In theory, paying off debt seems simple: stop any extra spending, and put more than the minimum payment towards the debt payment each month. Anyone who’s ever carried over a credit card balance or taken out a loan, knows it’s not that easy. Not even close.
Debt and debt repayment is a very personal thing, and can be an emotional, stressful, and potentially shameful experience.
But it doesn’t have to be. To help you start making more significant progress on your debt repayment journey, we’ve put together 5 tips:
- Create a budget
Before you begin putting money towards your debts, you need to figure out how much money you actually have to allocate for debt repayment. Putting $500 on your credit card each month is not helpful if you then need to charge $300 before the month is over.
To do this, you’ll need to create a budget. Look at how much money you take home after tax, figure out what you need for expenses and savings, and how much you can put towards debt. There are many apps that can help you navigate budgeting, and the Government of Canada has a Budget Planning tool as well.
- Pay More than the Minimum Payment
If you only pay the minimum amount required each month, you’ll find you are going nowhere fast. Often the monthly interest that accumulates is only slightly less than the minimum payment, meaning a $100 minimum payment may be virtually canceled out by a $90 interest charge.
- Decide between the snowball and avalanche methods of debt repayment
If you have more than one debt or loan, decide which debt repayment method is better for you. The avalanche method involves paying off the debt with the highest interest rate first, while putting the minimum payments on the others. Once the first debt is paid off, you focus your attention on the next highest interest rate. This results in you paying less interest overall and paying all of your debts off faster.
However, if you are motivated by seeing results, you can pay off the smallest debt first. This may take slightly longer in the long run, but many are motivated to keep going by seeing positive change. This method is called the snowball method.
The best way, is the way that works best for you.
- Look into Debt Consolidation
Some banks may be able to take all of your debts and combine them. Often this comes with a lower interest rate, and having only one number to focus on can make it an easier journey, versus having to manage multiple accounts and multiple payments.
- Follow the 50/30/20 Rule
Of course, no ‘rule’ is a hard and fast rule when it comes to finances, but it’s generally accepted that budgets should be split into:
- 50% for needs and essential expenses
- 30% for wants
- 20% for savings and debt repayment
While it is just a guideline, it can help you determine if you are living within your means or if you need to make some more substantial changes to your living expenses in order to come out ahead.
If you’re struggling with paying off debt, no matter what the amount is, it’s important to know you’re not alone. At Everest Financial, it’s our mission to help you simplify your finances. If you’re looking for support with Debt Management, book a free consultation call today.