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Rich by 40 by Lesley Scorgie.
Rich by 40 by Lesley Scorgie.

Book excerpt

Debt: Get out and stay out Add to ...

This is an excerpt from Chapter 5 of Rich By 40: A young couple's guide to building net worth, written by Lesley Scorgie. You can read a Q&A with the author here.

Debt - Get Out and Stay Out Curtis, twenty-five, owes $25,000 in student loans, $10,000 on a vehicle loan, and $3,000 on his credit card. He graduated two years ago and has been working full time since. Each month, he pays down $400 on the student loan, $400 on the vehicle loan, and $300 on his credit card. Curtis feels really strapped because his take-home pay is $2,500 a month and after paying his debts, he doesn't have much left over for rent, food, clothes, entertainment, and savings. He feels like he's not getting ahead.

Having debt can feel like a ball and chain around your ankle, making it difficult to move forward. If you have any debt or feel that it is getting in the way of having the life you really want, pay close attention to this chapter. You will increase your debt knowledge and learn the skills to tackle your debts faster and smarter.

Getting a handle on your debt and making progress toward reducing it is critical. Although it requires your time and energy, it is a huge demonstration of your ability to manage your finances.

Here are the facts: most Canadians have some form of debt. Access to credit cards, loans, mortgages, and the like has become easier and more prevalent than in previous generations. You can't walk through an airport or shopping mall anymore without being approached to sign up for a credit card or deferred-payment plan. Our generation has grown up using debt regularly to afford our increasingly expensive lifestyle-and yes, it is more expensive to live now than it was fifty years ago.

The Certified General Accountants Association of Canada published a report in May 2009 called "Where Has the Money Gone: The State of Canadian Household Debt in a Stumbling Economy." The report revealed that Canadians owed $1.3 trillion ($900 billion in mortgages and $400 billion in consumer debt). That's a lot of debt. And that number is on the rise, up from $1 trillion the previous year. Debt has risen steadily over the past decade at an average of 5.5 per cent annually, which is slightly higher than the average increase in inflation of 3.5 per cent. Canadian Business reported that in 2009 Canadians owed a total of $181 billion on their lines of credit whereas in 2004 they owed $100 billion and in 2000, only $50 billion.

So what does that mean per household? According to Statistics Canada, in 2005 Canadian households owed $9,000 on their lines of credit, $2,400 on their primary credit cards, $9,000 in student debts, $11,000 in vehicle loans, and $6,000 in other debts (typically credit cards or consumer loans). This totals $37,400 in consumer debt per household. Since 2005, these numbers have increased. For example, the average graduate from a bachelor's program has at least $20,000 to $30,000 in student-related debt-far more than a few years prior. Finally, as of May 2009 approximately 85 per cent of Canadians carried a balance on their credit card.

Canadians are heavily in debt, but what can we do about it? Overall, the first and the best debt-reduction strategy I can offer is this: stay out of debt. But for many, I realize this strategy isn't ­possible. So, rather than dismissing debt completely, I want to discuss debt reduction and navigation. I believe that having debt is now, unfortunately, the norm. But managing debt properly is your key to getting ahead and building the lifestyle you really want.

Owing money on a credit card is financially lethal, forcing us into a situation where we are continually paying for the past rather than investing in the future!

Debt 101 The money you originally borrow is called principal. To borrow money, you must pay a premium, which is called interest. Interest is the cost associated with borrowing money.

Far too often, I hear, "The total cost of borrowing doesn't really concern me, just the monthly payments." When it comes to responsible money management, this attitude is dangerous. Of course a monthly payment seems reasonable; it's the total cost of borrowing (principal plus interest), broken up into so-called easy and affordable monthly payments. This is a much easier sell for salespeople than trying to move a product at the real price. Low monthly payments can trick you into thinking you're getting a good deal when you're not. A monthly payment of $100 when you're being charged 20 per cent in interest is never a good deal! Take a good hard look at the real cost of borrowing.

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