Saving money and paying down debt are two sides of the same coin. - Margot Bai, author of Spend Smarter, Save Bigger

Writer Margot Bai says Canadians have embraced the idea that shopping is a form of entertainment. (White Knight Books)Margot Bai knows something about owing and saving money. When the Markham, Ont.-based author married her husband, James Bai, in 1998, they shared a tiny one-bedroom apartment and $18,000 in student loans. To realize their dream of buying a house, they had to hunker down and focus on their financial goals.

Many Canadian consumers are facing a situation similar to that of the Bais in these rocky economic times. But instead of formulating a sound financial plan and sticking to it, they're see-sawing between saving and spending.

Case in point: Canadians queued for Boxing Day electronics sales, and according to Interac, on December 23 (its busiest pre-Christmas shopping day), they upped debit card usage to 15.9 million transactions from 15.6 million for December 21, 2007. Meanwhile, 62 per cent of 1,000 Canadians recently polled by the Boston Consulting Group said they plan to start living more frugally and skip big-ticket items such as travel, cars and electronics.

In her book Spend Smarter, Save Bigger (Toronto, White Knight Books 2006), the 35-year-old Bai says, "Canadians have embraced the idea that shopping is itself a form of entertainment."

The trouble is, those shopping sprees are leaving many saddled with growing debt loads.

John de Wit, president and chief executive officer of Abbotsford, B.C.-based DebtManagers, Canada's largest independent credit counselling firm, says his clients range from recently graduated students to individuals earning six figures. They have debts ranging from $1,000 to $50,000, with some reaching $100,000 or more, and the number of people on the higher end of that scale is rising.

"We started to notice it [increasing numbers of people with higher debt] first in B.C. with the reduction of labour with the forest industry, then in Ontario with the layoffs in the auto industry," de Wit says. Lately, he adds, debt loads are increasing in affluent provinces such as Alberta as the global downturn in oil prices drives the oil industry to cut jobs and backburner development projects.

The total debt per Canadian household in 2008 climbed up to 140 per cent of disposable income, according to the Vanier Institute for the Family's 2008 report, released January 22, 2009

Credit can become a trap for the unwary as what was intended to be a short-term debt becomes a long-term financial burden. Because most credit cards are free, people "think that the day of reckoning will not come," says de Wit. But if you're paying bills with your line of credit, can't pay your mortgage or make the minimum credit card payment, welcome to Debtsville.

It sounds simple, but the key is to recognize the spending habits that are driving you into debt and change them.

"The worst thing you can do," says Bai, "is to keep living as you have been living."

Margot's Story

Margot Bai learned frugal living from her family. Her father, nearly 30 years older than her mother and a retired Stelco professional engineer, started up a home-based tax-return business; mom taught piano. Dad's thrifty modus operandi included saving energy, driving one used car, seldom dining out and vacationing in a camper in provincial parks (free then to seniors).

But the heart of the family's control of finances was "the budget." Everyone recorded personal expenses in a budget notebook. Dad added the amounts and compared them to the annual family budget. Margot and her sister were paid an allowance for household chores (teenage Margot discovered she could make more money cleaning houses than flipping burgers). Dad contributed to the Canadian Scholarship Trust Plan. When he died (Bai was 17), to supplement her widow's pension, mom continued teaching piano and rented out the basement of the family home. When Margot moved to Guelph for university, she took a page out of dad's budget book — keeping track of spending, first in longhand and then on a computer.

At the University of Guelph, she met James Bai. After his 1998 graduation, they married and moved to Toronto for James's new job at IBM. Their parents and wedding-gift money covered the wedding expenses, but that didn't stop the couple from cost-cutting. They held the ceremony in an old Baptist church in Guelph, had photos taken at the university's arboretum, and Margot purchased her dress from a wholesaler. Despite a good deal on a honeymoon cruise, the $2,500 it cost went on a line of credit.

Then there was James's $18,000 student loan. The couple moved into a tiny one-bedroom apartment near James's work, and Margot obtained two part-time positions at Young Drivers of Canada. Their dilemma? Buy a home or pay off the student loan.

The house won. They achieved their goal through a mix of planning and self-discipline.

They paid the minimum on the student loan ($262 a month) and went on a saving spree: brown-bag lunches, one used car with basic insurance ($65 a month, plus $80 a month for gas and less than $1,000 a year for maintenance), dial-up internet from James's work ($0), a phone landline only ($40) plus cable TV ($35) and rent ($900). Furniture consisted of wedding presents, a 1980 sound-challenged stereo console from James's parents and items scrounged from the IKEA "as is" section. They did splurge once — on bookcase speakers for $282. Besides TV, entertainment consisted of walking in conservation areas, using the library, playing guitar at church, occasional dining out using coupons, car camping vacations and, courtesy of James' work, discount movie passes and sports activities such as volleyball. Instead of cash, they used a joint credit card to pay their expenses but erased the balance every month. And they kept a budget. Bai says it was tough, and they didn't always agree on cost-cutting, but they had the same goal: their own house.

Bai suggests consumers should try living on cash alone. (White Knight Books)They looked at new home builders just outside Toronto and used the federal Home Buyers' Plan, which allows first-time home owners to put a portion of their RRSPs toward a down payment, tax-free. James deposited $15,000 into RRSPs so he could get a tax refund from his first year's earnings, and 90 days later, he withdrew the RRSP with no penalty to use as a down payment on a home. By the end of 1999, they had paid off their line of credit. With their other thrifty measures and the $15,000 in RRSP money, they put $19,700 (10 per cent) down on a new townhouse. They moved in in February 2000.

"A year and a half after we moved into our new townhouse, we rolled the remaining balance on our student loan into our mortgage," says Margot, who writes freelance stories for MoneySaver Magazine and is a licensed insurance representative for a major insurance company. "It allowed us to get a lower interest rate on the remaining balance on the student loans. The government was charging us around eight per cent while our mortgage was in the five per cent range and later fell to three per cent as rates came down."

Beyond the lattés — assessing and saving Both Bai and de Wit say consumers should assess their situation and be willing to make real concrete changes. "Create a lifestyle that lets you save and not go into debt, [but] that's comfortable to you," suggests Bai.

Look at the big picture, she adds. Can you afford your home's upkeep? What about its location? How are you getting to work? Do you need two cars? Can you carpool? Take public transit? Change in housing and vehicles can generate big savings.

If you've lost your job, don't hide your head in the sand, counsels Bai. "The main thing is, don't be an ostrich," she says. "If your income is going to be interrupted over some time, you'll have to make tough choices. Cut back on discretionary items."

Look at those big items. If you can't afford your home, downsize, rent the basement or a room to a friend, she adds. (See Bai's Top Ten Ways for Big Savings)

Saving Specifics

"Live within your means," says de Wit. "Try to go back to the basics and avoid the non-necessary type of items."

Bai says she loves budgeting "because it makes me feel in control. You use your budget to see how much money is coming in and plan your expenses."

She advocates using software such as Quicken because once organized into accounts, categories, and groups, it is easier to monitor credit cards, bank accounts and cash flow. (For more budget tips, see this story)

Bai also suggests:

• Put store receipts in your wallet, not the purchase bag.
• Try living on cash only.
• Switch regular monthly bills (newspaper subscriptions, ISP) from credit card to automatic bank account withdrawals so "you're paying your bills in real time."
• Cut back on electronic "toys" unless needed for work.
• Use cellphones for practical purposes — call friends from home. Margo's wireless plan costs 25 cents a minute, minimum $11.30 monthly, including tax.
• Take road trips instead of flying while gas prices are low. The Bais are planning one to Myrtle Beach.

"Paying off your debt becomes possible only when you make a true commitment to change your spending habits; the choice is up to you," Bai says.