Six ways to deal with debt

Man­age your money so you can start sav­ing again

Metro Canada (Toronto) - - VIEWS - Michelle Wil­liams

If you’re like many Cana­di­ans, your cur­rent fi­nan­cial strat­egy is less about fund­ing your fu­ture re­tire­ment and more about deal­ing with debt. Even if you’re earn­ing a good liv­ing, fis­cal chal­lenges like in­ter­minable stu­dent loans, mount­ing credit-card bills and mas­sive mort­gage pay­ments can take a huge chunk of your earn­ings. But there are ways to man­age your money that help you pay down debt while putting you on the path to sav­ing:

1. De­fine your long-term goals

“Ba­si­cally, it’s start­ing at the end­ing point,” says Kurt Rosen­treter, a se­nior fi­nan­cial ad­vi­sor at Man­ulife Se­cu­ri­ties and char­tered ac­coun­tant in Toronto. “Likely, your goals in­clude pay­ing off your debt, ac­cu­mu­lat­ing enough wealth to re­tire on and per­haps help­ing your kids to­ward fi­nan­cial in­de­pen­dence. By defin­ing those goals, you have a fo­cus, some­thing you should never lose track of.”

Rosen­treter sug­gests go­ing back ev­ery few years to track how you’re do­ing at meet­ing your long-term goals.

2. Ex­am­ine your spend­ing

“Go back a year and look at your bank and credit- card state­ments to de­ter­mine where your money is go­ing,” Rosen­treter says. “On a spread­sheet, group your ex­penses into cat­e­gories.”

He rec­om­mends four group­ings: es­sen­tial costs (such as food, shel­ter, util­i­ties), vari­able costs (things you need but could spend less on or put off to later), dis­cre­tionary costs (restau­rant meals, va­ca­tions, en­ter­tain­ment) and lux­ury costs (in­dul­gent items, such as ex­pen­sive cloth­ing, high­priced cars, etc.).

3. Change the way you spend

Track­ing how you spend can be en­light­en­ing and help­ful in start­ing you on the road to chang­ing your money habits.

“The big­gest im­ped­i­ment to pay­ing debt is your spend­ing be­hav­iour. Many of the ex­penses in the first two groups are dif­fi­cult to elim­i­nate, but you can cer­tainly change the way you spend in groups three and four, the dis­cre­tionary ar­eas.”

4. Don’t ig­nore the small stuff

It’s not just the big- ticket items that con­trib­ute to debt load. When scan­ning your credit-card state­ments, it may be sur­pris­ing how many of the credit charges are in­ci­den­tal.

“Fewer movies, fewer lat­tes, fewer lunches out. Skip­ping all th­ese lit­tle treats will add up big over time.”

5. Pay off the high- in­ter­est debt first

“Credit-card in­ter­est is usu­ally high. Your first pri­or­ity should be to pay down the debt that has the high­est rate of in­ter­est.”

You may wish to move some or all of your credit-card debt to a line of credit or some other lower-in­ter­est ve­hi­cle to save on in­ter­est while you’re work­ing down your debt.

6. If nec­es­sary, make big changes

If you still can’t chip away at your debt, maybe you need big­ger changes to your life­style. Ex­am­ine things like your home (is it too much house for you to carry?), the food you buy (can you shop at a less ex­pen­sive store?) or the way you get around (do you re­ally need a car?) Fol­low­ing this plan will help you save, but how much — and over how long?

“It’s dif­fi­cult to put an amount or time frame around debt re­pay­ment, but you should have a debt-free date as part of your goal plan­ning. It will be much more dif­fi­cult for a lower-in­come earner to save large amounts of money over smaller pe­ri­ods of time than some­one who has more dis­pos­able in­come,” says Rosen­treter.

Set rea­son­able time­lines and re­al­is­tic amounts so you can max­i­mize your chances of suc­cess. Look on­line for a debt re­pay­ment cal­cu­la­tor tool or seek the ad­vice of a fi­nan­cial ex­pert to help you set rea­son­able goals you can man­age.

Debt man­age­ment in­volves ex­am­in­ing your spend­ing habits and mak­ing nec­es­sary changes.

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