What would your life look like if you were able to pay off your debt?
For most Canadians, debt is a fact of life. The average Canadian owes about $1.70 for every dollar of income he or she earns per year, after taxes. As intimidating at this sounds, it is important to not become overwhelmed. Like weight loss or getting fit, many consumers are looking for a quick fix to help them to get out of debt and repair their credit. Like physical health, your financial health takes time. A little every day goes a long way and a plan can increase your success.
Make a plan to pay off your debt, starting with small steps.
Step 1: Review Your Current Financial Status
The first step in trying to tackle your debt is getting your financial house in order. Complete a full assessment of where you are at financially. Look at everything from your pay cheque to your debts, regular expenses and even your insurances. A net worth statement can help to determine what are your assets and liabilities.
Step 2: Determine How You Got There
Your credit card balances did not just all of sudden explode, although we do like to think that. It is important to reflect on where you’ve been, so you can make sure you don’t go back to the same place. With credit card debt, it tends to start small. Maybe it could be a result of not budgeting or using your credit card a little too often then growing to a point that if your income shifted or a big expense came along, you would be unable to maneuver through the storm. Recognizing the early warning signs can make all the difference. Take time to reflect on what your triggers are.
Step 3: Decide How Your Money Will Be Spent
Now that you know where you are and how you got there, the next step is to plan for the future. If you want to pay down your debt, you need to make a plan. A budget will break down how you spend your money. This will show you how much money you have to go towards paying off your debt. If you are new to budgeting, your budget may not balance the first time you try. You might have to look for places where you can spend less and make adjustments along the way.
Step 4: Pay Down Your Debt
Now that you’ve got your budget determined, you know how much money you have available to pay down your debt. Using an online debt repayment calculator can help you develop a monthly payment plan. These tools can even show you the order in which you should pay off the debts, and how long it will take. Do not be too aggressive at first- meaning make your payments realistic and affordable. You do not want to find yourself in the position of incurring more debt because you ran out of money by the end of the month. As your balances dwindle and you see success, you will find that as you are finishing paying off one debt you are freeing up additional money for the next debt you will tackle.
Step 5: Rebuild Your Credit
When not managed properly, debt can lead to bad credit. Often, we are asked how to rebuild from bad credit. Once again, there is no quick fix. The truth is, once you have your financial house in order, the things that you need to rebuild your credit are likely in place. By prioritizing your debt repayment and making your payments on time you are building your credit.
Just like getting fit or losing weight, having a coach can really help. A not-for-profit credit counsellor can be that coach and cheerleader as you pay off your debt. They may even have suggestions to help you do it faster! Visit Credit Counselling Canada to locate a counsellor near you.
Submitted by: Tamara Kelly, Credit Counsellor, Credit Counselling Services of Atlantic Canada