Does paying down debt prevent you from saving?Dec 12, 2016
Most Canadians have financial goals around saving for the future. A recent survey from online bank Tangerine found that 79 per cent of respondents have established savings goals, whether saving for retirement, saving for emergencies, or for a big vacation. What’s more, 84 per cent of them say they live within their financial means. However, paying down debt remains a roadblock for many; 54 per cent of Canadian parents feel their debt is preventing them from saving.
Among Canadian families, many are concerned they aren’t saving enough for their children’s education, or their own retirement. And while many Canadians manage to live within their means, the survey found that half of us sometimes lose track of the family budget.
Make paying down debt as easy as pie
If you’re struggling to find the right balance for your budget, there are some guidelines that can help you create spending categories. One common spending guideline is the 50/20/30 rule, which suggests that you allocate 50 per cent of your income to essential expenses, 20 per cent to savings and 30 per cent to personal expenses, including discretionary spending. Although this model might not be for everyone, it does prioritize saving, suggesting you save 20 per cent of your monthly income. Debt repayment would fall under essential expenses, and you would have to factor that in along with food, housing, utilities and other bills.
Canadian personal finance expert Gail Vaz-Oxlade offers an alternative budgeting method, which she calls The Life Pie. This pie has five slices, broken down into housing, transportation, saving, debt repayment and “life”—anything that doesn’t fit into the other categories. You can see how she breaks down these categories below:
While the allocations above can be a good starting point, Vaz-Oxlade says they’re not set in stone. On her blog, she notes that savings should not dip below 10 per cent, but debt repayment should not necessarily remain at 15 per cent, either. The important thing is that when you increase spending in one category, to account for a rise in mortgage payments for instance, or to pay down debt, you would then have to cut back in another category. The primary objective is to spend less than you earn.
Seeking help with debt can also help you save
If, like most Canadians, you find that paying down debt is preventing you from saving, there are debt solutions that can help. By combining and reducing your monthly debt payments with a debt consolidation loan, or by filing a consumer proposal, you can fulfill your debt obligations while allocating more toward savings.
A debt consolidation loan allows you to combine multiple personal loan or credit card payments into one monthly payment with a lower interest rate. To get a consolidation loan, you would need to visit your bank or another lender, and some conditions—such as a proof of income or a co-signer—could be required.
A consumer proposal allows you to combine and pay off multiple debts in one monthly payment with the help of a Licensed Insolvency Trustee (LIT). Your LIT will negotiate with your creditors to eliminate interest charges, while often reducing the amount that you will have to repay.
If you’re struggling with debt, either of these solutions could help make your monthly payments more manageable, freeing up additional income that you could put toward savings. An LIT will also be able to explain all of your debt-relief options to help find the best solution that’s right for you and your family.
Has debt affected your ability to save? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt