Believe it or not…., not paying off debts… pays off!
My last net worth update is dated as at August 2012. Back then, I was just “surviving” a tough period where I had to pay for over $5,000 in car repairs and $10,000 for my pool. The first expense was unexpected (I usually budget $1,500 in car maintenance per year) and the later was poorly budgeted (I was expecting $5,000 for the pool).
At that time, my total liabilities added up to $320,080. I was worried about my balance sheet at that time. The problem wasn’t the amount. It wasn’t even the fact that I was definitely not in line with my objective of going under the mark of $300,000 in debt for 2012. The problem was deeper; for the first time in a while, my consumer debts were growing. If you have been following The Financial Blogger for a while, you know that I have no problem with carrying a large amount of debt and that I’m always willing to borrow money if there is a good investment somewhere. But my blunt attitude towards debt has backed me into a corner; I started to borrow money for the wrong reasons. I think it’s okay to get a mortgage for your home when you are young (I’m only 31!) and it’s a good idea if you borrow money to invest in the stock market or to fund a business (as long as you can afford it!). But it’s definitely stupid to borrow money to put a pool in your backyard, to go on vacation and to buy a new car. This is where I landed; in the world of stupidity!
At that time, I stopped producing my net worth update on a monthly basis. There were two reasons for this:
So for the sake of my own psychological health, I decided to not pay debts anymore. I completely stopped focusing on my budget and debt level and moved towards what I do best: making money. I took a serious bet; by not looking at my debts for a few months and focusing on growth (of my income) instead of restraining (my budget) I would be able to show a better balance sheet in January. So here we are! It’s time for some accountability!
CHANGE (%) CHECKING ACCOUNT $1 000 $1 000 0.0% EMPLOYER STOCK
$2 139 $2 507 17.2% RRSP ACCOUNT $29 703 $35 573 19.8% RESP $503 $2 003 298.2% PENSION PLAN $26 131 $26 131 0.0% HOME $351 640 $351 640 0.0% COMPANY SHARES $131 521 $131 521 0.0% MAZDA TRIBUTE $14 756 $12 586 -14.7% MAZDA RX-8 $2 800 $800 -71.4% TOTAL $560 193 $563 761 0.6%
It’s pretty hard for me to improve my assets at the end of the year and here’s why: each month, I’m losing $834 in asset value as my cars are depreciating. My 2009 Tribute value is following my car loan so the asset is just in my balance sheet to offset the impact of my car loan. As you can see, my RX-8 will be set to nothing in two months as I’m depreciating the value of this car by $400/month. I don’t believe in cars’ value on a balance sheet but it’s still important to use them to offset some debts incurred to buy them. If I was to sell my car tomorrow, I would get between 6K and 7K as I see similar cars for sale at 8K-9K right now. But since this money would be used to buy another car anyways, I would rather put a $0 on it!
The other factor that doesn’t contribute to my asset increase at the end of the year is the reassessment of my 2 biggest assets: my house and company shares. I already updated my house value in the middle of 2012 when I added the pool. A similar house to mine has been appraised at $375,000 just two months ago so I’m pretty confident with a value of 351K on my balance sheet. This value will be updated during the summer of 2013 according to inflation (around 2%). I would rather stay conservative.
In regards to my company shares, we evaluate them once a year around May during our yearly meeting. 2012 was a “rough” year in a sense that we didn’t see growth similar to previous years. However, I know that my shares will go up again in May because the company is still in better shape than it was a year ago!
Finally, I’m quite happy to see my RRSP and RESP going up so fast. I have contributed another 5K to my RRSP and I continue to put $200/month in the RESP for kids. This is a great progression and I hope it will continue year after year!
CREDIT CARD $7 607 $6 831 -10.2%
LINE OF CREDIT $19 517 $19 597 0.4%
HELOC $263 279 $263 015 -0.1%
CAR LOAN $14 756 $12 586 -14.7%
Personal Loan $9 374 $8 333 -11.1%
Pool Loan $5 547 $5 370 -3.2%
TOTAL $320 080 $315 732 -1.4%
This is a huge win for me! The 1.4% drop is not super impressive but the fact that both my Disney trip and my Christmas shopping has gone through my budget over the past 3 months makes it more substantial!
My consumer debts are going down and I’m quite confident that I’ll be able to pay off over $16,000 in debts in 2013 to go under the psychological level of $300,000. Technically, I need to drop my debts by $1,333 per month for 12 months to reach $16,000. I think it’s quite feasible!
What will help me this year is that I have no spending projects. Nothing is due on the house, my cars should be in good shape (HOPEFULLY!) and my 2013 vacations are already behind us. So over the months, I should be able to master my budget and keep my pace.
I will keep my focus on producing income instead of paying off debts and we will see where it leads me to the next quarter! What do you think? Do you think I’ll be able to reach my goal and pay off $16,000 in debts without even looking at them?
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