July 18, 2024
Getting out of debt on your own is possible. There are lots of strategies you can use to understand your own finances, and tools to help you improve your finances on your own.
We know people struggling financially have trouble asking for help, often out of a fear of being judged or because they’re worried about how it will impact their ability to access credit in the future.
It’s true that not all debt problems need professional help. Sometimes it’s possible to regain control of your finances on your own.
It’s important to know when you can tackle your finances on your own and when you should seek professional advice. We’re going to look at ways to tell the difference between the two.
Living paycheque-to-paycheque is a reality for about half (47%) of Canadians, according to a Leger poll from 2023.
If you’re living paycheque-to-paycheque, it isn’t necessarily a sign that you’re in financial distress yet, but it does mean you are likely living in a precarious situation. Without having any emergency savings, even a relatively small financial emergency can turn your situation upside down.
Canadians are carrying extraordinarily high debt loads right now. The country has the highest level of household debt to disposable income of any G7 country right now, according to Statistics Canada. For every dollar Canadians have in disposable income, they have $1.85 in debt.
This highlights the urgent need for individuals to assess their financial situations and take proactive steps to manage and reduce their debt to avoid falling into financial distress.
Credit cards are one of, if not the most, common reasons for Canadians’ debt. Overextending credit card usage can pose significant dangers to your financial well-being. Maxing out a credit card or carrying high balances from month to month means paying high interest fees.
It can also negatively affect your credit score. Credit utilization, which is the ratio of your credit card balances to your credit limits, is a significant factor in determining your credit score.
You should not use more than 30% of your credit limit at once, according to Equifax, one of Canada’s largest credit bureaus. This means if the limit on your credit card is $5,000, you should not have more than a $1,500 balance on your card at a time.
Having a high debt-to-income ratio is another sign you’re in financial trouble. Your debt-to-income ratio shows what percent of your monthly income goes toward paying debts.
To find out your debt-to-income ratio, simply add up all your monthly payments (mortgage, rent, groceries, utilities, credit card bills, etc.) and divide it by your monthly income. Our handy Debt to income calculator can help you do it.
If you’re spending more than 40% of your income on debt, then it’s a sign that your situation needs to be addressed.
We all know that saving money is key to our financial health. Doing a savings rate assessment will help you see what percentage of your income you save each month or year.
To find yours:
Add all the income you received in a certain period (monthly or yearly).
Add up all the money you have saved during the same period.
Divide your total savings by your total income for the same period and multiply by 100 to get a percentage.
Let’s imagine you made $3,000 a month and saved $300.
300 ÷ 3,000 =.10
.010 x 100 = 10%
In this case, you would be saving 10% of your income each month.
Saving at least 10% of your income is considered a good starting point, but saving anything is better than spending more than you’re earning.
If you find you’re spending more than you’re earning, then there are some steps you can take.
Budgeting is key to turning any financial issues around. By tracking your income and expenses, you can make informed decisions about how to spend and where to cut back and save.
There are many budgets for people to choose from, and there is no one-size-fits-all budget. We’ve broken down the pros and cons of five different budgets here.
Budgets should evolve with your spending. What you might budget for one month, you may need to cut back on the next. That’s why it’s important to review your budget regularly.
Credit cards are a large reason so many Canadians have debt. If you have a high credit card balance or are struggling to keep on top of your bills, it’s best to stop using it all together.
Instead, stick to debit and cash. This way, you’ll see the money leave your account each time you make a purchase, meaning you’ll have to truly consider each transaction.
It also means you’ll avoid interest payments on each purchase as well.
Reducing how much you use your credit card will also allow you to catch up on your bills. Remember, you should only be utilizing 30% of your overall credit limit at the most. Of course, it's even better to lower it below that percentage.
The avalanche method is a debt repayment strategy that focuses on paying off debts with the highest interest rates first. High-interest debt is a massive burden on your overall finances. It means paying significantly more for purchases in the long run. Debt from credit cards, payday loans, and online alternative lenders are some common forms of high-interest debt.
By prioritizing the repayment of high-interest debts, you can save money by reducing the overall interest you would have paid long-term.
Lowering your high-interest debt can also free up more disposable income, giving you more flexibility in managing your budget.
There’s an alternative to the avalanche method you can try as well.
The snowball method is a debt repayment strategy that focuses on paying off the smallest debts first, regardless of their interest rates. The idea behind this method is to gain momentum and motivation by experiencing early wins.
By paying off your smaller debts, you’ll be motivated to tackle your larger debts.
Unlike the avalanche method, which prioritizes debts based on interest rates, the snowball method places emphasis on the psychological aspect of debt repayment. By celebrating each payoff, you can experience a sense of progress and achievement, which can help you stay committed to the process.
The issue with this method is that it often costs more in the long run than the avalanche method. The snowball method often results in paying more in interest.
The avalanche method is generally the better option when you’re trying to remove debt and pay the lowest amount in total.
Debt consolidation can make paying multiple debts easier and save you money.
Debt consolidation involves combining multiple debts into a single monthly payment. This monthly payment often has a lower interest rate than that of a standard credit card, meaning if you consolidate multiple high-interest debts, you’ll save money on interest and have lower monthly payments than if you kept these bills separate.
By streamlining your debts into a single payment, you can also avoid the stress and confusion of managing multiple due dates and varying interest rates.
If you find yourself struggling to get out of debt on your own, it can be an overwhelming and stressful experience. Speaking to a Licensed Insolvency Trustee can provide you with a fresh perspective on your situation and help you understand the most viable options available to you.
Our Licensed Insolvency Trustees at BDO can work with you to develop a personalized strategy that can help alleviate your financial burden. Licensed Insolvency Trustees are regulated by the federal government and are bound to act in your best interest and being neutral. The first consultation is free.
July 18, 2024
Getting out of debt on your own is possible. There are lots of strategies you can use to understand your own finances, and tools to help you improve your finances on your own.
