October 8, 2021
Debt problems often build slowly, but once you realize you’re struggling, what should you do? We look at the options available here.
Debt is a fact of life for many Canadians, whether it’s a mortgage, credit card balances, a vehicle loan, student debt, or a line of credit. If you have a solid plan to pay off your debt and are regularly contributing to savings, debt might not be a problem for you.
Unfortunately, unexpected events like job loss, divorce, accidents, or serious illness resulting in a loss of income can occur. Any emergency can quickly turn manageable debt into problematic debt. When debt starts to affect your ability to cover essentials or interferes with your quality of life, it’s time to act.
Most Canadians have some level of debt; in fact, Canada has the highest level of household debt per disposable income of all the G7 countries, according to Statistics Canada.
However, there’s a difference between good debt and bad debt. Good debt allows you to reach a goal or puts you in a better financial position; it should be an investment in your future. A mortgage or student loan, for example, is generally a good debt if you can afford the payments.
On the other hand, bad debt is when you purchase items that do not appreciate and do not generate income. Examples of bad debt include car loans, credit card debt and payday loans.
If you’re struggling to save money or find yourself unable to pay off a credit card bill in full, these are signs that your debt may be becoming unmanageable.
This is already happening to many of us. Almost 50% of Canadians are now living paycheque-to-paycheque.
Barely making ends meet isn’t the only sign you may be reaching a breaking point with your debt.
Others include:
All this goes to say that there’s no one common factor that means you’re having debt issues; it often is a buildup of many things.
A budget helps you gain a clear picture of your income and expenses and helps you make informed spending decisions. Ideally, it should show you areas where you can cut back and put more towards your debt repayment.
If you’ve never created a budget and aren’t sure where to begin, it all starts with tracking your income and spending.
You can use a notebook, spreadsheet, or our budget planning tool. Once you have a detailed record, categorize your expenses into groups such as mortgage/rent, utilities, groceries, transportation, entertainment, and savings. This will help you see where your money is going. From there, you can adjust your spending to save money.
One of the best strategies to remove debt is to focus on the higher interest accounts first. It is referred to as the avalanche method.
Often, this means tackling credit card debt first, where interest rates of about 20% are common.
You’ll save money on interest payments by focusing on the debts with high interest first. By directing extra payments toward the highest-interest debt, you reduce the amount you owe faster. As this amount decreases, so does the amount of interest you owe, which speeds up your overall debt repayment.
Once the debt with the highest interest is paid off, you’ll have more money to put towards your other debts.
The snowball method is an alternative to the avalanche method. It’s meant to help people build debt repayment momentum by focusing on the smallest debts first and using that momentum to pay off larger debts.
Instead of prioritizing interest rates, this method focuses on paying off your smaller debts quickly. This gives you once the smallest debt is paid off, the money that was going toward it can be used to pay off the next smallest debt.
This approach provides quick wins, making it easier to stay motivated. However, it often costs more in interest over time compared to the avalanche method.
If you’re looking for a way to access credit without going overboard, then a secured credit card may be the answer.
A secured credit card works exactly like a normal credit card. You can make purchases with it and you are billed each month for the amount you spend on it, but your limit is set by a deposit amount.
If you deposit $500, for example, then that is your limit on the card.
Failing to pay the bills for the card will mean losing your deposit amount.
Secured credit cards provide a controlled way to manage spending, as your credit limit is equal to the deposit you put down.
This helps prevent overspending and accumulating further debt, they’re also a great way to build up your credit score and rating.
If you find yourself overwhelmed by debt and struggling to manage your financial situation, there is help. A Licensed Insolvency Trustee can provide you with professional guidance and options tailored to your specific circumstances.
The first consultation is entirely free, and there is no obligation to sign anything.
October 8, 2021
Debt problems often build slowly, but once you realize you’re struggling, what should you do? We look at the options available here.
