A financial wake up call

Whenever an unfamiliar number popped up on call display, Mary Jane Jeffery used to panic. Chances were that it was another creditor. They were relentless. They called so often that Jeffery stopped answering her phone.

Two years ago, the Truro, N.S.-based community worker was mired in so much debt she couldn’t even afford the minimum payments on her three credit cards. It was a terrible feeling. And like most people who have fallen behind on their bills, Jeffery never saw it coming.

While Jeffery is picking herself back up, Bank of Canada governor Mark Carney is worried that there could soon be plenty of others to take her place. For months he’s issued warnings that Canadians are becoming too financially stretched. Household debt already accounts for a staggering 150% of income. Should interest rates rise we could see a spike in Canadians trying to avoid the phone when creditors call.

Falling behind
Falling into debt can happen quicker than you think. Jeffery, for instance, didn’t have a problem with debt five years ago when she was living in Vancouver. But things started to change in 2007 after health issues kept her out of work for about a year.

Although she received short-term disability payments, the money wasn’t enough to cover her expenses. By the end of that year she had $8,000 in debt. She decided to move back to her hometown in Truro to go back to school. Before long she had amassed another $10,000 in debt. She’d maxed out three credit cards and had stopped making payments altogether. “When you miss one payment it gets easier to miss another and then the creditors start calling,” she says.

While Jeffery fell on hard times because of a health issue, others get into trouble all on their own. Just ask Bonnie, a 46-year-old Ottawa resident, who didn’t want her last name used.

In the early 2000s, money wasn’t an issue for Bonnie. She had a good job at a Nortel-related company and she could work overtime whenever she needed extra cash. But instead of saving, she spent her money. One time, she surprised her now ex-husband with a pair of centre ice tickets to an Ottawa Senators game that were worth about $150 each. She also splurged for a hotel room and a $380 jersey.

There were other big purchases, too. By 2005 she had $35,000 in debt spread out across three credit cards and several lines of credit, including one line of credit for $10,000.

Looking back Bonnie says she didn’t respect money. She felt secure using credit, because she felt her job would always provide her a steady cash flow. “When you have credit it becomes part of you, rather than a safety net,” she says. “In my mind that became a source of income.”

But then Bonnie lost her job after her company was sold and she and her husband divorced. She was a mess and didn’t know what to do next. Still, she kept spending, until she couldn’t make the minimum payments on her bills. That’s when the phone started to ring. “I felt panicked,” she says. “When people start calling it’s an awful feeling.”

Digging out
Asking for help is tough, even embarrassing, but it can be one of the best decisions you can make. Both Jeffery and Bonnie reached the point where they sought out credit counseling.

Jeffery turned to the Credit Counselling Services of Atlantic Canada. The first thing the counsellor did was cut up Jeffery’s credit cards and then they started to work out a financial plan. To create the plan, Jeffery brought in every bill to see where every dollar went. They then created 15 categories—such as food, rent and entertainment—and came up with a spending limit that she couldn’t exceed.

Before she went to Credit Counselling she was spending $40 a week on coffee; now she makes coffee at home. For the next three months, Jeffery documented everything that came in and out of her bank account.

Fortunately, she was able to stick to the plan. In less than two years she’s paid off half her debt and she finally feels like her life is back on track.

Bonnie also had to watch as her credit cards were cut up in front of her, but her credit councilor came up with a different plan. Like Jeffery, she added up all her expenses to see where she was overspending, but she only separated her expenses into two categories: direct costs, which include rent and hydro, and indirect costs, like concerts and clothes.

Today she always makes sure she has enough money for her direct costs, but she uses what she calls the “envelope system” to save for her indirect buys. If she wants a new shirt or a ticket to a show, she puts a few dollars in an envelope each month. Eventually, when she’s saved enough, she’ll buy that new item.

Bonnie also keeps a journal to track everything she buys and how much money she has coming in so she doesn’t make any spending mistakes.

Following the plan was a struggle at first. For three months Bonnie survived off peanut butter; she only ate proper meals when her friends fed her. She also babysat in exchange for groceries and seldom went out unless she was the designated driver and her friends would chip in for her cover.

It wasn’t easy, but her diligence has paid off. Bonnie has only about $8,000 of debt left and expects to pay it off completely in the next 12 months. And she says she’ll keep sticking to her financial plan once she’s debt free, but admits it’s still hard to save. She has a better job now, one that pays $18 an hour. Looking back Bonnie cringes at the thought of her spendthrift life. She says that besides those Senators tickets, she can’t remember a thing she bought.

Both Jeffery and Bonnie admit that dealing with debt will be a lifelong struggle. Bonnie says that being knee-deep in debt is akin to being an alcoholic. There was a lot of lying and covering her tracks. “I was the greatest juggler in world,” she says. “I was borrowing from here to pay something off there.”

Like having an addiction, it’s important to admit there’s a problem and working through those money issues with close confidants. Jeffery shares her budgeting details with her sister, while Bonnie talks to long-time friends.

Jeffery has a word of advice for people who are in the same position as she was a few years ago: manage your money. “That’s really the key,” she says. Budgeting is the main way to do that, but don’t wait until interest rates rise. “Pay down that debt immediately,” she says.