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Canadians (both young and old) are carrying more debt than ever before with recent data showing that the average household owes $1.70 for every $1 of income.
The numbers are not encouraging especially when you consider that the average non-mortgage debt stands at $29,312 per person, including $4,154 in average credit card balances.
So, what are the options if you want to pay off your debts and start saving for retirement? Here are 8 strategies that can help you get your finances back on track quickly.
1. Audit your finances
This is your starting point for getting out of debt. You need to know how much you owe by listing your debt and the interest rate (fees) payable on each one. Determine how much money you owe in total. Next, list your income and compute the total amount you earn every month.
2. Create a budget
Create a monthly spending plan that takes your expenses and income into consideration. There is no way you are going to pay off debt if your monthly expenses exceed your income. Identify areas where you can cut your expenses and determine exactly how much money goes towards paying off debt.
A popular budgeting plan is the 50/30/20 budget that allocates 50% of your income to essential spending (mortgage, food, utilities, minimum debt payments), 30% to wants (entertainment, vacation, fashion), and 20% to savings, investment, and other debt repayments.
An essential part of budgeting is to reduce your spending e.g. carry your lunch from home, cut cable, cancel unused subscriptions, etc. Track where your money goes every month with budgeting apps like Mint and YNAB.
3. Pay more than the minimum payments
It will take you forever to pay off your credit card balance when you only make minimum payments.
For example, if you only pay the minimum payment of $150 on a $5,000 credit card balance at 20%, it will take you about 20 years to become debt-free. On the other hand, if you make an extra $100 payment every month, you save almost $4,500 in interest and become debt-free 17 years earlier!*
This principle applies to other debt as well. If you recently bought a home in Canada, you can pay off your mortgage early and save thousands of dollars utilizing this same strategy.
*Using the FCAC’s Credit Card Payment Calculator.
4. Pay off high-interest debt first
There are two main debt repayment strategies – debt snowball and debt avalanche.
The debt snowball method involves paying off your smallest debt first, while debt avalanche focuses on paying off your debt with the highest interest rate. The debt avalanche strategy saves you more money and you pay off your debt faster.
5. Knock off credit card spending
If you find it difficult to be disciplined with paying back your credit card balances on time, consider cutting them up and spending cash. People tend to spend less money using cash as they can feel the impact on their wallet immediately.
You can also try a no-spend challenge where you pick a day of the week, or an entire week or month, and avoid spending any money on non-essentials.
6. Find a lower rate
Ask your credit card company if they can offer you a lower interest rate on your debt. Alternatively, consolidate your debts using a 0% balance transfer card or a lower-rate debt consolidation loan.
Take advantage of the lower rates and aim to pay off your outstanding balance as soon as possible.
7. Earn cash back on your spending
Save money and cut your expenses by earning cash back on the regular purchases you have to make every month.
For example, use money-saving apps like Checkout 51, Caddle, and Drop to earn cash back on your grocery shopping. Use Ebates to earn cash back when you shop online and earn rewards when you pay your utility bills by using the Paytm Canada app.
8. Increase your income
There is a limit to how much you can cut back your monthly expenses. Give yourself some breathing room by monetizing your spare time with some of these legitimate side hustles.
You can rent out your spare room, deliver groceries in your area, become a freelance writer, teach English online, start a blog, drive for Uber or Lyft, and more. There are many opportunities to earn extra cash in today’s gig economy.
Getting out of debt can be challenging. Start by taking note of how much you owe and then create a realistic plan for paying it off. Celebrate your successes along the way and ensure you get back on track quickly when you fail. It will take grit and hard work, however, you can become debt free!
About the Author
Enoch is a Canadian personal finance blogger over at SavvyNewCanadians.com. He is a veterinarian by day and an avid blogger by night, providing Canadians with savvy tips on savings, investing, retirement planning, debt management, and everything money.
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