Four ways to get out of debt faster
In December 2016, Canadians owed $569 billion in consumer debt like credit cards and lines of credit — and that’s not counting mortgages.*
Debt, especially revolving debt (like credit card debt), can be difficult to get on top of, as evident by the fact that 46 per cent of Canadians carry a credit card balance every month.
With some planning, it is possible to break the debt cycle and get on the path to financial freedom.
Use “found money” to pay it down
Almost everyone will encounter “found money” throughout the year; this can be any money outside of your regular paycheque, like a tax refund, bonus at work, gifted money, etc. Although it’s tempting to use this “extra” money for something fun, using it toward your debt is a great opportunity to make a good dent in it. If you have multiple debt products (like credit cards, lines of credit, etc.) make sure you put money toward the product with the highest interest rate first.
Create a budget
This might sound like an obvious solution, but half of Canadians are living paycheque to paycheque without much insight into where their money is going.
The first step to making a budget is knowing how you’re spending now. Go through your finances for the past three months, categorizing your spending (ie. rent/mortgage payments, groceries, dining out, etc.). You might be surprised to see where your money’s going. After you’ve done that, you can start creating your ideal budget in each of the categories, including how much you’ll be allocating to your debt every month — hopefully along with a savings budget for something that will add value to your life (like a down payment or travel fund).
When you have your budget done, ideally you should have your fixed costs (bill payments, rent/mortgage payments, savings) automatically coming out of your bank account, with the rest in a ‘spending account’ (like the recently launched MogoCard). That way, you won’t blow the budget.
Get a side hustle
Choosing to use a side gig to bring in extra funds is increasingly becoming a reality for Canadians, especially Millennials. Think about what skill you could monetize, whether it’s a freelance writing/design job you could do outside of work hours, dogwalking on the weekends or moonlighting as a server.
Here’s the catch: You could be tempted to use the extra money for other things in your life. So ensure you’re disciplined and stay focused on transferring your extra pay directly toward your debt.
Consolidate it
Sometimes, the best way to get on track with getting out of debt is to consolidate it. If you have revolving debt, like credit card debt, you might find yourself stuck in what feels like an endless cycle of debt. Revolving credit comes in the form of a credit card or line of credit that lets you immediately re-borrow what you paid back on principal. And many revolving credit products allow you to pay back only the interest.
Credit cards in particular are psychologically proven to make it easy and convenient for you to stay in debt. In fact, people spend an average of 12-18 per cent more when making purchases using a credit card. In reality, the interest rate you have on a credit card might not make a difference in your spending habits; whether you get a five per cent or a 30 per cent rate, you’re likely to shop and borrow in the same way. It’s the perfect recipe for ongoing debt.
If you’re caught in this cycle, a personal installment loan can be a great option. Unlike credit card debt, an installment loan has a specific term and requires you to pay back interest and principal in every payment, which means you have a set deadline for paying it off and getting out of debt.
For example: If you have a credit card with $10,000 owing at a 19.9 per cent interest rate, and you’re only making the two per cent minimum payment each month, it’ll take you 83 years to pay it off. Maybe you’ll be able to be diligent and pay it off over a year, but if you’ve struggled with the revolving debt cycle, temptation is likely to make that revolving credit look appealing again. If you were to consolidate that same $10,000 debt by paying it off with an installment loan, you could be out of debt in as little as five years.**
Rather than only focusing on interest rates, we should consider the type of credit product we’re getting and the total cost of borrowing instead.
*credit.bankofcanada.ca/ householdcredit
** based on a 5.9 per cent interest rate
Learn more about consolidating your debt at www.mogo.ca/mogo-money