133 – How Do I Pay Off Debt When Living Paycheck to Paycheck

Wayne Kay 00:04
How do you pay off your debts when you’re living paycheque to paycheque? That’s our topic today on the Debt Matters podcast, where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada.

I’m Wayne Kay and we’re going to talk about options to service your debt. What do you do? We’re going to talk about high interest versus lowest balance. We’re going to talk about some strategies that can help you in 2024. Is consolidation a good thing? And when you know, okay, it’s not working. I need serious help.

My guest today is Matt Fader from Allan Marshall & Associates Licensed Insolvency Trustee in Nova Scotia, two offices in Dartmouth and Halifax. Matt, thanks for being here.

Matthew Fader 00:51
Thanks for having me. Wayne.

Wayne Kay 00:52
Going to be a great topic. This is the season. Tis the season to look back and say, I am sick and tired with my financial state and I need to make a change. Wouldn’t you say?

Matthew Fader 01:04
Kind of. Usually it comes the month after when everyone gets their credit card bills. But we’re getting around that point where people really start to panic.

Wayne Kay 01:13
Okay. And I think paycheque to paycheque for a lot of people, actually is a dream. There’s a lot of people who are – two, three, four, five days before getting a paycheque. And those days suck. I mean, we’ve been there.

Matthew Fader 01:27
Yes, absolutely.

Wayne Kay 01:28
People aren’t alone. So let’s talk about this. What do people do when they hear the whole paycheque to paycheque and then they still have to pay off all these debts that you’re talking about, and that credit card bill that’s coming?

Matthew Fader 01:40
Well, when it comes to dealing with debt, there’s a few things that people can do. Always the first thing that they need to do is to review their cost of living calculation. So I’ll never call it a budget.

I’ll have people that say, well, I budget $100 a month for groceries. And I’ll say, well, that’s great that you budget that. How’s that going for you? Because nobody’s living off $100 a month for groceries. So what is the actual expense?

That’s typically what we’re going to get or what I would recommend that people get into when they start to review to say, how do I make this work? And when it comes to spending, there’s a real acknowledgment that there’s a psychological component to a lot of this money management stuff.

One of the biggest things that people do need to realize is that they treat themselves like failures because they can’t make the budget happen. So they’re treating themselves like they have a budgeting issue or a money management issue, where sometimes you just sit down and you do the core math and say, this is what you need to survive. And then when you line that up with your income, they don’t match.

I have $4,000 a month in expenses, and I have $3,800 in income. Well, you can’t beat yourself up for a budgeting failure when that’s an income problem.

We can still work on it and say, how can we bring that more into parity? But it is definitely something that we need to focus on to be realistic, just so that, again, people aren’t beating themselves up for the wrong reasons.

Wayne Kay 03:37
So this is the time, though, when we’re supposed to take a look and realize that. Because the number of people that don’t know how much is going out and how much is actually coming in is quite shocking to me.

Matthew Fader 03:53
But at the same time, it’s understandable because money is being stretched in so many different ways. We have a lot of things that we pay for, like convenience types of products, subscriptions, or things like that that people often forget about, even though they might be monthly.

And we do have recurring costs that people need to focus on and understand that it’s not just rent or a mortgage and a car payment and gas and food. There are a lot of other types of expenses that exist.

Some of the expenses we classify as like, occasional expenses, Christmas and birthdays and winter boots and things like that, that we say, well, you don’t spend money on your license renewal every month, but it comes. And when we have those, and we have a lot of those types of expenses that occur, it does leave people in a position where they’re just woefully unprepared for them.

Wayne Kay 04:51
So what do you do then? How do we get even started here with figuring out how to take care of this?

Matthew Fader 04:58
The first thing, and especially when you’re looking at saying, how do I tackle this debt problem, is to say, can you afford to tackle it? And again, that’s where it really takes you, doing that core deep look into what your income is and what your expenses are.

I typically start people with that expense portion just so that we can determine what does need to come in per month to maintain the standard of living that they want to maintain.

That’s a basic focus on three basic types of expenses – recurring monthlies, occasional expenses, and weekly expenses. And when you add them all together, you can roughly figure out what your cost of living is. And as a result of that, line that up with your income and say, where is my problem at? Is it a spending issue or is it an income issue?

Wayne Kay 05:48
Okay, all right, so we get that figured out, then what do we do?

Matthew Fader 05:52
Well, then you’re in a position where you have to say, okay, is this sustainable? Can I do this?

If you’re saying I’m allocating a good chunk of my money to servicing debt, which is great, that’s what we’re supposed to do. We have debt, but that’s to the detriment of not being prepared for the next disaster. It may not be the greatest way to handle the problem, if you know what I mean.

Like, oh, I’ve been working my guts out and I finally got that credit card paid down $1,000. And then bam, something happens with the car. And I had to max the credit card out to get the car repaired. Now I’m back to square one.

People will focus on all the struggle and everything that it took to get to that point, and then they’re right back to square one. That can be very discouraging for folks. So that’s when we look and we say, is this a problem that you can afford to dig yourself out of? We really have to be realistic about that.

Wayne Kay 06:55
So that’s something we have to get honest with ourselves on this.

Matthew Fader 07:01
A thousand per cent. It doesn’t do you any good to try. And it’s like going to your therapist and lying to them and saying everything’s okay. Well, you’d pay somebody to lie to them.

Your therapist doesn’t care. Your next door neighbor doesn’t care that you can’t afford to pay your bills if you lie to them. So you have to be honest with yourself or else you’re not going to get better.

Wayne Kay 07:19
Yes. Okay, so what are we doing then? Help me through this. Are we going to be saving and tackling debt at the same time? How is this going to work? Because there’s some high interest cards that’s just killing you every month.

Matthew Fader 07:35
Well, yes, that’s where, again, you have to say, because you get those two scenarios, you can get the person that says, well, I’ve realistically looked at my budget, or I’ve contacted a Licensed Insolvency Trustee like myself or a credit counselor. I’ve been through my budget and if we get to that point, then, yes, we’re there to help guide somebody through that, make that burden a little easier.

If it’s somebody who’s in a position, though, where they say, well, the debt might be manageable, but how do I clean it up in the absence of this? Like, how do I exercise that self help remedy?

So if you had $500 left and you said at the end of the month, and you said, okay, well, I have $250 for savings and $250 for debt service, you say, okay, is that $250 enough for debt service?

And if it is, if you said, well, I’ve got three credit cards and the minimum payment on one is $100 and the minimum payment on the next one is $50 and the minimum payment on the next one is $25. You can say, okay, well, I got $250 to pay between these three cards. It’s going to cost me a minimum of $175 to make the minimum payments on each of them. What do I do with that extra $75?

Some people would just say, oh, well, I’ll put an extra $25 on each card, right? That keeps it balanced. Well, you can do that. It’s not, in my opinion, the greatest way to handle it.

Some people would say, well, I’ll put that extra $75 on that higher interest card because that’s going to save me the money, or the one with a higher balance, right. Because, of course, that’s costing me more money to service that debt.

And I said, well, yes, from a logical standpoint that makes sense. But again, from a psychological standpoint, you’re much better served to tackle your smallest debt and to sink all the effort that you can into satisfying that small’s debt. Because one of the things you do need to do when you’re trying to tackle debt is you need to feel like you’re accomplishing something.

You need to see the benefit of your hard work, and it’s going to take you a lot longer in servicing that larger debt for you to see any kind of discernible difference in what you’re doing, where if you can sink the majority of your resources into knocking off that smaller amount of debt very quickly.

You’ll be able to say, hey, maybe that credit card has been paid off. And when you have that credit card paid off, you say, wow, I did something. And you can feel good about that. On top of that, now you say, okay, well, now I attack the next one. But when I attack the next one, I now have the surplus funds that I was put towards the lower one, the minimum payment that I was putting towards the lower one piled on top of the minimum payment that I was making in this mid range card.

So all of a sudden, your progress on paying that second card off, you’re really amping it up, if you know what I mean. You’re keeping that proper amount of motivation to say, I am making that headway. I am able to get this paid down. So from a strategic standpoint, I would rather see that go than somebody who’s focusing on just saying, let’s save interest.

Wayne Kay 10:52
Love it.

Matthew Fader 10:52
Because again, from a logical standpoint, that makes sense. It’s saving you money. But if you really do the math for the amount that you would save on stretching that out over the longer period of time versus what I’ve just sort of laid out for you, the difference is negligible.

Wayne Kay 11:09
But I love that. I love that you gave us a strategy, at least to move forward with. But the big thought is, what about going to get a consolidation loan?

So you put all these together. Is that something that we should be doing or what?

Matthew Fader 11:24
Consolidation loans are fantastic, but when you get a consolidation loan, there are a few things that you need to do. A consolidation loan should always follow that income and expense process, so you know what you can afford to pay.

That’s very important, because one of the problems with a consolidation loan for a lot of people is they get the loan. They can breathe that sigh of relief. The pressure is off.

I’m making one payment to this one person. It’s a hefty payment because it is a consolidation loan, but because it’s an installment, it’ll be over in five years. I’m making the same payment every month. It’s nice and uniform and consistent, and that’s great.

But if that doesn’t come with an adjustment to your spending habits, and it doesn’t come with you saying, okay, in getting that consolidation loan, I’ve removed, canceled, or reduced all the debts that I was consolidating into that. If you haven’t limited your access to that credit, a lot of times people end up falling back.

Wayne Kay 12:32
After all that work, you’re stressing.

Matthew Fader 12:34
They go through all that, they get the consolidation loan.

Wayne Kay 12:37
Yes.

Matthew Fader 12:38
And then they say, well, paying the consolidation loan is good, but I’m coming up $200 short on the groceries, so I’ll put that on the credit card, and then it goes up and up and up.

So in a year’s time or two years time or whatever it is, the credit cards and everything are maxed back out. But now they have this consolidation loan on top of it.

Wayne Kay 12:57
What about line of credits? You could use that. To me, I guess a consolidation is similar in my mind that you move it over to, but once again, you can’t be spending it. But a consolidation is actually through a banking institute where they actually say, here’s your payment, and we’ll have it paid off in 58 years.

Matthew Fader 13:16
Yes. So your two types of debt are a line of credit or consolidation. These are your differences between revolving and installment.

Wayne Kay 13:27
Okay.

Matthew Fader 13:27
So we can know that, hey, if I get a line of credit, yes, my minimum payment might be less because my requirement is for me to pay only the interest.

Wayne Kay 13:38
But we know because we’re listening to this show, that’s not what we want to do. We want to actually pay the loan.

Matthew Fader 13:43
The bank is more than happy to take that interest payment from now until the end of time. Because you owe the exact same amount of money when you start it, right?

Wayne Kay 13:53
Yes, exactly.

Matthew Fader 13:55
With a consolidation, at least as an installment, it’s factored out to say, okay, your interest rate is this, you’re going to pay this much, and as you pay that down, you can’t borrow against it. So we know that there’s no credit available to you as you reduce that. But it puts a light at the end of the tunnel.

To say, well, there’s a conclusion that’s going to come here through the consolidation. So both products have their pros and their cons. Consolidation is designed to say, let’s take a bunch of debt, put it together, and get it paid off. And that’s wonderful. Lines of credit typically would be reserved more for saying, oh, crap, I got to fix the roof, and I need access to some quick cash.

So hopefully I have the line of credit that I can borrow against, which would be a better alternative for me than putting it on my credit card, because my 9% interest on the line of credit is different from my 19% or 22% on the credit card. You didn’t get air miles for it or seen points or whatever, but at some point you have to say, well, those points cards can be a trap, too. Right?

Wayne Kay 15:08
Absolutely. Is there another option there or are those pretty much your two options – you consolidate or you use a line of credit.

Matthew Fader 15:16
Win the lottery.

Wayne Kay 15:17
I like that one.

Matthew Fader 15:19
That one works well. Find a rich man or woman, whatever you’re into, just make sure you’re on the will.

Wayne Kay 15:27
Well, when do you pull the plug? You’re like, okay, I’m just not going to succeed here. At what point do you say, okay, I’m just not able to do this.

I got to call Matt. I got to call the team. I got to call the team at Allen Marshall and Associates. They’ve got to help me.

Matthew Fader 15:41
Well, one of the things that you do want to keep in mind is that as a Licensed Insolvency Trustee, and based on my licensing and my regulation, anyone who comes into my office, our job is to assess, to say, do you need my service or not?

As we look at these expenses, is this going to be a benefit to you? Is there another way? So we will help sort of coach you through in making that decision just so that we can make sure you’re making the proper one to say, is this the right move for you?

Somebody comes to me and they owe $10,000 in credit card debt. I want to file for Bankruptcy. I’ll be like, well, that’s great. You want to, but you’re not going to because it’s ten grand and you’re working and you have this and this and this. So let’s look at these other alternatives.

But debt load is, of course, relative to your income, to your financial situation, things like that. So for somebody who makes $600 a month, ten grand might as well be a million. But then you have to look and say, what’s credit recourse? What is the damage to you? What are we trying to accomplish here?

So as a Licensed Insolvency Trustee, that’s what my job is, is to sort of evaluate somebody’s options and to say, well, if you need my services, these are what they are.

I can do a bankruptcy for you. I can do a proposal for you. We can find the solution for you that will work for you. And again, because I’m regulated, that’s my job is to lay that out where somebody who’s not regulated, somebody who might just be in there trying to make some money, is going to push you towards their solution. I’m happy to push you out of the door if it’s the right option for you.

Wayne Kay 17:25
Okay. And it’s free. The first consultation is absolutely free. So you get to go in.

Matthew Fader 17:30
Yes.

Wayne Kay 17:31
That’s a big thing, too. Absolutely.

Matthew Fader 17:33
If somebody’s charging you for a free consultation, then you should find somebody else to talk to.

Wayne Kay 17:39
Absolutely.

Matthew Fader 17:40
And I always recommend – if you can find somebody local it’s nice to be able to look somebody in the eye, if you can. Because it’s a hot market – a lot of people have a lot of debt. There’s a lot of people out there that are trying to make money off it.

So you do need to be cautious about who you’re dealing with. And again, that’s where if you do go to a Licensed Insolvency Trustee, at least I think there’s maybe 1,000, 2,000 of us in the country. So at least, you know, we’re regulated and we have these rules and we’re hopefully going to pop you in that right solution.

But always do your research. Get a second opinion. If you don’t like what you’re hearing from one person, talk to another, but go in equipped and informed, too. Somebody sits down across the table from me and they don’t even know what their income is. I’m like, okay, how deeply have you looked into solving this problem? Because I don’t want to work on quick fixes. These quick fixes can have lasting and damaging effects on somebody if they haven’t done the research. So we’re there to help navigate that path.

Wayne Kay 18:48
I love it. Matt, it’s always a pleasure having you on the show. Thanks so much for your time.

Matthew Fader 18:53
Thanks a bunch Wayne.

Wayne Kay 18:54
My guest today, Matt Fader. And if you want to learn more, schedule that free consultation with Allan Marshall & Associates. You can go to the website wecanhelp.ca. And of course, they’re Licensed Insolvency Trustees – wecanhelp.ca.

That’s it for today’s Debt Matters podcast. Make sure you subscribe wherever you get your favorite podcast from. And of course, for more information, you can always check out debtmatters.ca. Thanks for listening