Managing Debt—There is Indeed a Better Way
Most people prefer not to talk about managing debt. For many, it is a scary four-letter word that often invokes shame and is not to be spoken aloud. But not for Sheila Walkington, she actually loves talking about debt. She believes that “For far too many people debt has become a way of life,” and reminds us “that it is our money and our life, and we need to take proactive control.” And, it is most certainly not something that anyone should be embarrassed about. “It is far too easy to get into debt and although it can be difficult to get out of debt, it is not impossible,” says Sheila. As she likes to say, “There is indeed a better way.”
Sheila, who is the co-founder of Money Coaches Canada and co-author of UNSTUCK: How to Get Ahead Financially and Start Living the Life You Want, has spent the last 16 years dedicating herself to that mission. That is, working with people to help them reduce their debt and learn to spend smarter while taking control of their finances.
As a result, Sheila, who is a long-time supporter and presenter with Sophia Financial Group and Sophia Wealth Academy, did not hesitate when asked to talk about managing debt as part of the Wise Money Talks webinar series. Aptly named, How to Get Out of Debt and Start Living the Life You Want, Sheila offers a straightforward approach, with specific tips and strategies, to develop a clear plan for getting out of debt. She believes that it is “Important to know why you want to get out of debt,” because “then it is easier, and more motivating, to figure out how to get there.”
“Goals are dreams with a deadline. Dreams without a deadline are just wishes.” – Sheila Walkington
Know Why You Want to be Debt-Free
Some people who are in debt think that they cannot have goals. “Absolutely not true,” says Sheila, “You need to have some fun things to look forward to and you need to be motivated, so that you can do what it takes to get out of debt.” She believes that it is important to think about what will come after debt and “The bigger and more inspiring the ‘why’ the easier the ‘how’ will become.”
Set Your Goals—Make Paying Down Your Debt a Priority
“Once we know what our major goals are,” says Sheila, “we then need to make paying down debt our number one priority because debt can really weigh us down. And it can take away from the things that we really want.” By keeping goals top of mind, and by working towards a plan, she believes that people will spend more consciously. Sheila suggests that a simple tool to support this process is to ask these four questions every time before spending money:
- Do I need this right now?
- Can I afford this?
- Could I get it cheaper or even free elsewhere?
- Will this move me closer towards my goals?
As a way to help people remember these questions, Sheila recommends creating what she calls a “credit card condom.” Essentially, it is a cover for a credit card or debit card where you write your main goal on the front and on the back, you include the four questions above.
Set a Date To Be Debt-Free
According to Sheila, “When you know the date, you can see the end.” However, she cautions people not to overthink this piece, “Just pick a date that feels good.” Once you set that date, you can then start to work backwards. Think about what you would be willing to do to reach that goal. Would you be willing to spend less? Would you look around your house and see what you can sell? Would you be willing to work more hours or take on a second job? Alternatively, maybe you could you take on a roommate. What would work for you?
Make Debt Reduction Systematic
It is important to have a systematic plan to pay down your debt. Many people just try to find money to put down on their debt at the end of the month but Sheila prefers that people focus on the beginning of the month instead. “Set a plan, stick to it, and make it systematic so that there is no wiggle room to not pay down the debt,” says Sheila. She also recommends using automatic payments as that can help people to remain accountable and on track.
Keep a Running Tally of Your Debt
“Tracking your progress will keep you motivated and on plan,” says Sheila. Once you have set your date to be debt-free, and you know why you want to get out of debt, you are now ready to start tracking your debt and payments. Create a spreadsheet that lists all of the debts you have and their current balances. Sheila believes that this is a great way to keep track with a visual reminder that you are moving forward and making progress on managing your debt.
Tackle One Debt at a Time
Ideally, Sheila recommends people prioritize their debts. “You still need to pay your minimum payment on all your debts,” she cautions, “but if there was one debt you wanted to focus on you can put all your extra money or your big payments on that debt so that you can start to tackle one debt at a time.” She suggests that there are a few different ways to approach this. You can focus on:
- The highest interest rate—to save on interest
- The smallest balance—for a quick win
- The largest monthly payment—to free up cash flow
If you have high-interest debt or multiple debts, you might consider consolidating either to a line of credit or getting an installment loan from your bank. “But be aware,” says Sheila as “this is a one-time solution, a get-out-of-jail-free card.” If you are going to consolidate your debt to an installment, make absolutely sure this is the last time that you are going to need to consolidate debt, and have a clear plan moving forward. Because the last thing you want to do is to consolidate your debt and then run up your credit card again.
Pay Off Your Credit Cards in Full Each Month
“If you have a goal, a plan, and are saving for the things you need and want, paying off the credit card in full each month is a must,” according to Sheila. Try to get at least one credit card paid off and only use that one and make a plan to pay it off completely every month. “We are not meant to be carrying a balance on our credit cards,” says Sheila “as the interest rates are quite punitive.”
Save for the Things You Need and Want
Many of us are good at knowing what our monthly payments are (e.g., rent, mortgage, daycare, etc.) but where we get into trouble are with the variable expenses or unexpected costs. For example gifts, car repairs, travel, property taxes, home maintenance, etc. Sheila likes to have separate savings account set up for some of these of costs and then puts money aside in that account every month so that they do not become unexpected expenses. She also believes in saving for some fun stuff too! A simple way to do this is to think about what those costs might be then tally them up and divide that by twelve so that you can save for them monthly.
Listen to Sheila’s complete Wise Money Talks webinar session available on Sophia Wealth Academy’s YouTube page. Don’t forget to subscribe if you want to receive a notification when new videos are posted.
DOWNLOAD Sheila’s handouts and worksheets (You will need to sign up for their newsletter to receive the handouts)
DOWNLOAD Sophia Wealth Academy’s fillable spreadsheets: Sophia Cash Flow Tracker and Sophia Net Worth Calculator