Debt, Consolidation... And More Debt?

How is it that so many people who consolidate their debts, or receive some kind of financial windfall, find themselves right back where they started, often within a few short years or less?

People sell their homes to find they have absolutely no equity, despite the fact they've been paying a mortgage for more than 10 years. Others have received significant windfalls – winnings, insurance proceeds, or an inheritance which should put them on a solid footing for the future, only to find it gone within the year.

On a less severe (but no less concerning) scale, oftentimes people will consolidate their debt, only to find it creeping up again a short time later, despite their best intentions to keep things under control.


How It Happens

Admittedly, I've seen it happen to myself on a small scale (hey, we can't learn if we don't talk about these things, right?), and I've heard more than enough stories to believe the phenomenon is far more common than anyone seems to be acknowledging.

To find out how it happens, and hopefully to learn how to keep it from happening in the future during these lean years, we talked to a few experts in debt management to get their advice.

"It happens because people really haven't changed their lifestyle" once they consolidate their loans, says Elena Jara, director of education at Credit Canada Debt Solutions. "They go right back to the old lifestyle that got them into trouble."

Specifically, she uses the grocery store as an example: When times are tight, people may price match while shopping at the No-Frills store, but then return to the larger, prettier, pricier, and more convenient grocery store once the pressure's off.

"Debt consolidation doesn't really change your financial behavior. It's like financial liposuction – you're taking out the fat, but you're not dealing with the eating issue," says Avraham Byers, founder of Breakthrough Personal Financial Trainers. "Most people have that attitude – I'm going to do this once and never do it again. The problem is they never really put any budgeting or support systems in place before they consolidate."

Those who receive windfalls, meanwhile, can see the opportunity as carte blanche to spend – on vacations, large toys, (ATVs and boats are big around here), or feel pressure to share the wealth with just about anyone who asks, not realizing that money, even in large sums, is a finite resource.

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Warning Signs

Unfortunately, says Jara, most people are not terribly realistic or honest about their situation until things are out of hand, and many will wait until the last minute to seek help.

There are the typical, severe warning signs that the family's finances are in trouble: Using one credit card balance to pay another, not being able to make minimum payments, or cashing in registered savings to pay off credit cards, but still finding the balance unmanageable.

There are also a few lesser warning signs to heed ahead of time, before things get out of control:

• Carrying a credit card balance.
• The juggling act – timing your bill payments, or trying to decide which bills to pay, and then
• using a credit card to pay for gas or groceries, out of necessity.

Avoiding the Trap

If you must consolidate, put a budget in place first, then work on sticking with it for some time before you head to the bank. (After consolidating, stick to that budget, no matter what!)

In creating your budget and savings plans, create goals that are achievable and very specific – anything vague will get you nowhere.

"People say 'I want to buy a house,'" says Jara. "Well, how big do you want the house? Where do you want to live? How much do you want to spend? A lot of people get lost in the full planning process. Once they've done the homework, they're surprised to realize that maybe they can't afford it. It's unrealistic." If they don't do this homework, meanwhile, they end up failing, without knowing why. "They get frustrated and they give up."

"If you don't have enough money right now to even pay rent, looking at a house is not the most important thing. The goals should be 'how do I ensure my bills are paid every month?'"

For both consolidators and for those who've received a windfall, Byers suggests people start this process by free-writing all of their goals, and putting all of it on paper. It makes sense: Dumping all of these ideas, and getting them out of your head ahead of time removes the tendency to be reactionary and impulsive with your new-found cash flow.

"To write it out and formalize it is very important. Then what you need to do is prioritize," he says. "A-list priorities need to be taken care of right away. B-list priorities need to be done sometime, and C-list priorities – you can have them or leave them. Then what you've got to do is really work off your A-list throughout the year."

(Priorities can include paying off certain debts, saving certain amounts – an emergency fund, for example – making home repairs, or saving up a vacation fund.)



For those working with a budget, he recommends figuring out what your daily disposable income is, as well. This number is your net income after taxes, savings and fixed expenses, divided by 30 or 31 days. The resulting number is the amount you're allowed to spend each day. "If you don't spend it today, you can keep it for tomorrow," he says.

Finally, for you lucky windfall recipients, keep in mind that money, even a lot of it, is a finite resource. Curb that impulse to spend or to live differently until you've done a real analysis of your situation.

"Don't take crazy risks with your money," says Jara. (This includes risky stock market investments, but also any "opportunities" that you haven't fully thought through.) Get some professional advice.

Also, "don't let friends take advantage of you," she adds. "People are easily influenced by friends. They might lend money and it ends up being a gift. People can lose friends over money. That happens often."

One of the most sensible pieces of advice I've heard in insurance circles, meanwhile, is that people should avoid making any serious decisions for at least a year. Pay your bills, for sure. Maybe take a small vacation or buy a new pair of running shoes, but park the rest of your cash (do some of the exercises above – particularly the goal-setting exercises) and give yourself some time to think.





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Kate McCaffery is a freelance writer, editor and former urbanite, now living somewhere in between the lake, the ski hill and some farmer's cow path. Visit mccaffery.ca/kate2.0/ for more information.