Battling the debt monster
How to pay off what you owe efficiently and effectively
Debt is a four-letter word that can induce shudders in even the most stoic of Canadians.
While some debt — such as student loans and mortgages — is often inevitable, there are times when people find themselves overwhelmed by the money they owe.
But never fear: there are ways to efficiently pay off your loans, and save money while you’re at it. Scott Hannah, president and CEO of the Credit Counsel- ling Society, is well versed in how to be financially savvy when it comes to managing debt.
Here are some of his top tips on how to not waste time — or money — when it comes to paying off what you owe. Set a goal and prioritize: The first thing to do when you’re facing debt is set your priorities, Hannah says. This process includes listing all your debts, how much you owe, what the interest rate is, what the monthly payment rate is and so on. This is the information that will help build a practical and efficient repayment plan.
“You want to have a really clear idea how much you owe and what your monthly responsibilities are, and surprisingly most people don’t do that,” Hannah said.
Hannah notes it’s also important to keep payment goals realistic.
“It takes time to get into debt and it takes time to get out of debt, so there needs to be some balance.” Hide those credit cards: One of Hannah’s top tips for paying off debt is limiting credit card use to avoid owing even more.
“If you’re serious about getting out of debt, you need to remove the temptation entirely,” he says, noting hiding or even cutting up your cards is a wise idea. “Getting rid of the temptation makes it a lot easier.” Tighten up your budget: If you’re going to get out of debt, it means you need to trim some of your expenses to free up cash — and a budget can help you do this.
“It’s been stated by a lot of experts that those who use a budget to manage all their expenses typically save 10 to 15 per cent more than people who don’t,” Hannah says. “So try using a budget or a spending plan to manage all your expenses and debt repayment.”
This doesn’t mean adapting a frugal, puritan lifestyle — but it does mean taking a cold, hard look at all the household expenses you incur and where you can make cuts so you have money to deal with your debt. Pick a method: If you’re paying off multiple types of debt, it’s a good idea to pick a payment method and stick with it. Hannah recommends two plans: the avalanche plan, where you pay all fixed debt payments per month while focusing the majority of extra funds on the amount with the highest rate of interest, and the snowball method, where you pay your regular fixed expense debt items but focus the most attention on the debt with the smallest balance first.
“The snowball method gives you a real sense of accomplishment by paying off a small debt first,” he says. “While the avalanche method is an efficient way of paying off or paying down the most expensive piece of debt you have first, and then focusing on the next most expensive.” Start saving: It may seem like all your extra money should go toward paying off debt, but Hannah says it’s critical to establish a monthly savings plan for unexpected expenses that will pop up.
“It surprises the heck out of people, but you need to have cash on hand to manage unexpected expenses that crop up,” Hannah says. “If you don’t put money aside, you revert back to using your credit cards again, and that’s frustrating and people often give up.” Ask for help: If you’re struggling to pay off your debt, Hannah recommends asking for professional help — but be selective about who you listen to.
“The longer you delay the process the more interest you’re going to pay, and the fewer choices you’re going to have in terms of how you resolve it,” Hannah says. “It’s amazing how many people think the situation is hopeless, only to find out there really is a budget that works and a plan to get them out of debt in a reasonable amount of time — they just need some initial help first.”
Do your homework before making an appointment. The organization should be licensed, have accredited financial counsellors, and you should have a clear understanding on fees charged, if any, upfront before agreeing to meet with them.
Any professional organization you choose to go to for help should be licensed and have accredited financial counsellors