Strategies to Manage Debt

November 13, 2024

What is debt? Debt is money owed to a person or business, which has a contracted time frame for repayment with an interest rate charged to the borrower. Many Canadians carry debt to finance larger purchases such as a home, vehicle, or education. Credit cards are often used to make everyday purchases more convenient. The ideal situation would be to plan, save and pay for all items needed. This may not always be practical, so money is borrowed to make some purchases. The challenge with debt is that the amount owed can become significant and payments can be difficult to keep up with. Here are some tips to consider for debt management.

Understand Your Debt

It’s important to have a clear picture of what you owe as this is the first step in creating your action plan for debt management and repayment. Make a list of everything you owe including your mortgage, car and student loans, credit card and line of credit balances and any buy now, pay later plans. Include the dollar amounts owed, minimum payments required, and the interest rate being charged. Most public debt is reported to the credit bureau where they assess debt usage. Requesting your credit bureau report will allow you to review your debt and determine your credit score.

Make the Minimum Payments

A crucial area of managing your debt is paying minimum balances on time. Missing payment due dates can create penalties, additional interest charges and could have a negative impact on your credit score. All credit balances and payments are used to build your credit history which calculates your credit score. This means debt management in the present can have a major impact on any borrowing requests you may have in the future. Setting up minimum payments as preauthorized debits or as pre-scheduled payments in your online banking can help ensure these payments are made on time.

Debt Consolidation

Debt consolidation is combining several loans into one loan balance. Completing a debt consolidation loan is beneficial if it has a lower interest rate than your current debt and has a lower monthly payment than all your debt put together. This will simplify how many payments you are obligated to make in a month. Research various lending choices to find the lowest rate and the loan with the best options to meet your financial circumstances.

Debt Avalanche vs Debt Snowball

There are several possibilities to paying down existing debt, but two most common ways are Debt Avalanche and Debt Snowball. Both options include paying the minimum payment on all outstanding balances. Debt Avalanche prioritizes interest rates. This means making extra payments on the highest rate loan first. When paid off, move on to the debt with the next highest interest rate. Debt Snowball prioritizes debt value. This involves concentrating on making additional payments on the smallest loan balance. Once that debt is paid off, take the money put towards that account and roll it onto the next smallest debt owed. Sticking with either of these strategies will create momentum and enable you to see your debt decrease.

Review Your Budget

Assessing your budget is an essential step in paying down your debt, avoiding accumulating more debt and saving for your financial goals. This includes calculating your net income which is your take home pay after all deductions have been subtracted from your earned income. Create a list of all expenses. Note all your non-discretionary expenses, which typically are needs, in a separate column from discretionary expenses, which usually are wants. The discretionary expense column is the part of the budget with the most flexibility and possibility for reducing spending to redirect those funds to other priorities such as debt repayment. Understanding your financial situation will help balance your expenses within your income and will assist with guiding your spending to reach your financial goals.

Avoid Accumulating More Debt

You are working on paying down your existing debt, so it is important to work on keeping away from accumulating debt in other areas. Some ways to help stay away from building more debt include:

1. Opening a chequing and a savings account to separate your everyday spending money (chequing account) from your savings (savings account). This will help to avoid dipping into savings for everyday spending.
2. Staying away from making impulse purchases. Before heading out on a shopping trip make a list of items required and stick to the list. If you are tempted to make a purchase that is not on your list, take 24 hours to consider and decide if it is needed.
3. Save for your financial goals in advance. This can help you avoid borrowing to make purchases. Saving a little bit every month can go a long way in the future.
4. Review your existing budget to evaluate if adjustments can be made by reducing expenses or increasing your income. Consider the possibility of taking on more work to earn additional money to put towards your debt.
5. Refrain from applying for or accepting new credit cards. This may lead to the temptation of using this additional credit and creating more debt. Use your credit cards wisely and only spend what is in your budget to be paid off in the month.
6. Pay with debit vs credit cards. This will avoid spending money that you do not have.
7. Shop for sales and comparison shop to reduce your spending on everyday items.

Credit Counselling

Credit counselling may be an option for people who feel overburdened by their debt and are having difficulty managing their financial obligations. A credit counselling agency can provide one-on-one counselling to create a personalized plan to address your specific credit situation. Group counselling is available and can provide tips on topics such as budgeting, money, and debt management. Both options have the goal of avoiding bankruptcy.

When looking for help it is important to do your own research to find trustworthy agencies, qualified counsellors and to understand what services are being offered along with any associated costs. Be cautious, if what’s being offered sounds too good to be true, it probably is.

A credit counsellor may suggest a debt management plan which is an informal proposal to your creditors made on your behalf which consolidates all your debt into one monthly payment and in some cases, it may eliminate any additional interest accumulation. In most cases you will still have to pay the full outstanding balances owing. To find more information, visit the Government of Canada’s website Canada.ca and search under credit counselling.

You may want to seek out the assistance of a professional financial advisor who can review your financial and creditor situation with you. This could include assessing the possibility of qualifying for a debt consolidation loan or options for lower interest rates on existing credit cards, lines of credit and loans to allow for more of the monthly payment to be applied to the principal balance vs interest or if amortization periods can be extended to lower monthly payments.

At times, we may all find ourselves needing to borrow money. The key is to make certain the repayment of the loan is manageable. This includes ensuring the required payments can be reasonably made when taking into consideration your income and other financial responsibilities as well as the required time frame for full repayment of the amount owing. If you do find yourself owing money, the most essential aspect to being debt free is to stick with your debt reduction strategy. This may be difficult at times but will pay off in the long run by helping to meet all your personal and financial goals.

FirstOntario Credit Union in partnership with Aviso Wealth has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This should be considered as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. The views expressed are those of the writer and not necessarily those of Aviso Wealth.