Cash Flow

Using debt to cover expenses

Lesson 8 Chapter 3

It is important that you try as hard as you can to reduce your current expenses down to match your new level of monthly income.

I know it sounds obvious, but it is hard to do. I mean you committed to many of your most expensive costs when you had a much higher income and had no idea a pandemic was on the horizon.

So, to cover your remaining expenses you have two choices: take money from your savings or go into debt.

If you have access to a secure or unsecured line of credit, start there. If you are $700 a month short to cover your expenses, set up automatic withdrawals from the line of credit for that amount before many of your expenses are due. Treat it as a tax-free paycheque.

By setting it up as a monthly income, it is easier to manage your spending month to month. With no restrictions on spending it will be easy to pay credit cards with the line of credit. The amounts could add up fast.

Secondly, setting up a monthly amount from your line of credit will allow you to know exactly how much time you'll have before your line of credit runs out of money.

For instance, a $10,000 line of credit ($8,000 available without affecting your credit rating) with monthly withdrawals of $700 will provide you with 11 months before you will be forced to make further financial decisions. As soon as you borrow 80 percent of the limit on a line of credit or credit card it will beginning negatively hurting your credit rating.

If you start to run out of room on your line(s) of credit, then you will want to start looking at using any short-term savings (not retirement savings). This is usually any money put aside for emergency or in a savings account. This money is usually invested in cash and easily accessible.

You may or may not have much in savings, but if you have even a little bit, it might give you a few extra months.

The reason for using your savings after your lines of credit is that you are more protective of money you've saved. This means you are only doing this because you absolutely must. It is a behavioural thing. Also, during a stressful time like this, holding onto your savings can provide a bit of comfort and assurance, even if it is in tiny amounts.

Lastly, if you've run out of short-term savings you can turn to short-term debt such as credit cards.

Hopefully, you'll have bought yourself enough time that things have recovered and you are able to earn enough to make up for your monthly shortfall. If not, some more difficult expenses may have to be reduced, reorganized or eliminated.

Always, no matter what beware of scams. There is no easy solution to this. If it is easy, it is not legit.

Also, never resort to payday loans. It will bring you only additional pain and make your situation worse.