoes, shirts, suits, jeans, jackets, scarves, belts, purses, coats. Then go through your wardrobe and take inventory of what you already have, marking it off your master Clothing List. What’s left is what you need to complete your wardrobe. That’s your Clothing List and you can’t buy anything that isn’t on that list.

  Each season, you can add to your wardrobe by looking at your master Clothing List and figuring out what pieces you need to keep your wardrobe current. if blue is the new hot colour, you may only need to add a couple of pieces in with your existing stuff to have a fresh look. By knowing what you have, and figuring out what you need before you go shopping, you won’t waste money on impulse buys.

  Manage Your Planned Spending

  You can manage the money you are planning to spend in a couple of ways:

  1. You can set up a separate account for each planned spending goal you’ve set and then have the specific amount you’ve designated automatically moved from your regular account to each of your savings goals. This is clean and simple, and since there’s no cost for a savings account, you can have as many as you want as long as you can keep track of all your pots of money. Just make sure you’re aware of when the money’s being moved over so that you don’t end up in overdraft.

  2. You can set up one savings account and then keep a paper trail of what’s going into the account and what it’ll be used for. Let’s say you’re saving for a roof ($5,000), a vacation in two years ($2,500), and those stunning new boots ($240). You’ve allocated $350 a month to the roof, $250 to the vacation, and $50 to the shoes. You’d move $650 a month to your savings account each month and you’d note how much more you have for your planned spending within each category. When you hit your goal amount, you go shopping.

  See how easy? The idea is to have a system for dealing with the money you are accumulating to spend at some future date so that you don’t use credit that can’t be repaid immediately.

  Strategy 2: Figure Out What It’s Really Going to Cost

  Shopping consciously also means being aware of how much of your life’s energy you are exchanging for the stuff you’re buying.

  You’ve decided that you just have to have the newest cell phone that spits nickels and whistles “Dixie” while calculating how far you haven’t walked this week. It runs for $379.99. You’re planning to spend the money, so you’ve put it on your Stuff List. And you’re accumulating the money you’ll need so you don’t put it on credit. Good for you.

  So, how many hours are you going to have to work to get that Phat Phone?

  This is a useful step to see how much energy you’re prepared to expend to have all the Stuff you want. While it’s easy to spend money mindlessly, when you take the time to figure out how many hours you will have to work to get that great new whatever, you may find it just isn’t worth it.

  Let’s say you take home approximately $50,000 a year net. That translates into a net hourly income (assuming 50 weeks and 40 hours a week for work) of $25. You make a whopping $25 an hour after taxes. But that’s not your disposable income. You have to cover stuff like rent, car payments, debt repayment (for the last phone and all those dinners out), savings, and the like. Okay, let’s say your essential expenses—rent, food, and all the other things you must pay—add up to $3,300 a month. That breaks down to $19.80 per hour.

  Are you still with me?

  So your actual disposable income is your net monthly income of $25 less your essential expenses of $19.80, which leaves a whopping $5.20 an hour as your Hourly Disposable Income (HDI).

  Now here comes the really painful part.

  Take whatever you’re thinking of buying and divide the cost by your HDI to see how much of your life’s energy you have to swap for that handy-dandy new device. In the case of that Phat Phone, you’d have to work for about 73 hours—almost two weeks. Hmm.

  If you really want the phone, and you have the money set aside to pay the bill right off the bat, you should buy it. But you should also do this exercise since it’s useful for putting things in perspective.

  If you really want the phone and you’re going to put it on credit, then you have to add in the interest you’ll pay to come up with the right number of hours of your life you’ll be swapping for it.

  Strategy 3: Stay Focused

  Everyone has stuff they can’t pass up. For some it’s that fine cup of coffee. For others, a great handbag. Some guys love browsing the aisles of the local hardware store, looking for the perfect tool that will make that job at home worth doing.

  But how many of the things you buy come as a complete surprise to you? You don’t set off to buy a new set of wineglasses, but there you are standing in the store, paying for them. Sure, they’re great-looking glasses, and you can always come up with a good reason or three why you need them, but you didn’t intend to buy them.

  GAIL’S TIPS

  Slow your spending down by creating a 30-Day List. If you have an urge to buy something, first you have to put it on your 30-Day List. You can buy it (if you have the money) after 30 days, assuming you still want it and something else hasn’t jumped up and captured your Impulse Gremlin’s attention.

  Could it be that you can’t stay focused on what you do want? You want to be debt-free, you want to save money for a home, you want to have a big, fat emergency fund, but the end seems so far away. It may be wonderful to be debt-free, but giving up your day-to-day indulgences just doesn’t feel like it’s worth it. After all, it’s going to take months, even years, to get out of debt, and who wants to spend all that time denying all those small pleasures?

  So how do you make your goal feel satisfying when you’re skipping all that coffee, not buying that purse, forgoing t
he walk around the tool department, all to make your dream of home ownership or debt-freedom a reality? How do you pass up dinner with friends, a movie with the kids, or that cruise you’ve been dying to go on with your honey? Here’s how: you create a tangible way to track your progress.

  Parents who are trying to teach their kids about saving up their money to make a big purchase face the same problem keeping their kids focused. With short attention spans, kids often have difficulty deferring today’s gratification—the bag of chips—for tomorrow’s goal: the new video game. Here’s what I suggest parents do with their children when they’re trying to keep the kids focused on a goal they are saving for:

  1.Cut out a picture of whatever your child wants to acquire and paste it on a page171ith the price beside it.

  2.Find out how much your child wants to save each week and divide that into the price of the item. So if an item costs $20 and your child plans to save 50¢ a week, it would be a total of 40 weeks.

  3.Draw 40 small boxes on the page172ith the picture on it. You can label each box 50¢.

  4.Each week, as your child sets aside the 50¢ she’s saving, she gets to check off one of her boxes.

  Kids respond well to the chart because it is a visual representation of their progress. As they check off each box, it gets easier and easier to stay focused because they’re building momentum. Once they’re within striking distance of their goal, they may even decide to add an extra dime or two each week to get them to the end even more quickly.

  Charity drives use a version of this when they draw what looks like a big thermometer and fill in the amount they’ve raised toward their total goal, raising the mercury each time they get another contribution.

  And you can do the same thing with your goals.

  Instead of leaving the goals as an abstract concept, something that’s easily pushed aside by the smell of coffee or the anticipation of showing off a new purse, make your goal as concrete as possible. Part of your success in moving from impulse buying to planned spending will depend on your ability to “see” the progress you are making toward that family vacation, the new big-screen TV, or a new computer.

  Once you’ve created your Goal Chart, display it prominently so you can watch the progress you’re making each day. Stick the chart on your fridge, on the wall beside your desk, or on your bathroom mirror. Each time you move closer to your goal, give yourself a check mark, colour in a box, or highlight your achievement in some way so that you get the satisfaction of momentum. And if you’re focused on your goal, you won’t feel deprived when you choose to forego an impulse purchase to get closer to your goal. You’ll feel smart.

  GAIL’S TIPS

  1.Take your net pay and divide it by the number of hours you work a year. I find dividing by 40 (for hours worked in a week) and then by 50 (for weeks worked in a year) works great. This is your Net Hourly Income.

  2.Calculate your monthly essential expenses. Multiply that number by 12 and divide it by 40 and then by 50. This is your essential-expenses hourly cost.

  3.Subtract your essential-expenses hourly cost from your net hourly income. You’re left with your Hourly Disposable income (HDI).

  Whenever you’re trying to decide whether a purchase is really worth it, divide the purchase price by your HDI to see how many hours you’ll have to work to pay for the item. Of course, you’d be a maniac to do this every time you’re considering buying something. C’mon, you don’t want to be obsessive or anything. But if you give even a second’s thought to the question, “Should i?” when it comes to buying something, do the HDI calculation and see just how much of your life’s energy you’ll have to swap for the new Stuff. if it doesn’t seem worth it to you, stick the money you would have spent in your savings account.

  Strategy 4: Every Dollar Counts

  You’re standing in the bookstore holding a $25 copy of a book you’ve been dying to read when the woman next to you says, “I saw it just down the street for $18.” Would you head off to the store that’s 15 minutes away to save $7 off the price of that book?

  I would. The walk would be good for me, and I just can’t pass up a good book.

  Okay, let’s say you’ve done your research and you can get exactly the new computer you want for $1,289. Off you head to the store. As you are standing in line to buy your new computer, the man beside you turns to you and says, “That exact computer is on sale down the street for $1,282.” Would you take the 15-minute walk to save $7?

  If you said “yes” to my example of the book that was $25, down to $18, but said “no” to the computer alternative, my next question is “why?”

  After all, $7 is $7, whether it represents a 28% savings or a less-than-1% savings, it’s still $7 and gets you $7 closer to your goal, whatever that may be. If you’re focusing on the percentage you’re saving, you lose track of the value of the dollars themselves. It’s all very nice to save 50%, but a buck is a buck, whichever way you cut it. And getting $1, $10, $100, $1,000, or $10,000 closer to your dream of owning your own home, being debt-free, or taking that family vacation is the point, so the relative savings isn’t important. Counting every dollar is!

  Strategy 5: Swap Bad Habits for Good Ones

  One of the challenges I give some of the families I work with is to find a way to swap bad habits for good ones. It’s a great challenge because it makes people both think and act. And since they’re usually fighting Gremlins on the bad-habit front, they’re grateful when I make ‘em stop.

  Swapping bad habits for good ones works because if you just take away something, you feel a loss and the loss is all you can think about. But if you substitute something else for what you’re eliminating, then you’ve moved from “loss” to “change.”

  If your socializing is costing a ton of money because you meet in bars, over dinner in restaurants, or at expensive outings, you can substitute a less-expensive, equally as satisfying social encounter. Instead of meeting in the pub on Friday night, have a Friday game night with your friends. Each week you decide what your next week’s location, game, and food theme will be, and then you all chip in. If it’s taco night, someone brings the cheese, someone else the veggies, someone else the salsa and shells. That’s no more expensive (except for the gas) than having dinner at home. You still enjoy a social experience but without the big spend.

  Strategy 6: Do the Math

  A great motivation for swapping bad habits with good ones comes from figuring out what you’re saving a week by eliminating your bad habit. If you’ve decided to eliminate coffee on the road by substituting homemade coffee and you’re saving $20 a week, multiply that $20 by 52 (weeks in the year) to see how much you’ll save in a year. Find an online savings calculator, plug in your annual savings, a reasonable interest rate (say 3%), and the number of years until you retire. If you’re saving $80 a month and you’re 30 years old, eliminating that one bad habit will mean more than $60,000 in your pocket.

  Smoking a pack of cigarettes a day eats up $3,650 a year, which is more than enough to provide your kids help for university or college. Sipping three bottles of moderately priced wine a week swallows $2,500, which is a pretty decent retirement savings deposit. Ordering in pizza a couple of times a week so you don’t have to cook after you finally get home from hockey or dance or karate with the kids will gobble $1,700 of your income, which is a good start to a fabulous family vacation. It’s easy to spend money on the conveniences and pleasures of life without giving it a second thought. Give it a second thought! Do the math and see what it’s actually costing you in terms of the dreams you would be able to make come true.

  You don’t have to give up your pleasures completely. If you’re buying a fancy coffee a couple times a day and dropping $4.75 a pop, that’s $2,280 a year. Switch your caffeine dealer or sip smaller and send the rest to your emergency fund, which likely could use a boost. Lunches out are another way unconscious spending eats up money. A lunch entrée can run to $15. Add in a cold beverage and a cup of tea with the caramel p
raline cheesecake and you’re shelling out $30 with tax and tip. Do that three times a week and watch $4,500 a year go down the toilet, literally. Cut back to a once-a-week lunch out and not only will the outing be special because it’s less frequent, you’ll bank more than $3,000 a year.

  GAIL’S TIPS

  Pick something you buy without giving it a second thought and figure out what the long-term cost of your “small indulgence” is. Whether you’re a “bottle of wine a night” girl, a “magazine at the checkout” chick, or a “doodad at the automotive store” dude, add it up. Multiply it by 52 if you do it weekly, 250 if you do it every workday, or 365 if you do it daily. (Check out what it costs for a small spend like a newspaper done daily over 30 years and you’ll see what i mean.) Once you figure out what you’re spending in a year, multiply it by 30 to see what it’s costing you long-term.

  The point isn’t to eliminate every small pleasure from your life. The point is to choose those pleasures consciously and, therefore, consciously enjoy them. If every sip of that beer brings you pleasure, and you can afford it, you’re doing fine. But if it’s your third bottle and you can’t remember the other two, well, kiddo, you got some consciousness raising to do.

  Strategy 7: Look for Every Possible Way to Save

  Your money is your money and you can spend it any way you please. But if you’re spending on credit, you’re not spending your money, you’re spending some other guy’s money, and you’re paying a whack of interest for the privilege. Shifting your mindset from Buy Now Pay Later to Plan Now Pay Cash is the difference between being a self-indulgent child and a responsible adult. Children may have a hard time deferring their immediate gratification, but as a grown-up you should have mastered this skill by now.