How we escaped from debt

My wife and I never planned to amass $42,000 of debt. We had both been raised by frugal parents who never even used credit cards. But in 1999, when we moved away from Montreal and settled in Calgary, we lost track of our finances.

Maybe it was being so far away from family and friends. Andrea was 22 and had just graduated from McGill with a degree in linguistics. I was 30, a theatre director and a writer. I didn’t speak French, so we knew that my career prospects were limited if we stayed in Montreal. We figured that if we moved to Calgary, opportunities might open up. At the very least, we thought we would enjoy a great adventure.

We hadn’t counted on how much stuff it takes to set up a household. Looking back, we went overboard. We bought computers, electronic gadgets, a table and chairs, lamps, artwork and coffee tables.

Then there was entertainment. We would go to movies and eat in restaurants several times a week. They weren’t great restaurants, mind you — A&W, McDonald’s and Swiss Chalet mainly — but the bills added up.

We never blew a lot of money on any one purchase, but all our tiny indulgences amounted to a surprising sum. Two years after our move to Calgary, we counted up everything we owed. We were amazed to discover that we were $42,000 in debt.

I realize $42,000 might not sound like much to some people, but at the time I was parking cars at a hotel for a living and Andrea was working behind a deli counter. Our household income was $39,000 a year. We could barely afford necessities, yet somehow we were supposed to pay back this mountain of debt.

We felt like losers. Our first year in Calgary we each suffered a death in the family and couldn’t even afford plane tickets to get back home for the funerals. We had to be helped out by siblings. It was humiliating. We had moved to Calgary to make a future for ourselves, but we were worse off than ever.

Once Andrea and I realized how much debt we had accumulated, we decided we had to learn more about money. We saw a money management seminar advertised at our local library and signed up. It cost us only $5 and it was the best investment we ever made. The speaker was a local accountant who talked about effective ways to manage your money. His money tips really sank in. We learned three lessons that helped us crawl our way out of debt. We still use them today.

The first lesson we learned was that we had to start talking about money and make sure we were on the same page. We found out at the seminar that many couples don’t agree on financial goals. They hide things from each other. Fortunately, we didn’t have that problem. Andrea and I had never talked much about money in the past, but once we started, we realized we had the same priorities. We wanted to buy a house, travel back to Montreal to see our families once or twice a year, take the occasional vacation. Most of all, we wanted to start a family. We told each other we were willing to sacrifice for a couple of years to make those goals possible.

The second lesson was a bit more complicated. The accountant told us we had to make a budget.

When we first moved to Calgary, Andrea handled all our finances and paid all our bills. I don’t remember how we decided on that division of responsibilities, but it seemed logical at the time. I had mostly lived at home until we moved to Calgary, but she had been on her own for a few years and had more experience with money.

Problem was, she didn’t enjoy doing the job at all — especially since our finances were so tight she had to constantly rob Peter to pay Paul. So we decided that I should take over managing the money. I’m a methodical, everything-in-its-place kind of person and I looked forward to the challenge.

We sat down one night and crunched the numbers. We began by estimating our expenses and taking note of the ones that were on automatic payment plans. I spent the next four weeks collecting all our credit card statements and bills. Once I had a good idea of where we were spending our money, I drew up a budget. When I was confident the budget was accurate, I showed it to Andrea who gave it her OK.

The budget showed us how dire our situation was. On top of $25,000 in student loans, we had six maxed-out credit cards and an overdraft of several hundred dollars on our joint account. What really shocked us was the $10,000 we owed on a line of credit. We had no idea the total was so high. We had no savings and not a penny for emergencies. It was clearly time to take action.

That’s where the third and final tip we learned at our library seminar came in handy. The speaker had stressed the importance of using only cash if you wanted to avoid impulse spending. So we cut out all of our non-cash spending other than the automatic payments that would go toward paying down our various debts. After the automatic payments were made, I withdrew whatever was left over from our joint account once a month and put it into envelopes. I marked each envelope — one was for rent, another one was for groceries. Others were for entertainment, clothing, transportation, car maintenance and so on.

We stopped writing cheques. We no longer carried debit cards or credit cards. We allowed ourselves to spend the cash in each envelope on its stated purpose, but once the cash was gone, we didn’t let ourselves spend anything more that month on that particular category. If the entertainment envelope was empty halfway through the month — well, that was just tough. We ate at home and watched TV.

The envelope system was a lifesaver. We could no longer put impulse purchases on our credit cards. If the money wasn’t in the envelope, it just wasn’t there. Lots of times we thought our grocery money would run out and sometimes it nearly did. We spent the final weeks of more than a few months eating pancakes and pasta.

We tackled our debt in order, beginning with the loans that carried the highest interest rates. First up was the $6,500 we owed on department store credit cards. We were paying 19% annual interest on that debt, which was just insane. Next up were our other credit cards, which had interest rates ranging from 8% to 11%. Then we tackled our $25,000 in student loans; they carried a 6.5% interest rate. Finally, we paid off our $10,000 line of credit. At 4.5%, it was our lowest-interest debt.

Looking back, the first few months of our new life were definitely the hardest. Much of our spending had revolved around meeting friends at restaurants and bars. When we cut out those expenses, we cut out much of our social lives. But things got better. We explained what we were doing to friends and we began to arrange pot luck dinners. It was fun. We would invite a few people over and play board games like Cranium. The get-togethers went late into the evening and Andrea would bake a cake or cookies to cap off the evening.

I don’t want to make it sound like bliss, though. Most nights, it was just me and Andrea. We did a lot of reading. The highlight of our week would be a care package from my mother in Montreal. She would send cookies along with videos of our favorite shows.

Our challenge was staying motivated. Every time we paid off another credit card, we marked the event by going to a movie or having a banana split at Dairy Queen. We plastered pictures of what we wanted on our fridge. There were pictures of places we wanted to vacation, of a new house, of a new car. It looked funny to friends when they dropped by, but we didn’t care. Whenever we wanted to go out and buy something, we would look at the pictures, think about our long-term goals, and the feeling would pass.

We started to see progress. In two months we paid off one of our department store credit cards. Within six months, we transferred much of our high-interest-rate debt to a lower interest-rate credit card, saving us hundreds of dollars of interest every month. We could see theory turning into accomplishment and that spurred us on.

But it was a long slow process. We discovered that it can take years to pay down the debt it took you only months to accumulate. During the early months of our economy drive, Andrea would accuse me of not wanting to have any fun. So I started to include a small allowance for each of us. Our “mad money” was only $20 a month at first, but it was enough so that each of us could buy a chocolate bar or have a coffee without asking if the budget permitted it.

Over the next couple of years, Andrea and I both got better jobs as office administrators. Our household income jumped to $105,000. As our debt dwindled, we slowly raised our personal allowances. We began to see light at the end of the tunnel.

Finally, in 2005, after nearly five years of toil, we paid off the last of our $42,000 debt. We celebrated by spending a weekend in Banff. The following year, our son Jack was born. Today, our family life is what brings us the most happiness.

The good news is that we’ve stayed out of debt and managed to start a savings plan. We try to put away 10% of our income every month, but if we sometimes fall a bit short, we’re OK with that. We figure the important thing is to save something every month.

Three years ago, my mother sold her house and gave us a very generous gift of $50,000. I shudder to think what we would have done with the windfall in the old days — blown it on restaurant meals and clothes, probably. Instead, we used $20,000 of Mom’s gift as a down payment on a small, two-storey house outside of Calgary with a nice backyard. It’s a dream come true for us.

I plan to invest the rest of the money. I’ve grown more and more interested in the market and I’m researching and following about 30 stocks. I haven’t bought anything yet, but I plan to begin soon. My friends say it would be great if I stumble upon the next Microsoft and made a fortune. But I know better than to gamble my future on having such a stroke of luck. Instead, I’ll be putting my money into some solid blue-chip stocks that can provide me and my family with a steady stream of dividend income. You see, I’ve learned the hard way that every little bit counts.