Six ways to deal with debt
Manage your money so you can start saving again
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.