The Costs of Doing Nothing
Debt is the single biggest threat to our financial future, yet it is the most overlooked piece of every financial plan.
Excessive debt is a problem that many Canadians have to handle. All too often though people put off dealing with it because they either don’t know where to turn to or because it is seen as the easiest path. I am here to explain to you why you really should deal with it as soon as possible.
Financial freedom is the ultimate goal.
To get there a two pronged approach is necessary. Freedom from excessive monthly credit payments is the first goal. This in itself causes significant anguish every month when you open that credit card statement. The second is the enormous opportunity cost of doing nothing. High monthly minimum payments create a large obstacle to saving and investing. The earlier you acknowledge the problem and begin to realize that there are real solutions to getting out from under it. The sooner you deal with it the sooner you can get your life back on track and begin to save and invest.
Saving and investing is critical to establishing a solid financial future. Our government has recently doubled the amount we can put in a TSFA to $10,000. They have done this because they want us to begin planning for retirement. A very high proportion of us are not putting enough away for the golden years of retirement.
For many, this is a result of carrying high unsecured debt balances. How often have you thought to yourself, I would love to start saving some money but I can’t because of my debt problem. For far too many then, the issue is not that they don’t want to save, but they can’t. They cannot take advantage of this savings plan because of insufficient cash flow. Minimum payments are just too big a drain on take home income.
Too often people only reach out for help when they have reached the end of the rope. I see it too regularly, individuals and families have reached the end and they are either borrowing from one credit card to make the payment on another or in extreme cases have reached the limit on all their cards. This is the very worst approach to take for many reasons. It is critical to get help now instead of reaching this point.
What is the real cost of doing nothing?
The real costs to not dealing with unsecured debts now become more graphic when you include the lost opportunity to save because of the high monthly service costs. So in effect you are throwing money out the window the longer you prolong the indebted situation. In addition, you are losing out on the opportunity to invest for your financial future. A real double blow.
The cost of doing nothing – a typical example
Let’s take a very typical example of someone who is not insolvent yet because he can still pay his bills. He brings home after taxes $3,000 per month. He has unsecured debts of $22,000, here his minimum payments each month are $525. Most months he can still pay all his bills but every once in a while he has to dip into his credit card debt to meet his monthly expenses. But he is not too worried yet because he still has some room available on his credit card limit. As we will see, this is when he needs help.
Let’s now do some projections based on him doing nothing about his debt problem for a year. After 12 months he owes the $22,000 but he has paid interest of over $6300. He has nothing invested and nothing to show for all that money paid towards his creditors.
What is the other financial opportunity?
In comparison, this is what he can do if a debt restructuring plan is implemented. He could make a proposal to his creditors to get his debt down to $7,500 in which he would be obligated to make payments of approximately $125/month for 5 years.
After paying a consultation fee for the debt restructuring plan he could begin making payments to his creditors interest and penalty free through a carefully structured consumer proposal (administered by a licensed Trustee in Bankruptcy). Immediately he would free up $400 of additional cash flow each month.
Its very important to remember, a debt restructuring plan should not be just about getting people out of debt, it should be about teaching consumers about debt, the differences between good debt vs bad debt and how to manage their money to meet long term financial goals
As part of our comprehensive budgeting program we would recommend he takes $300/month of his available cash flow and put it in an investment plan where even conservatively would generate a portfolio of $3,600 while paying of his creditors and working towards being debt free.
The difference is significant.
- Doing nothing over a year leaves him owing $22,000 and paid interest of $6,300.
- Doing something leaves him owing only $6000 by the end of year 1 with savings of $3600 from the available cash flow .
After two years an individual would have $7,200 in savings vs doing nothing about his debt problem.
This investment can then be applied to a house down payment or a child’s education or retirement.
The contrast is even more dramatic with individuals carrying higher amounts of unsecured debt. Someone carrying $35,000 in debt would be paying $900/m or $10,800 in minimum payments per year and giving up $500/m that he could put into a tax free savings plan. Invested in a conservative investment plan would net that individual with $6,200 after one year.
The results of comprehensive debt restructuring programs turn negative cash flow into positive ones putting consumers back onto the road of wealth creation.
At 4 Pillars we have changed how the client should deal with debt and what they should expect from a debt restructuring plan, we work to represent the interests of the debtor through the debt restructuring program which includes the much needed ‘post restructuring’ services and provide our 18 month rehabilitation program to effectively rebuild credit, regain financial stability and help identify how they can better manage their money to meet their long term financial goals.
If you want to get rid of your debt problem, learn to manage and save for financial freedom please call Laurence Herzenberg at 289-803-6314 or visit my 4 Pillars Newmarket Website and we will go over a detailed plan to reach your goal.
