44 – How to Break the Debt Cycle for Good

Wayne Kay  0:04  

Welcome to the Debt Matters podcast, the place where we help Canadians find solutions to their debt with Licensed Insolvency Trustees from across Canada. I’m Wayne Kay. 

Today’s big topic is about how to break the debt cycle for good. Once you get into that debt cycle, how do you get out of it? Why is it hard to get out of? How do you start to break it? And we’re going to learn some tips on how you can get started to break the debt cycle that can draw so many people into it, especially with the inflation and what we’ve seen happen in our country. Wow, a lot of people are going into debt. 

To help us out my guest today, Derek Chase from Derek Chase and Associates, Licensed 

Insolvency Trustees serving Vancouver Island, Sunshine Coast, and the BC North Coast. Thanks for being here, Derek. 

Derek Chase  0:54  

Thanks, Wayne, great to be here today.

Wayne Kay  0:55  

I’m excited about our topic today. Because once somebody gets into the debt cycle, it is hard to get out of it. So I think this is going to be a great show where we can really help people get out of this cycle. So when you talk about a debt cycle, let’s go to the basics. What does the debt cycle mean?

Derek Chase  1:14  

Debt cycle is a situation where you’ve incurred some debts, you’re making some payments, and it just starts to cycle around in the sense that every month you’re getting the same stuff. You’re getting the same envelopes, or emails, and the balance is either just hovering around where it started, or it could even be going up. And that’s especially true, if you have high interest installment loans or credit cards. Those are good examples, especially the credit cards where the balances can easily be growing. 

So you’re just crawling around, you’re not making any progress. And it can be maddening. It can be infuriating. I remember talking to a couple, this was actually for their taxes – they were making some big monthly payments towards their outstanding tax bill and it kept going up. And they just could not catch it. So having a debt cycle and being trapped in it can be torture, really. You just just can’t find a way out.

Wayne Kay  2:23  

And they were doing everything right. They were working hard and trying to get this payment down and just couldn’t do it. What do you find for most people? What is the problem? Why is it so hard to get out of this debt cycle?

Derek Chase  2:39  

Well, I think it’s difficult because of a number of factors. Usually, it’s the high interest rate that is keeping people in that debt cycle – either high interest rate or high administrative fees that rob the payment that they’re making, in a sense. So the payment that’s being made, a very small portion of that goes towards the principal. 

And if they happen to add more debt, maybe continue to use the credit card or whatever loan product, or if they miss a payment, you’re just building and making it more difficult to make progress against that debt. So the biggest factor is probably the high interest rate. 

But I think it’s so hard now, especially because we’re getting whacked with inflation. And when you go in to get your normal everyday goods, it’s taking more dollars to do that. And as a result, a person could have less dollars to pay their debts, and that’s going to keep them in that debt cycle.

Wayne Kay  3:45  

Yes, that’s a great point. I know a family – we were just talking about this. They had to go on a big road trip for a sports team. And it was like a $900, a weekend trip, because of the extremely high gas prices and hotels are extremely high as well. And once again, if you don’t have that money that just adds on to that credit card bill, which is a ridiculous interest rate.

Derek Chase  4:14  

And I think we should spend a minute on that. Because you’d be surprised how often that is not unusual to hear when we’re talking to people. We start to ask how did the debt build up. And sports travel is a fairly consistent factor. 

I think it’s really wise for families to have a serious conversation about how much they’re willing to spend on these types of activities, whether it’s sports or dance or basically something that requires travel. And lots of money can go out on that. And is it really worth it? Do you have to play that particular team, can you play club? Can you play more local? 

It really is an important one, I think. And for those people that tackle it, or want to go and make those trips, I’d really encourage them to see how creative they can be to minimize those costs. Stay with the team that’s hosting or take all their food with you. There’s ways that you can mitigate that cost. But it certainly is a factor that we see that I think is possible for avoiding debt.

Wayne Kay  5:41  

I was talking to a bank manager once and basically they said that sports, divorce and I think job loss were the three main reasons for Bankruptcies.

Derek Chase  5:56  

Those are definitely factors, there’s a ton of reasons for financial difficulties right across Canada. Two other big ones I can think of could be substance abuse issues, or gambling. I think it is another large one, according to the government statistics. 

But there are some big underlying factors that can cause a person to need to use the insolvency system. And I think that sports, although great, I’m a big fan of youth being in sport and that whole environment, it can get out of control, though. And if you’re traveling every weekend, and the cost is going on your credit card. That is not good.

Wayne Kay  6:41  

Yes. And especially you get kids going different directions: mom goes one way, dad goes the other way. It can add up very, very quickly. So let’s talk about how do you start breaking this cycle.

Derek Chase  6:55  

Yes, how to start, and you want to start sooner rather than later. One of my favorite sayings when it comes to finances is to start small and start now. And I think a lot of people put it off because it’s a difficult topic. Sometimes in a family or in a setting, it’s just something that makes them cringe, or they want to avoid it. But you need to start now. 

And we’ll share a few ideas here in a minute. But I think you have got to start. I mean, we’re probably repetitive in a lot of ways in these podcasts. But you have to get some numbers down on paper or on a spreadsheet and see where you’re at as far as your living expenses, and then start making small adjustments that will help to break that cycle.

Wayne Kay  7:48  

Has your family changed the way you purchase things, even when we were talking about inflation? Have you made any changes?

Derek Chase  7:56  

Personally? Yes, well, I can tell you that we’re certainly eating less meat than we have in the past, which has been really interesting. Somewhat refreshing, honestly, somewhat refreshing in the sense that we’re trying a lot of new recipes which has been fun. Yes.

Wayne Kay  8:17  

So you talked about doing something different and there you go. That’s exactly like every single person, especially when you’re focusing on, where’s that money going. We’ve had to be a lot more creative with where we shop, and what we shop for, what we buy and cutting back on meats, etc. So that’s why I had to ask that question. I liked it. I liked your answer that you are learning new recipes.

Derek Chase  8:43  

It’s true. It’s been a good experience, and to find out that there’s sufficient protein in a lot of other types of things that you can eat beyond just having meat. It has really been fun. So that’s been an interesting byproduct. 

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But another example is, my coffee has become a lot more simple and that again, might sound really silly and small, but it’s true. And it works. So it’s a battle to fight back against the cost of food. And it’s one that can be won though. You just have to pay attention and put some energy into it. And yes, it’s not going to go away. So we might as well get used to fighting.

Wayne Kay  9:30  

Absolutely, we might as well and when we talk about starting to break it as you said, you repeat this often that you start now and you start small. These are the little things that we are kind of having to do for a lot of families.

Derek Chase  9:44  

I think that the next thing you can do is to try and avoid being overwhelmed. We just have so much stuff pushed out to us to almost keep us in fear it seems like. Another thing I like to do when people are feeling overwhelmed or don’t know where to start or what to do –  is just to encourage people to control the controllables. There are certain things that you can control. You can control how often you go through a drive thru. You can control that. You can write down what you spent today, that’s perfectly in your control. 

So if you start doing these things that you can control, and not feel like you’re just getting bounced around all the time, by different worldwide forces or cost of a barrel of oil are – you can’t control that, it’s just impossible. But the other side of the equation is just controlling those things that are within your power. And I think that gives a person, gives me a sense of, hey, I can do something. I don’t have to wait for someone else, or feel like I’m a victim. I’m going to do these certain things and gain some control. 

Wayne Kay  11:07  

Yes, so controlling what you can control is a big deal as well. And you’re mentioning, with all the different apps that are out there as well –  kind of controlling where your money goes and writing it down. It’s almost easier now than ever with some of the technologies that are there.

Derek Chase  11:23  

It is for sure. And apps are great, they’re not for everyone. Certainly, that ties into just generally tracking your expenses. And there’s several different ways that can happen. I would just encourage people to try it. And if the way that you pick isn’t feeling like it’s going to last, then try a different way. So whether it’s just writing it down, or a spreadsheet or an app, give it a try. And you want to find a way that’s going to stick so that you can do it each month. 

But there are some other ways that you can control things in order to break the debt cycle. And I think certainly, initially, just to stop using your credit cards – it is a big point. If you have debt, you usually have some credit card debt. So if you just stop putting money onto the credit cards, that’s a good way to start. And instead of using that credit card as your go to methodology, or a way to pay, you start using your debit card, or cash. That can help. 

A couple of other ways that you might want to think about to break the debt cycle. Certainly picking up a tiny bit of extra work is never a bad idea. Even if it’s just for a short period of time to give a little boost to help break that momentum of that cycle. 

I know Wayne, you like to give some music lessons. That’s an awesome way to pick up some extra work or extra cash. Or it could be anything that you’re interested in, really – any hobby that you have can usually be turned into some little bit of cash flow. Lots of people give advice. And I would agree that to break the debt cycle. 

Another way to think about it is to tackle the highest interest rate loan that you have. And by doing that, and getting rid of that loan first, it enables you to make better progress on the rest of the loans. Once you start making payments to them, it doesn’t make sense to give an equal payment to a low interest loan and an equal payment to a high interest rate loan. It would be better to pay off that high interest rate loan first. 

So there’s a couple of other ways that I was thinking about when I knew we’d be taking on this topic. Sometimes people like to look at their debts and pay off the smallest loan that they have. And in that sense, the smallest debt, to make that go away. And that really can give a sense of accomplishment because you get the feeling that you’re making headway and that you’re dealing with one less transaction a month. It just helps to simplify life. 

Wayne Kay  14:15  

I love that you’d feel better too, when you see that you’ve achieved that goal. And it’s going to be tough for the first while. We have to admit that when you’re used to just putting stuff on your card and all of a sudden you have to stop – it’s going to be tight for a little while but it’d be well worth it.

Derek Chase  14:31  

I agree. Always a good idea to have a look at your banking, especially if you’ve got a number of smaller debts and you feel like you’re not making headway and you want to break that cycle. Well, you can sometimes qualify for a consolidation loan where you bank. That’s not a bad idea. It can bring all those debts into one payment to again simplify your month. It can often lower the interest rates. 

The hard part about that option is usually being able to qualify for the loan. But it’s worth a look, I think. And when you’re looking, you want to pay attention to how much the bank is going to ask you for a monthly payment, and also what the interest rate is because you want to be able to handle the loan payments and to not have to pay too high of an interest rates, I certainly wouldn’t recommend that you try and consolidate with a high interest rate loan, that sort of defeats the purpose.

Wayne Kay  15:30  

What about, I hear the term remortgaging. they are taking a second mortgage on a house, what does that mean?

Derek Chase  15:41  

A second mortgage – often people have a first mortgage on their house. And then as they pay down that first mortgage, and as the property value rises, as it has, over the last several years, it creates equity in your house, or a spread between the market value and the first mortgage balance. 

So sometimes people can take or access that equity by putting a second mortgage on the house, and a lender will provide funds to you and put a second mortgage. It is going to be second in priority to the first mortgage as collateral on your house. 

I would really focus on what sort of cost you’re paying for that though, because we have seen some very bad situations where people have paid huge administrative fees and a substantially high interest rate to do that. So although it is on the table for a possible option, it goes to the thought that all lenders are not created equal. And some would charge you what I would consider to be a reasonable interest rate and reasonable setup fee. And there’s others that will just gouge a person. So it is a possible answer. But again, laser in on that interest rate and what fees you’re going to pay to set it up. Do I need to do this here or can I do it somewhere else? You know, it’s buyer beware.

Wayne Kay  17:18  

I thought maybe it was at the same amazing mortgage rate. You get your first mortgage and, maybe it’s 1.5 or 2.2, or 3.8. But I guess we’re not so lucky.

Derek Chase  17:31  

No, typically a second mortgage has much, much higher interest rates than your first mortgage. 

Wayne Kay  17:37  

Some final words of advice regarding this and anything else we need to touch on?

Derek Chase  17:43  

How to break the debt cycle. You could find a friend just to give you that encouragement and help you stay accountable. But I think you have to be realistic as well. And if you see you’re trying all these things, you’re trying hard to do the right thing and to break this debt cycle. If you can’t, if it’s just not moving, then I think you have to muster the courage to reach out. 

I would encourage everyone to reach out in that setting to a Licensed Insolvency Trustee directly. And just ask for an initial appointment to get some thoughts because there’s a federal Consumer Proposal that has been really successful in helping people consolidate. Snd there’s other other options that we can help with.

Wayne Kay  18:25  

Great to know and of course that consultation is free. Derek, thank you very much for all this great information. 

Derek Chase 18:30

You’re welcome. 

Wayne Kay  18:35 

Well, my guest today Derek Chase from Derek Chase and Associates. And to get that free consultation you can contact bankruptcytrusteebc.ca That’s the website bankruptcytrusteebc.ca. And that is it for another edition of the debt matters podcast. 

If you know someone who needs this information, feel free to share the podcast with them. Also, make sure you subscribe wherever you get your favorite podcasts from. And of course for more information, you can always check out debtmatters.ca Thanks for listening