10 Tips to Help You Eliminate Your Debt
There’s no shame in getting into debt. It can (and does) happen to almost everyone at some point in their lives. There are a million ways to find yourself in debt, but an essential part of getting out of it every time is to make smart financial decisions. If you’re looking for some help getting started, we’ve got ten suggestions for you!
1. Start carrying cash
It’s important to have one, but carrying your credit card everywhere might be hindering your progress as you try to pay down your debt. According to a study by Dunn & Bradstreet, people who shop with credit cards pay 12% to 18% more than those who shop with cash. When you’ve got thousands in credit available to you all the time, it can be difficult to avoid taking advantage of it. Instead, if you leave your credit card at home when you go out shopping, you’ll be forced to spend no more than the amount of cash you take with you that day. This strategy is extremely helpful when going grocery shopping in particular.
2. Determine the best repayment strategy
If you’ve got more than one type of debt to pay, that means you need to be strategic about which one you focus on first. Determine a repayment plan that tackles your most expensive debt first - that’s the one that’s charging you the highest interest rate. Of course, you’ll still need to be paying at least the minimum on everything else you owe on time as well, but if you allocate the largest share of your resources towards your most expensive debt, you’ll minimize the amount you’d otherwise owe in fees and interest charges over time. Once you’ve got the most expensive debt down to a manageable level, you can turn your focus towards the next most expensive and so on.
3. Build an emergency fund
If you’re trying to get out of debt, it’s important that you’re also thinking proactively about how to prevent yourself from getting into debt again in the future. A great way to do so is to start building an emergency fund for yourself. An emergency fund is a pool of savings meant to be used only in the event you face a major, unplanned expense, such as a surprise medical bill or car repair.
When you experience a financial shock but have a well-tended emergency fund to fall back on, you’ll be able to get back on track relatively quickly. Without one, you may be forced to take on high-interest debt in order to make ends meet while you recover. If you’re already trying to pay down debt, this could end up setting you back in a major way.
Instead, think ahead and create a financial safety net for yourself. Most financial experts will advise that you aim to accumulate somewhere between 3 and 6 months of your salary or your expenses in savings to set aside for emergencies. If that seems daunting, try aiming for a smaller amount, like $1000, first and continue to grow your emergency fund from there.
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4. Get organized
A critical part of getting on top of your debt is to know exactly what’s expected of you by your creditors. It’s really important that you know when each of your bill payments are due, how much they’ll be each month, what your interest rate is and so on. Otherwise, it becomes too easy to let payments slip through the cracks and needlessly rack up late fees, making it even more difficult for you to chip away at your debt.
A great strategy is to create a bill payment calendar that lays out everything you owe to creditors, on what days each month, when you get paid and other information that’ll help you plan ahead. The act of creating the calendar and updating it regularly will help keep you on track and ensure that you never get charged another late fee. Plus, because updating it will put the thought of minimizing your debt at the top of your mind, the calendar will likely serve as motivation to spend wisely day-to-day.
5. Pay on time + more than your minimum
This is obvious, but can’t be overstated! Paying your bills late creates a ripple effect of negative consequences for you, including late fees, seeing an increase in your interest rate, a decrease in your credit score and more. If you’re trying to pay off your debt, not paying your creditors on time each month is the opposite of acting in your best interest.
But, beyond just paying on time, you need to be paying much more than your minimum monthly requirement on each bill, if at all possible. Paying just the minimum each month will end up costing you a fortune in interest over time, so if you’re really trying to get out of debt, you’ll need to be very smart about how you spend on non-essentials until you’re in a more stable financial situation. You may find that you need to cut down on extras, like takeout and new clothes, for a bit as you focus as much of your income as you comfortably can towards your repayment plan.
6. Consider major lifestyle changes
Instead of cutting back on a number of smaller things, have you instead considered a big change? Making a large financial cutback, like getting a used vehicle or a smaller home or apartment, can really help you get ahead while you service your debt. This is because opting for a cheaper alternative on these kinds of major items will also reduce any associated costs you may incur (for example, you’re likely to pay less in utilities in an apartment than you will in a house).
This strategy certainly isn’t for everyone, but it’s worth a thought if you’re looking at a debt repayment plan that’ll take you over a year to complete. Just remember that it doesn’t need to be permanent, and the long-term benefits may greatly outweigh the temporary downgrade!
7. Earn some extra income
If you’ve got the time, picking up some form of extra part-time work can make a real dent in your debt. There are plenty of ways to create a second stream of income for yourself that you can do on your own schedule and even from your own home. It’ll inevitably require some kind of time commitment from you, but you can put some or all of what you earn towards your debt until it’s manageable.
8. Track your expenses
Tracking your spending is critical to gain an idea of where your money is really going. When you have clear data on your spending to analyze, you can pinpoint patterns in your spending behaviour, such as repetitive impulse purchases, and make specific changes that’ll help you avoid making the same mistakes in the future. For example, if you see take-out all over your bank history, you could delete all food ordering apps from your phone. You could always re-download them, but that extra step might help to stop you before you spend impulsively next time.
9. Stick to your budget
This seems like an obvious point, but getting out of debt requires you to make a sharp u-turn in the way you manage your money. If mindless spending got you into debt, you’ll need to be disciplined about sticking to a budget to get out of it. According to research by the Government of Canada, Canadians who budget are less likely to fall behind on their financial commitments, less likely to spend more than their monthly income and less likely to need to borrow money or rely on credit between pay days to make ends meet.
Take the time to map out where your money is going over the next month so you have a clear understanding of how much financial flexibility you have once all your non-negotiable expenses (rent, food, transportation and so on) are covered. If you’re used to spending mindlessly without a budget, this figure may surprise you! If you’re tracking your expenses, like suggested above, this process will be much easier to accomplish. Once you’ve got a budget created, you’ve got a road map for how you need to behave to stay within the lines.
10. Take out a consolidation loan
A consolidation loan is a financial product offered by some financial institutions that allows people to consolidate all their consumer debt into one, unified loan and usually with some benefits, such as a lower interest rate or a lower monthly payment. For those who have a large amount of debt, these can be a great repayment tool and a way to help you stay organized.
However, most financial advisors would recommend that you really assess your financial habits and make sure you’ve changed your ways before taking out a consolidation loan. According to a study by a U.S. consolidation bank of all their loans over a number of years, 70% of people who took one out were not financially better for it after they paid off their initial debts because their financial behaviour had not changed. If you’re still spending at a rapid pace or living beyond your means, you’ll need to work on that before you can really make improvements to your situation.
If you’re not quite ready to get a loan, you can always contact your creditors and ensure you’re getting the best deal you can. Every situation is different, but some creditors may be willing to offer you a lower interest rate or a slightly more favourable deal if you speak with them directly.
