How to make paying down debt a priority in 2017Jan 09, 2017
An annual CIBC poll has found that paying down debt is the top financial priority for Canadians in 2017, for the seventh year in a row. Not only that, but the number of Canadians who chose debt repayment as their top priority (28 per cent) is the highest it’s been since The Great Recession in 2010.
One encouraging sign is that 70 per cent of those who answered the CIBC poll did not take on any new debt in the past 12 months. This is despite the national household debt hitting a new record high of 166.9 per cent in the third quarter of 2016. However, while the poll shows that many didn’t add to their debt in 2016, it also illustrates that Canadians might not be taking the necessary steps to pay down their debt in the new year.
Reducing spending can help you reach your goals
Whether your top financial priority is paying off debt, keeping up with bills, saving for retirement or something else, there are two basic concepts that can help you reach your goal: increase earnings or reduce spending. Now, an earnings increase is certainly not impossible in 2017—for instance, if you’re able to find a new job after being laid off last year, you will likely have more money to put toward your financial goals.
Boosting your earnings isn’t always feasible, however, which makes reducing spending the preferred approach. By taking a closer look at your household budget, you should be able to find areas where you can cut back on non-essentials and put that money toward paying down debt. But here’s where the CIBC poll shows a couple of key concerns: only 26 per cent of respondents have a household budget, and just 52 per cent plan on reducing non-essential spending.
How to prioritize needs over wants
First of all, if you do not currently have a household budget, creating one is the first step toward reaching your financial goals. There are several great online budget calculators that can help you track all of your expenses, including one from the Financial Consumer Agency of Canada (FCAC). If you’re not sure about how much to budget for certain expenses, try tracking everything you spend for a month or two in order to get a better idea.
Once you have broken down your spending, you can then take a closer look at each spending category. Essential items like rent, car payments or hydro bills likely cannot be reduced—unless you take a major step like moving or leasing a less-expensive vehicle. However, when spending on entertainment, such as restaurants, movies or concert tickets, you should be able to reduce spending by setting a cap on your monthly purchases.
This is why it’s important to distinguish between needs and wants. A need is something that’s required or essential, while a want is something you desire or wish for…but could probably live without. Housing, clothing, food and transportation are all essentials—but when it comes to buying designer clothes or eating at restaurants, those are wants, not needs, and they can certainly be trimmed, if not eliminated from your budget in order to pay down debt.
Why more Canadians should be saving for emergencies
As Licensed Insolvency Trustees, we are encouraged to see that Canadians have prioritized paying down debt as their top financial goal once again in 2017. However, if you look way down the list of goals in the CIBC poll results, you’ll find that establishing or building an emergency fund comes in at the bottom, tied with “Other,” “I don’t know” and, interestingly enough, “Saving for my children’s education.” Only three per cent of Canadians say they’ll make emergency savings their top financial goal for 2017, which is down slightly from last year. But while it might not be the top priority, Canadians should still consider adding to their emergency funds in 2017.
Setting enough money aside for emergencies could actually help you eliminate debt, by allowing you to avoid adding to your debt load. Oftentimes, when the unexpected occurs—a job loss, medical emergency or even a natural disaster—many Canadians find themselves relying on credit to cover unforeseen expenses. But by having an emergency fund, with enough money to cover three to six months’ expenses, you’ll be financially prepared for the unexpected and able to avoid emergency debt.
What is your top financial priority for 2017? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt