This teacher works a second job to help pay off $55,000 in debt. How can she get out of the downward spiral?

“Hydro with electric heat plus it’s a heated water line so winter is more pricey,” she says.

She makes $5,200 a month teaching and an additional $1,700 from her second job working at a restaurant. Her debt includes a $1,391 payday loan, a $13,000 Easy Financial loan, $14,921 in consumer debt and $41,000 in car debt.

“After living with someone and a broken engagement, I had a consumer proposal done four years ago,” Elizabeth explains. “I received a small inheritance two years ago after my mother passed away and paid off the consumer proposal — but my credit score was affected.”

Elizabeth’s credit score is low at 580, and she worries she’ll never be able to own a home — a dream she hopes to achieve one day. She currently doesn’t have a credit card and is fearful of getting one again because of her past as an impulse spender.

But not all hope is lost. We asked Elizabeth to share her monthly and weekly expenses with a financial adviser to help her set up a plan.

The expert: Janet Gray, money coach at Money Coaches Canada

Congratulation to Elizabeth on this first step. Sometimes even the exercise of submitting information and data is illuminating — it shows you the reality of where you are right now and maybe some ideas of how or why you got there. 

Financial planning is about looking at where you are (current situation) and where you want to go (goals). The middle part is the “how” (the strategy). It’s the time of contemplation and reflection on what your priorities and values are. What are you prepared to delay, pass up, or reconfigure?

I suggest starting with two things. Firstly, Elizabeth needs to get very clear on her goals. She should separate them into short term (less than 12 months), medium (one to five years) and long term (more than six years). She wants to reduce her debt (short term) and then save towards a down payment for a home. At her current rate of debt repayment, the high interest loan will be repaid in 24 months and the car payment will take 6.8 years to pay off. With Elizabeth’s new second job, she should be able to pay off the $55,921 of debt much sooner. 

Secondly, Elizabeth must review each and every expense she has and divide them into “need to have” and “want to have.” Need-to-have expenses include housing, utilities, debt payments, groceries and transportation. Want-to-have expenses are discretionary. Examples are entertainment, dining out, travel, and they can easily get out of hand. Every dollar Elizabeth spends on want-to-have costs, is a dollar she could have paid onto her debt balances (her No. 1 goal).

Elizabeth doesn’t currently have credit cards which means she is using cash or debit. To help increase her credit score, she can consider getting a “secured” credit card where she puts a deposit on the card and pays the outstanding balance as she goes. It’s lower risk for the credit card company and it helps to build her credit score until she is able to qualify for an unsecured card. 

Elizabeth’s credit score is low at 580 mostly due to a consumer proposal four years ago (which was paid off two years ago via an inheritance). A low score means she is less likely to get preferred rates on loans and may be even denied for standard credit cards or mortgages. The best way to increase a credit score (minimum for a mortgage is 680, and higher is better) is to show you are a low risk to the lenders by making debt and bill payments on time, paying more than the minimum, and not have fully used credit limits. Eventually, Elizabeth’s consumer proposal will soon “fall off” her credit report which will boost her credit score. This usually happens after three years of full repayment but she can confirm with her credit councillor. 

She can also create an emergency savings account so she doesn’t have to rely on payday loans. Elizabeth should be hyper aware of her spending so she doesn’t create new debt and plan to ultimately have at least one month of expenses in her savings account ($4,900).

Elizabeth should also review her spending on high tickets costs. Her rental costs are not just $1,500 monthly when she has to pay $500 month in heating costs and pay for snowplowing as needed. She may be further ahead to live in a $2,000-month rental and be more certain that there are no other costs. Is she able to go on Equal Billing payments (EBP) for her hydro so the payments are level month to month?

Elizabeth can allow yourself personal treats but she should limit them. She can buy a Tim Hortons gift card on pay days and use that until next pay, for example. It’s often the little costs here and there that add up.

Elizabeth can consider selling her car and buying a less expensive one. The costs of a 10 per cent car loan on a $41,000 car are a challenge on her current income. With payments of $230 biweekly, the car will be paid off in nearly seven years, not including the higher car insurance costs she is currently paying. 

When she receives her retro-pay, Elizabeth should keep some for emergency and put some on the high interest loans. Before she does that, she should make sure to look ahead to see what future expenses are coming so that she can set aside the money for them and not need to use high interest loans.

Elizabeth can benefit from putting a date in her calendar for a monthly review of the past month and upcoming months. This is not a “set it and forget it” exercise. It needs monitoring and adjusting as she goes.

Income for Elizabeth’s second job is added to her teaching income at tax time. It’s likely she will need to pay more taxes. She should also set money aside from each pay so she is prepared at tax return time.

Now that Elizabeth is more aware of where she spends her money, she might find it helpful to divide out her pay (on the day she receives it) into saving subaccounts (often called E-Savings at banks). She should leave enough in her main bank account for rent and phone and other auto-payments. Once she has paid all the bills and savings, the remaining balance is how much she can spend until next pay day.

I applaud Elizabeth for taking this step. Getting started is the biggest hurdle but it gets easier. She can take her time, review and revise as she goes and give herself permission to be patient, stay focused and to ask for help. 

Spending in week one: $1,929

Spending in week two: $176

Takeaways: Knowing that she has a financial plan, Elizabeth said her “shoulders already feel lighter.”

“I will set these plans into motion,” she says. “It feels good to know that I can do this on my own, after working all these years. Finally, I will see some results in the positives moving forward.”