March 20, 2014, 5:00 am

The Only Secret to Paying off Your Debts is Really to Make More Money

by: The Financial Blogger    Category: Pay off your Debts
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You know that already, I started a fight with my consumer debt back in… 2012. We will all agree that I lost the first round (2012) when I failed to go drop under 300K of debt. In 2013, I used a similar technique… and got similar results.

 

Einstein defined madness by doing the same thing over and over and expecting different results. I guess that there is always a little bit of madness in each of us!

 

But towards the end of 2013, I started to get very sick of seeing so many debts on my balance sheet and began to look around to find a solution. I sat down for hours looking at both columns; revenues vs expenses, and found out the solution wasn’t in the latter.

SETUP A SOUND BUDGET

 

When I decided to pay off my debts back in 2012, I did what made sense: I created a sound budget. I thought by looking carefully at how cash was flying out of my wallet, I would control my personal finances and my debt would drop. It didn’t happen in 2012 and the same result happened in 2013. I was very good at finding excuses:

#1 The addition of central A/C

#2 The addition of a pool

#3 Car repair$

#4 Vacation

#5 etc, etc, etc,

 

But I ignored the most important part of my budget during this exercise: my sources of income. I’ll go back to this point later on in this post but I want to finish about how to do create an effective budget first.

 

Making a good budget doesn’t require a fancy online app where you get 3D graphs in multiple colors. All you need is a pen and a piece of paper (or an excel spreadsheet if you don’t feel like using an old fashioned calculator!). I’ve made a list of all monthly expenses and classify them into three simple categories:

 

What I can’t do anything about: mortgage, taxes, electricity bill (you can’t cut that forever), healthcare (mainly products for kids), savings (pay yourself first!), gasoline.

 

What I can reduce: food, restaurant, wine, car payment, insurance, etc.

 

What I can waive: car expenses.

 

At that time, there was only one expense I could completely waive without affecting my lifestyle too much: sell my second car. I didn’t have a car payment on my RX-8 but it was costing insurance, gas and car maintenance bills on a monthly basis. By selling my old car, I was getting rid of a few hundred each month.

 

Then, I attacked what I can reduce. I actually sold my two cars to replace them with a new one back in September 2013. It has increased my total debt but my monthly payments were greatly reduced. Since my car value drops as fast as my new car loan, it had no effect on my net worth; only on my budget. I’ve slowed down on wine and cut out restaurants. I went to my own limit of my lifestyle.

 

After cleaning up my budget and reducing expenses, the numbers still didn’t work perfectly yet. I faced a dilemma: I had to either cut back on lifestyle or find another solution. I consider that I’ve worked too hard when I was younger to give away on my current lifestyle. I love the way I live and don’t want to sell my house, miss going on vacation or reduce my children’s activities. This brings me back to finding another solution.

 

THE KEY IS THE MONEY YOU MAKE NOT THE MONEY YOU SPEND

 

For several years, I was able to both increase my lifestyle and not increase my debt level. It just happened recently when I’ve lost control over my personal finance temporarily. My first reflex was to cut down on my expenses and try to manage my budget tightly. This was a mistake.

 

In fact, a few years ago, I accepted a new position at work. It was a promotion but also a long term move where I could make more money… but only in the future. Since I had to start a new book of clients from scratch, in the beginning bonuses would be smaller than in my previous career. This is exactly what happened in 2012 and 2013. On top of making less from my day job, I also started to make less from my online company. Back in 2010 and 2011, I was withdrawing some good amounts to support my lifestyle and enjoy life. In 2012, Google slapped us big time and we had to reconsider our business model.

 

While the business is now back on its feet, it wasn’t the right time to withdraw company money for leisure. So back in 2012, the issue I ran into was not a spending problem, it was an income problem.

 

The key with your personal finance lies within your ability to make money, not to reduce expenses. I can appreciate my “new” strategy as we are now making more money since September 2013 with the opening of a daycare at home. On top of this, the company is now generating more income and we can also benefit from it.

 

I saw the positive impact instantly on our budget as months are easier to get by and I see my debts reducing each month now. I don’t have to wait for a bonus or a tax refund to apply a lump sum payment on my debts.

VACATION + PAY CONSUMER DEBTS?

 

That’s right! This year, I will get rid of 15K of consumer debts and go on two vacations! We will have a couple’s vacation and a family vacation! Both can be done because we are making more money than ever.

 

So I won’t have to sell my house or get rid of my new car and will continue to live the way I want. On top of this, my debts are going down and I’ll be ready for more investments no later than 2015!

 

The morale of my story is simple: focus on your ability to make more money and you will pay down your debts. You can spend hours to reduce your expenses, do things by yourself to save a few bucks and burn yourself out in a miserable frugal life. Or, you can live the life you want, enjoy all the good things while making the money to pay for it. I’m done fighting with my budget. It’s time to make some more money now!

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Comments

Increasing your income is also more fun than cutting back on your spending.

At the end of the day the key is to optimize both, but not to the point where it is detrimental to your health or well being.

by: RICARDO DI VINCI | March 23rd, 2014 (11:47 am)

You mention setting up a sound budget. One of the principles of this is to not spend more than you make – go in to debt.
Not always possible when the roof leaks or the car goes to scrap yard heaven but none the less the idea is to have some left over to put under the mattress, or invest in dividend paying stocks. Other wise you can just as well justify buying that “necessary” item on the credit card and not pay off the principle. Similar but a much higher interest rate.
So a sound budget means not spending more than cash on hand, or in the bank.
Now making more cash, more revenue, is highly laudable but until the money is in the bank the credit card will not get paid off. So, in my humble opinion, that is not a sound budget.
Money is so easy to spend. Everyone wants some of the other person’s money for one reason or another. That is why we are a consumer society. But a little restraint would help eliminate bubbles and the following aftermath which affects everyone.
There are always those who live on the edge and there are those who live over the edge.
So you spend what you make not more, on everyday items. Taking risks, buying a house, buying stocks, starting a business are probably going to require indebtedness. But buying household items should be taken care of with cash on hand and not to the detriment of paying off debt or increasing it.
My humble opinion.
Different strokes for different folks

I struggled with getting out of debt for years. I managed to keep up with my minimum payments but never really got the debt down no matter how hard I tried.

While I believe budgeting is an important aspect of getting out of debt (in order to control and manage your money and ensure it goes to the right places) the biggest thing that kicked my debt repayments into gear was getting a serious pay rise and then rolling this extra cash into additional repayments.

There is certainly value in reducing costs and making more money. The key that you pointed out is that you can only go so far when reducing until it may make you feel miserable. Income can be infinite so as a long term strategy it allows you to pay down and still live the life you want to live. For those not in the position to make more money, reducing is the more realistic solution.

by: The Financial Blogger | March 24th, 2014 (8:18 am)

@Andrew,
You bring a good point: health! It’s definitely fun to make more money, but if you have to work 80hrs/week forever to keep up with your lifestyle, you are not a winner!

@Ricardo,
I agree with you that, at one point, I was definitely spending more than what I was making. But I didn’t increase my spending, I just saw my income level going down and didn’t take action. I’m now in a position where I make a lot more than what I spend and if I don’t run into any unexpected expenses, I should be able to pay 20K in debts this year. Never underestimate a good budget!

@FrugalityMag,
Last year, I took my pay raise to start saving in my TFSA. This year, I’ll do the same. It’s important to keep up with my previous income and save any excess. I don’t want to fall into debts again.

@Carlos,
I think we are all in a position to increase your income. Sell your crap, get a sideline, work overtime, get a second job over the weekend, start a small business, etc. There is always a way to increase your income.

[...] week, I started an interesting discussion with my post about making more money instead of cutting from my budget. After debating the point of cutting my expenses or making more money, I chose the latter and [...]

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