Its an austere fact in Canada that our personal level of indebtedness is amongst the highest in the world. In other words, Statistics Canada said, household debt as a percentage of disposable income rose to 170.7 per cent in the third quarter, up from 162.8 per cent in the second quarter of 2020. The ratio was still below the $1.81 seen in the fourth quarter of 2019. The average Canadian now owes $73,532, according to Equifax Canada, up 2.2% from last year. Its says total consumer debt increased 2.8 per cent to $1.99 trillion in the second quarter amid a strong recovery in the housing market. Not a pretty picture by any stretch of the imagination.
So, I felt it is a good time of year to replace those empty new year resolutions with some practical advice on engaging, reducing and managing our personal debt in the next three blog posts. Debt is a bad word that most do not want to talk about. But it is one of the first hurdles we must cross in the development of our financial life plans.
It’s nearly impossible to live debt-free these days. Most of us don’t have ready cash to pay for our cars, homes or education costs. Though holding some amount of debt isn’t necessarily a bad thing. A mortgage, for example, may replace the rent you would otherwise have to pay; a student loan can help you earn a college degree that may lead to a rewarding career.
But what about taking on debt for things you don’t need and can’t afford — like that expensive watch or handbag, Caribbean cruise or a new car? Consider the discussion of personal debt above. That kind of debt can put a real drain on your wallet, damage relationships and limit your ability to reach more important goals like saving for retirement.
Here are suggestions for how to manage debt and think through what’s best for you and your money. Rather than lamenting you have too much debt, imagine how much better your life would be with less.
Come clean about spending
Debt can pile up for all kinds of reasons. Paying it down can be pretty straightforward but for that to happen you have to be honest about your spending. Gather all your credit card, car and student loans, and other debt information. Then, make a note of the balance, interest rate, due date, the minimum payment and how long it’ll take to pay off the balance for each.
It will help you put your spending into perspective so you can start developing a plan to get yourself in better financial shape. If you’re married or have a partner, ask your loved one to do the same so you can work together at reducing your debt.
Give it a positive spin
Rather than lamenting you have too much debt, imagine how much better your life would be with less. Then set specific financial goals with a focus on debt reduction. For example, “I plan to pay off my total debt of $15,000 in three years. I plan to do this by putting $420 toward my credit card bills every month and by not taking on any new credit until my current bills are totally paid off.”
Automate your payment plan
Put as many of your credit card and/or loan payments on auto-pay from your checking or savings account as you can. That way, you’ll be sure to avoid any sky-high late fees.
Prioritize your debt reduction
If you can’t pay all your debts each month, prioritize what you can pay. Give high priority to debts secured by a house or car, necessities like utilities and debts you can’t discharge, including student loans and unpaid taxes. Then tackle unsecured debt like credit cards.
Generally speaking, you’ll want to identify the credit card with the highest interest rate and pay that one off first. That way, you’ll save yourself money by avoiding unnecessary and excessive interest rate charges over the life of your debt.
Also, see if you can obtain a lower interest rate by calling your credit card company. Often, they will reduce your interest rate to keep you from transferring your credit card balance to a competitor. If that doesn’t work, it may make sense to transfer your balance to a credit card with a substantially lower interest rate. But first make sure you understand if a balance-transfer fee applies and what the interest rate will be when the introductory rate ends, typically a year to 18 months after the first billing cycle closes.
Once you pay off the first card, use the “snowball effect” to keep going. Take every dollar you were putting toward the first card’s payment and add it to what you were paying on the card with the next highest interest rate. When that card is paid off, do the same thing with the next card, and so on. Going forward, commit to paying every balance in full each month and living within or below your means.
Pay as your go
This is an important one but may be necessary. I am a big fan of debit card to help track your expenses. It may seem old fashioned, but it may be necessary to avoid paying with plastic and start using cash or a debit card instead. Sure, it will take a little extra planning to make sure you have sufficient cash in your wallet, but doing so can help you clearly connect to where your money goes each day. It may also help you avoid impulse purchases and other unhealthy spending.
Make more of your income
Many people believe they don’t have enough money to put toward debt reduction. A spending calculator or a simple budget can help you find the fat in your spending and redirect those funds to reducing your debt more quickly.
Ask yourself: Do I really need a latte every morning, special cell phone services, premium cable or that new designer shirt? Sticking to a budget isn’t easy, but if you find ways to save small amounts and add them together, you’ll be able to pay off your debt that much faster.
Don’t lose sight of retirement
Paying off debt isn’t a free pass to put your retirement savings on hold, especially if your RRSP at work offers a company match. Even if you’re paying a high interest rate on your credit card debt, the 50 percent match on your retirement savings makes your retirement plan contribution the better deal.
The bottomline
Most important, if you find you owe more than you can manage, don’t be reluctant to get help. Having an experienced financial professional to guide you through the process of eliminating your debt can also make a difference. We have the tools and connections to assist our clients in this endeavour. As I said before, sometimes it is a necessary hurdle to cross in straightening our your finances as we prepare a financial life plan.
The stress and depression associated with financial challenges in our lives can be very damaging and difficult to handle or overcome. The benefit of working with a financial life planner is that we can act as a coach and mentor in tackling the debt demon. Sometimes we can even provide that kick in the shins needed to boost the motivation necessary. Its true that some people do not know how to approach the problem and try to avoid it. Hence the necessity of good advice in Keeping Life Current.
