A Penny Spent is a Penny Owed: 10 Ways to Pay Off Your Debt
When it comes to debt, it’s always in your best interest to get a jumpstart toward paying it off, if you want to avoid being in debt for years to come. Easier said than done, we know. Everyone’s financial situation is different, just as everyone’s level of debt is. While some borrowers only have to deal with a moderate credit card bill every month, many are currently trying to pay off thousands of dollars in high-interest debt, car loans, and, mortgages. Whatever your debt case might look like, fear not, because there are ways of alleviating it. Not all of these solutions are easy or quick, but they are within the realm of possibility, so stick with us and we’ll explain them below.
Click here to look at some loans and programs that will help you get out of debt.
1. Creating a Budget/Spending Plan
Simple and effective, the first step to take when you’re in debt or are looking to prevent it, is to track your spending. When you have a steady job and you’re trying to live life to its fullest, it can be all too easy to spend the money you have on whatever you want. This is a mistake that anyone can make, one that can lead down the path to serious debt far quicker than you would imagine.
What is the 50/20/30 Rule of Budgeting? Find out here.
So, even though your debt might be getting out of hand, one way of organizing both your finances and your headspace is to get yourself a notebook or budgeting app, then list everything that you spend money on during an average month. While it’s simple enough to do with your regular expenses (housing costs, groceries, phone/internet bill, etc.), it’s actually the unplanned expenses that catch most people off guard. Eating at expensive restaurants, buying unnecessary consumer goods, these are just some of the easiest ways to rack up a whopper credit card bill. So, start by listing all these items, then create a reasonable budget by slowly eliminating the costs that aren’t essential. You’ll soon notice just how much you’ve been spending on things you can actually live without. Once you’ve started to cut back on some of those expenses, you can dedicate a portion (or all of) the money you’ve been saving to paying down your debt.
2. Whenever Possible, Pay More Than The Minimum Payment
For credit cards, in particular, making only the minimum monthly payments can ruin your finances. When you have a lot of debt spread across multiple cards, but not enough money in your bank account to pay it all at once, just keeping up with the minimum payments can be tempting. After all, at least you would be avoiding a penalty-free, right? This is a bad idea. While you might not notice it at first, the interest that accumulates with every unpaid amount can add up to way more than you anticipated, and you won’t realize it until it’s too late.
In fact, credit card companies are now required to provide information on all statements about how long it will take to pay off that specific balance if the cardholder only pays the minimum payment. For example, if you have a $5,000 balance on one high-interest card and you’re only meeting the minimum every month, it’s going to take you approximately 65 years and $22,000 in interest to pay it off in full. When you consider all the things you can do in your lifetime with that extra $22,000, you’ll start singing a different tune. So, the best thing to do for any revolving credit product with a minimum monthly payment is to really consider what will happen if you don’t pay your balance in full and on time.
Did you know that bad credit can affect all aspects of your life? Take a look at this infographic for more information.
3. Don’t Rely Too Much On Credit
Speaking of credit cards, here’s our next suggestion. Whenever you can, use cash to pay for your general expenses, rather than relying on credit. While this principle refers mostly to your cards, it can also be applied to other products, such as lines of credit and personal loans. Of course, larger expenses like mortgages and car loans are not always possible to pay for in cash. If you’re going on vacation, chances are you won’t want to pay for everything using your debit card. However, the basic idea stands.
When you’re earning a reasonable income and your credit score is in good standing, you’ll have little problem getting approved for whatever credit products you want. This attitude is how borrowers end up with 3-4 different credit cards and too many loans to keep track of. True, some credit cards come with perks that supposedly make them worthwhile. Then again, the more credit you use, the more you’ll be charged in interest and ultimately, the higher your debt will grow. So, not only will it benefit you to cancel some of those unnecessary credit products (make sure you hold onto the ones you’ve had for the longest period of time), but it will also work in your favour to use cash for smaller expenses, such as groceries and consumer goods.
4. Tackle Your Largest Debts First
Ever hated eating your vegetables? Here’s a technique. Plug your nose, eat your vegetables first and save the chicken nuggets for last. Believe it or not, the same principle works for paying off your debt. Though your bank accounts might look a bit meager for a while, it will certainly benefit you to pay off your largest debts first and save the small ones for later. Single out the debts with the highest interest rates and throw every spare dollar at them. Once your larger debts have been paid, you’ll be relieved to only have your smaller, less worrisome debts left on your plate.
For even more debt repayment advice, check out this infographic.
5. Live Below Your Means
Once again, when you’re making a decent income, it can be tempting to flaunt it by spending it on things you don’t actually need. While buying clothes won’t necessarily break your bank account, buying very expensive clothes might. Just because you’re earning money, doesn’t mean you should start spending it without any thought.
Let’s say you need to look presentable for your job by dressing in business attire. While the idea of living below your means might seem aggravating in that department, it doesn’t mean you have to show up to work in a cheap suit and a velcro tie. However, it might work out better for you if you don’t have a bunch of different suits in your closet that you don’t use. When it comes to groceries, unless you’re extremely picky, buying the no-name items, even if they’re only a little bit cheaper than the brand-names, can save you money in the long run. If you’re living in a big house or fancy apartment/condo, but if you’re thousands of dollars in debt, it can make a huge difference to downsize to a space that’s more reasonably priced. Though it might pain you, it’s better than paying for a dwelling you can’t afford and going bankrupt.
6. Ask For a Pay Raise or Get a Second Job
If you’re already working full time, it can be hard on your body and mind to take on extra hours. However, if you’re in massive debt, forcing yourself to do so might wind up being a quicker solution than most. If you can’t find a second conventional job, you might even be able to work from home, especially if you have access to a computer. In fact, plenty of small businesses are started online nowadays. If you’re a good writer, try typing up freelance articles for news or pop culture blogs. Even if you’re only making a few extra dollars on the side, when it comes to paying down debt, everything helps. You can also store that extra money away in an emergency fund.
Want to know a few side hustles that won’t ruin your weekend? Read this.
If the idea of having a second job still isn’t appealing, you can also try negotiating with your current employer for a pay raise. If you’ve been working hard enough, a pay bump will be well deserved and any good employer should recognize that.
7. Cut Down On Car Costs
What’s another place where people dump a lot of cash? Their car. With gas prices, insurance, licensing fees, maintenance and repairs, any car, whether it’s used or new, will cost you money every day you drive it. That being said, we definitely understand that many people need access to a car. After all, it’s not always easy to walk home with a week’s worth of groceries. However, it is possible to reduce your car costs here and there, saving you a few dollars on the back end. Though it might be slightly inconvenient, if public transport is an option for you, consider taking it from time to time. If the price of a monthly transit pass works out to be cheaper than a tank of gas that only lasts a week or two, you’ll definitely see your finances improving quickly.
Want to know how much car you can realistically afford? Click here.
If you do absolutely need a car, it’s a good idea to buy a certified pre-owned vehicle, rather than buying or leasing a brand new one. While most used cars are bound to have more mechanical issues than new ones, any maintenance is likely going to be cheaper, especially if you get a warranty from a legitimate dealership. If the option is available, you can even try carpooling to the office with a coworker. Take turns driving and ask for some gas money from time to time. If you’re living in a home with multiple vehicles, think about selling one and sharing the other.
Read this to find out how to finance a used car in Canada.
8. Get a Debt Consolidation Loan
As we mentioned, when you’re trying to pay down debt, it’s best not to rely too much on credit. However, if your debt load is becoming too much for you to handle, getting a debt consolidation loan is another common solution. These can be acquired through primary lenders, like banks, credit unions, and other traditional financial institutions. When you have multiple debts to keep track of, it can cause you to miss payments, which ultimately leads to a chain reaction that can damage the health of your credit.
Made a late payment? Click here to learn how you can rebuild your credit.
With this solution, your lender would grant you one big loan to pay off all your smaller ones. You can then pay back the loan through single monthly installments, making it easier to manage. To qualify, you’ll have to go through the same approval process you would for a typical loan, wherein your credit, employment record, assets, and income will be reviewed to determine your creditworthiness. Debt consolidation loans can be advantageous because they generally come with lower interest rates than other credit products. Most borrowers are debt-free in 2-5 years. However, not all types of debts are covered under a consolidation loan. Borrowers must also have certain specifications, such as a good credit score, a sufficient income. For those reasons, it’s best to speak to your lender or financial advisor before you decide on this option.
For more information and other methods of debt consolidation, look here.
9. Watch Out For Expensive Banking Fees
Another simple way of saving money is by making sure that you’re paying as little as possible when it comes to your banking fees. Unfortunately, there are few financial institutions that offer free banking. However, most banks will offer a variety of account types, some that cost more than others. Upon opening a chequing account at your bank, it’s possible that they automatically gave you an all-inclusive package that offers certain benefits, but costs $25-30 per month.
So, if you don’t think you need the extra perks, such as the free safety-deposit box or unlimited transactions, talk to one of the bank managers about setting up a cheaper plan. Another way to reduce your banking costs is to only take out money from your bank’s ATM machines. If you only have a certain amount of transactions per month but need cash regularly, simply take out a few more dollars with each withdrawal, and avoid all outside ATM machines, most of which cost a minimum of $2.00 per use.
Check out this infographic to learn all about the true cost of borrowing.
10. Refinance Your Mortgage
For all the homeowners out there, one less conventional but effective way of dealing with your other debts, particularly your credit card bills, is by refinancing your mortgage. To do so, you’ll have to start by breaking your current mortgage contract and applying for another, with the hopes that you’ll be able to secure a lower interest rate for your mortgage payments. This solution works in two ways.
Click here for our refinance appraisal checklist.
The first is by obtaining that lower interest rate. With it, you’ll potentially be saving hundreds of dollars a year, money that you can use to slowly pay down debt. Remember, every penny helps. However, not all homeowners should choose this method, because it comes with certain fees, such as a prepayment penalty for breaking a mortgage contract early. So, if you’re thinking about this solution, but the penalty fees outweigh the potential money you would be saving, it might be best to hold off for now, at least until your mortgage term ends and your contract is up for renewal.
What’s the difference between a mortgage term and a mortgage amortization? Find out here.
The second way of paying off debt with a mortgage refinance is by accessing your available home equity, then using a HELOC (home equity line of credit). Home equity refers to a home’s market value, weighed against the balance that you, as the homeowner, have left to pay on your mortgage. The more of the mortgage you manage to pay, the more home equity you’ll build. Once you have at least 20% home equity, you can apply for a HELOC through your lender. You can borrow from it as you need, pay your other debts, then only have one monthly payment to keep up with. Be wary, however, that this method should only be used if you’re already making a decent income and have a good amount of savings. Since you’ll be charged interest for your HELOC, you’ll need to finance those costs somehow. In other words, if you pay off your other debts, but don’t have enough money to cover your HELOC, you might end up in debt all over again.
Read this for more information about borrowing using your home equity.
Get Advice From a Credit Counselor
The final spot on our list, while it’s not technically a debt solution, is something anyone can do if necessary. Contact a licensed, non-profit credit counselor and discuss a way out of your debt for good. When it comes to paying what you owe, it doesn’t always help to talk to your lenders. They are businesses and can only provide you with so much advice. While you should inform your lender right away if you think you’re in danger of defaulting, credit counselors are there to you get the best financial knowledge.
Take a look here to read about credit and debt counselling.
Credit counselors deal with debt cases for a living and many of them don’t charge for their services. If your debt situation is so far gone that you may need to start a debt management program, file for a consumer proposal, or declare bankruptcy, they should even be able to put you in touch with a licensed insolvency trustee. While DMPs, consumer proposals, and bankruptcies should only be considered when your debt has become completely unmanageable, they are viable options. A credit counselor can help decide which one will work best for your particular situation.