Take stock of your debts
Start by making a complete list of your debts along with the related interest rate: mortgage, car loan, student loan, credit cards, unpaid bills, line of credit, include everything. This will give you a good idea of where you stand and what debts you need to repay.
Set a budget
By setting a budget, you’ll see where your money goes and, especially, which expenses can be cut back. You can then calculate how much you can use to repay your debts.
Set a repayment strategy
There are several debt repayment strategies. The best approach is to choose the one that will keep you motivated the longest.
The “snowball” method
With this method, you make the minimum payment on all but one of your debts and then start repaying the one with the lowest balance. Once you’ve settled one debt, move on to the next one and so on. This method is interesting since it gives you a feeling of accomplishment every time you eliminate a debt. However, over the long term, you’ll be paying more interest.
The “avalanche” method
This consists in tackling accounts with the highest interest rate. This will often be credit cards since the interest rate on credit cards can be as much as 30%. For example, let’ say you have a $6,000 car loan at 2.99% interest, a $5,000 credit card balance at 19.99% and a line of credit at 3.5%. You would start by paying down the credit card balance, then the line of credit, then the car loan. This is a very efficient method, because by paying down the higher interest rate balance, you can get out of debt faster. However, your progress is slower than with the snowball method. So, it can be harder to stay motivated.
Check out our credit card tool to see how long it will take to pay off your credit card debt.
Cut down your expenses
Naturally, by cutting down your expenses, you’ll have more money available to repay your debts. Get a handle on your subscriptions of all kinds by renegotiating the ones you need and dropping the others (telecom services, gym, online movies, insurance…). With inflation, grocery costs have gone up considerably. Check the flyers before you go shopping, choose house brands, eat less meat, etc. Also, consider reducing your alcohol consumption.
Think second hand
If you need to buy something, when possible, consider getting it second hand instead of new. Sell clothing and items you don’t use or need on special sites.
Find a part-time job
There is a labour shortage in all businesses right now. Even if it’s only a temporary job, the extra money will help.
Spend windfalls wisely
Did you just get a tax refund or a rebate cheque? Take the opportunity to apply it to one of your debts!
Consolidate your debts
It might make sense to consolidate all your debts into one loan at a lower interest rate. For example, you could transfer your credit card balances to your home equity line of credit to eliminate the higher interest and pay off your debts faster. Talk to your financial institution about this.
Lastly, make sure you review your budget regularly if your situation changes. Of course, some debts such as a mortgage will take longer to pay off than others. But if you’ve taken the right steps to pay them off gradually, they shouldn’t prevent you from saving for the future.
If you still can’t see the light at the end of the tunnel despite all your efforts, don’t hesitate to contact one of our financial recovery counsellors who can help you eliminate your debts.
