Hi guys, Phil McGilvray here from Grandma’s Jars, thanks for joining us today. Today’s tutorial is the second of our ten part series, our ‘Top Ten Tips for Paying Off Debt’. In our previous session we looked at tip number 1, which was ‘no more debt’. So coming to that place where we are committed to not taking on any more debt is super important if we are to move forward financially and get ourselves out of debt. So to start moving in the right direction we have to stop digging that hole.
Reviewing The Habits & Behaviours That Cause Debt
Today, what we are looking at is the habit and behaviours that have caused you being in debt in the first place. Going through a process to see what actually caused us to be in this situation to start with. So what we got here, is the process that we take all our clients through. So, whenever we take on a new budgeting client that has got debt, we sit down and look at it and say, “OK, what are the habits and behaviours that along the way have caused you to be in debt.”
I’ve got here a list of different habits and behaviours as an example. We’ve got our mock client, Fred, who has gone through and said, “Look these are the habits and behaviours that are holding me back, that have caused me to be in debt”. We have sat down with Fred and brainstormed some solutions to those problems and issues that have caused him to where he is today.
This is a very important process to go through when you are really looking to try to turn things around. Now, in this instance, I am going to take you through this process as I would a client. It’s important to know that you may not have these issues here. These habits and behaviours that are holding Fred back, might not be your habits and behaviours. But what I want you to do is to get an idea of the process that we encourage people to go through and certainly one we take all our clients through. What I am going to do is go through them step by step, something I encourage you to do. I have no doubt that some of these issues are issues for most people, probably for you as well, because these are the issues that I would say that 90% of our clients that come to us in debt have actually got. But as I said, it’s not about the specific issues, it’s about the process.
Habit #1: Ad Hoc Grocery Shop
So starting now, if we are looking at the habits and behaviours on the left hand side, you can see that the first one that Fred told us he got is that he shops on an ad hoc basis, which means that he will finish up work for the day, on his way home he will go by the supermarket, he will wander around until he finds something that he wants to eat. His intention is to spend 20 dollars but unfortunately he end up spending 50 because he is hungry and he has not planned and he will come out with a few extra nibbles and so on.
Solution #1: Planning Your Meals
So what we have said to Fred here is, “Look man, you need to change the way you are working. You need to change that.” We suggested planning your meal. Now we are really big at Grandma’s Jars on planning your meal because this is an area where clients can spend as little as 100 dollars a week through to 3-4 hundred dollars a week and it really comes back to planning. So what we did is we sat down with Fred, we looked at all his favorite meals, listed about 30-40 different favourite meals and then each week he sits down and pulls 4 or 5 of them, puts them into a list, and creates himself a shopping list, and then shops with purpose. And the ideal being is, you only go to the grocery store maybe twice a week; once for your main shopping, twice to top up on milk, fresh bread, fresh fruit and vegetables.
So what we did was sat down with Fred and just helped him get into the habit of meal planning. Now on our website, we have meal planning worksheets if you are up for something like that you can certainly get them there.
Habit #2: Bought Coffees and Lunches
The second thing that we went through and Fred told us was, “Look, I spend a lot of money on bought coffee and lunches. It sort of snuck up on me a bit.” He said, “I don’t plan to spend that much but because these little rituals on a daily basis – going to work via the local cafe together, you know, a bought coffee, and then going to the cafe again to buy my lunch. Those sorts of expenses have become part of my lifestyle and as a result I am spending far more money than I thought I would.” So we said to Fred, “Look, don’t cut it out altogether.”
Solution #2: Identify an Allowance
Me personally, I don’t get coffee, I don’t drink coffee, but I do eat chocolate and I what it’s like to have a bit of a pick me up at, you know, 2:30 or 3 o’clock in the afternoon. So we are not saying to Fred “Look, get rid of it.” What we are saying is, give yourself an allowance. Identify how much firstly you can afford and secondly how much you think is reasonable to spend on these sort of things and give yourself allowance and then plan your week around just having that amount of money. And when that money runs out – bad luck, you’ve got to bring a sandwich from home and instant coffee is gonna be the way till you get the next week’s allowance.
Habit #3: Use Debt as Reserve
The third thing is, and this is a real big one, is that most people don’t have cash savings these days. If you have got a home, most people use either their redraw facilities or money they have paid off their mortgage as a cash reserve. This is a real bad way to go because it means you can easily access the equity on your home. The problem is once you have done it once or twice or three times, maybe for legitimate emergencies, it just becomes easier and easier and easier when you are a bit short on money, to dip back into to your redraw facility.
Solution #3: Build a Cash Reserve
Now what I suggested to Freddie is that you definitely need to have a cash reserve completely separate from your mortgage, have it in, ideally, an offset account. If you are not sure what an offset account is, have a look on our website, we’ve got articles there for the best bank account structure for you. But an offset account is pretty much an account where any money you’ve got in that account is considered off the mortgage from an interest perspective. But it’s actually a completely separate account, not a big slush fund that has all the capital you have paid off your home at the time.
So we actually set Fred up with a cash reserve and we always say, “Start with a rainy day fund with 3-5 grand.” That covers most expenses, most emergencies – the car blowing, the fridge dying and so on. And over time you should try to build that further and it’s a good starting point but not a redraw facility. So you have a real cash cash reserve, not access to more debt via a redraw facility or a line of credit.
Habit #4: Use Bank Balance as Spending Guide
The fourth thing is Fred said to us is that he shops using his bank account balance as his guide for “can I afford it or can’t I?” The problem with this is your bank account balance doesn’t know when your expenses are coming up. It doesn’t tell you, hey your car registration is due tomorrow, it doesn’t tell you when your electricity is due, it doesn’t tell you when your rent is due. And all these big expenses will creep up on you and if you are always spending money you’ve got in your bank account, when they turn up, the funds are not there and you think “what do I do know? I’ll have to put it on my credit card” and then that credit card gets harder and harder to pay off. So you should never use your bank account balance as Fred does, to determine “can I afford to spend?”
Solution #4: Be Guided by a Budget
You really need to look at having a budget – the budget knows what expense you have coming up, it will tell you what you can afford to spend, what’s really spare, and what’s needed for upcoming expenses.
Habit #5: We’ve Always Borrowed
The last thing that Fred said to us was and it’s very particular, or very typical I should say, for people in their 20s, 30s, and early 40s where they say, “We have always borrowed, that’s just the way we do things. Anytime we’ve needed money – we just borrow. If we need to buy a car, if we need to replace the furniture, we just borrowed.” And unfortunately Fred is probably quite right, for the people in Gen Y particularly, and younger, borrowing money is just part of our culture but it’s not a healthy part of our culture and one of the things I said to Fred is, “You have to say no, you’ve got to say, look I don’t want to be like everyone else, because everyone else is broke. They have a nice car, they have a nice house, they have nice furniture but under the water they are swimming double time trying to keep their head afloat, trying to keep themselves from going backwards because of their debt. And one of our favorite sayings we have over here is “just because it is doesn’t mean it should be or has to be.”
Solution #5: Commit to No More Debt
So when I work with clients it’s very much about changing their mindset to, “just because you have always borrowed doesn’t mean you have to keep borrowing.”
Next Steps/Action Items
Ok, now, hopefully that’s given you an idea of the process with Fred and all of our clients. You need to sit down and identity your habits and behaviours and it’s not just about saying get rid of these, what we want to do is replace these with really positive habits that can really give us some momentum going forward.
That’s tip number two. I hope that’s made sense. As I said, it’s all about the process, you can get these worksheets off our website or else you can just draw up on a piece of paper – habits behaviours and solutions, and really sit down and work out what are those habits we can work on to make better that will have a huge difference in our future.