How to Pay Off Your Debt
Let’s talk about the elephant in the room that gets swept under the rug all too often when discussing our finances: personal debt. Our bills for borrowing can suddenly rack up as we establish new lines of credit and loans that are all too easily accessible via mail offers or pre-approvals. A 2017 poll conducted by Ipsos noted that Canadians with any amount of debt averaged $15,473 of consumer debt1. That is a scary number considering the recent spike in interest rates2.
Debt is unavoidable - it is a helping hand that assists us achieve those adulthood milestones - but it must also be managed correctly. A recent poll by insolvency firm MNP indicated that 47% of Canadians feel they will need to go into further debt in order to pay off their expenses this year3. So, what better way to avoid the downward spiral of borrowing money by paying it off as quickly as possible! We look at a few tips that will put you in the right frame of mind to take control of your personal finances.
Pay off more than the minimum
Settling on paying the minimum requirement on your bills will keep you firmly entrenched in debt. Have you ever looked at your credit card statement and noticed it will take 16.5 years to pay it off if you only pay the monthly minimum? Ouch! Therefore, if you have excess cash, consider knocking off a chunk of your balance on your credit cards you are essentially “saving an average of 10% to 29% per year in interest” 4.
Avalanche vs. snowball method
Both of these methods are great frameworks to guide your debt repayment strategies, however their value differs depending on your personal situation.
The snowball method insists that Canadians to list their debts from smallest balance to highest, allocate the minimum payment amount to each and then put all leftover cash towards the smallest debt until it is fully paid off. From there, individuals can gain momentum as they ‘snowball’ towards their next payment. Seeing these debts disappear one by one is a huge motivator!
The avalanche method takes the opposite approach, instead focusing all excess money towards the balance with the highest interest rates. Although this method may feel more disheartening, you are in fact paying less interest overall by tackling the heavy hitters first. Choose which approach feels right for you - ultimately whichever motivates you more will serve individuals best in the long run.
Set up an emergency fund
Establishing an emergency fund is essential for numerous reasons. Firstly, from a practicality standpoint, having money available amidst an unexpected occurrence allows you to make pressing financial decisions freely without worrying about other areas of your life. Secondly, having this fund handy prevents you from dipping into your balance dedicated towards paying off debt! If you are forced to take money that was destined to pay off your student loan, it can be a major psychological drawback; nobody wants to feel like they are behind schedule. An emergency fund doesn’t have to be a massive sum of money just enough to be flexible when life inevitably happens.
Log your costs & plan accordingly
Day to day spending can be a habit that puts us in considerable financial trouble. Certain things that we deem as a want may wriggle themselves into our daily purchases (hey there morning oatmeal muffin and coffee!) without being truly essential. Having a numerical value that records monthly expenses staring at you sheds light on exactly where your money is going! With this information we can then make cost-cutting decisions: maybe less frequent but larger grocery visits, or one less coffee break per week. Hey, maybe your log shows that you are right on track and saving as much as possible!
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2023 Advisor Websites.