You might’ve heard that personal debt is the largest financial concern facing Canadians in 2020. This is the 10th year running that debt repayment has topped CIBC’s list of financial priorities.
Canadians otherwise expect the costs of household goods to continue to rise. And, if you’re like many others, you’re concerned that you lack the knowledge to build a sound financial plan. One that balances saving for the future with paying down debt.
While this article won’t replace the advice of a financial planner, we have put together some tips and tricks for keeping your sanity while paying down your personal debt.
Tip 1: Audit Your Finances
You’re more likely to succeed in reducing your personal debt if you adopt debt-reduction strategies that contemplate your unique situation, motivations, and spending habits. To do so, you need to know what your spending habits are.
You should track your spending over the course of a month or two to really understand where your money is going. Don’t forget to do a stocktake of all your larger annual expenses, like ICBC insurance, car repairs and maintenance, special occasions, and property taxes.
This article outlines the best free expense tracking apps in 2020. Check it out if you think you could benefit from some help tracking your spending or keeping yourself honest.
The goal of the exercise is to know exactly where your money is going so you can get a complete picture of your income to expenditure and debt ratios.
Tip 2: Take Control of Your Spending
Understanding where your money goes is the first step towards taking control of your finances. From there, you’ll need to work out where you can cut your spending in order to free up cash to pay down your debt.
The best way to implement changes depends on your unique traits. Here are some of the most popular methods used to promote thoughtful spending habits:
- Use cash instead of credit cards
- Only give yourself access to the money you need
- Set short term financial goals
- Buy in stores (not online)
- Walk away from larger purchases and sleep on it
- Avoid buy now, pay later offers.
Whatever you choose to do, you need to be certain that your income is greater than your monthly spending if you’re going to reduce your debt. If you don’t have the money, don’t take on further debt to purchase unnecessary items.
Tip 3: Tackle Your Credit Card Debt
Not all debts are created equal. Simply paying the bare minimum off your credit cards will see you paying much more than you need to in the long run.
To get on top of your credit card debt, you should create a spreadsheet with all your balances and the interest rates and minimum repayments associated with them.
Then assess how you can tackle that debt the fastest, with the cash you’ve freed up from tip 2 in mind.
Personal Debt Reduction Using the Snowball Method
Many people achieve success with the snowball method of debt reduction.
This involves paying off the debts with the smallest balance first until that debt is completely paid off. You then move onto the second-smallest debt, and so on.
Studies have shown that the psychological benefits of tackling the smaller debts set you up to succeed in the long run.
Consolidate Your Personal Debt
Consolidating your debt can help you pay less interest. It means getting a line of credit or loan (with a lower interest rate than your credit card) and rolling all your repayments into one account.
Essentially, you’ll use the loan to pay off your existing credit card debt. Then, you make one monthly repayment to pay off that loan.
Remember, this only works if the debt facility you use to pay off your other debts has a lower interest rate than your credit cards. Be sure to read all the terms and conditions before doing this.
Take Advantage of Balance Transfer Offers
Many credit card providers offer interest-free introductory periods on balance transfers. If you expect to repay that debt within that introductory period, this can be a great way to avoid interest payments in the short term.
Again, be sure you understand exactly what it is you’re signing up for. You don’t want it to cost you more in the long run.
Tip 4: Think Outside the Box
There are plenty of ways you can avoid spending money if you think outside the box. While it might seem impossible to make do without the items you’re spending money on, there are so many creative ways you can cut spending.
Consider these tricks:
- Buy second-hand clothing and goods
- Take the bus (car upkeep is expensive!)
- Cancel subscription services and see what you can get for free instead
- Exercise at home/outdoors instead of paying for a gym membership
- Take advantage of coupons
- Make your own household items, like laundry powder and surface spray
- Use what you’ve already got for entertainment
- Trade or rent instead of buying new.
Tip 5: Ensure You’re Insured
Insurance plays a crucial role in protecting you in case of an accident or unforeseeable event. While insurance does have initial upfront costs, it can save you heartache and financial ruin.
There are plenty of different types of insurance and the policies you need will vary depending on your circumstances. Essentially, you should protect yourself against the risk of loss that you can’t afford.
Your house, your contents, your car, and personal liability insurance are typically essential at a bare minimum.
Bonus Tip: See a Financial Planner at Osoyoos Credit Union
The financial planners at Osoyoos Credit Union are here to help you create a robust debt management plan. We will work to help you decrease your debt while maximizing your savings and investments – and protecting your current assets.