At Creditaid, we talk with people every day who are struggling with debt. Over time, you start to see the same patterns — and the same solutions. Here’s some of what we’ve learned.
- The ‘ostrich’ strategy is for the birds. Ignoring calls and letters, especially ones that involve legal threats, isn’t a great strategy. I’ve seen people ignore court summons, resulting in liens against their property and wage garnishment. Its much easier to reach an agreement to repay debts before this happens, as a lot more options are open to you. Even more importantly, the longer you leave debts festering, the more the interest will snowball.
Speaking with a credit counsellor sooner rather than later opens up far more options — and takes a weight off your shoulders. A professional can outline your options, develop a game plan, and help you avoid the stress of mounting interest and legal complications.
2. Stop giving away money to the banks. There are many bank accounts available for low ($5) or no fees- my local credit union waives fees if there is a regular payroll deposit. Most people I see need the money more than the banks do, so shop around and keep the fees in your pocket. If you’re thinking it’s not a big deal, that $15–17 a month adds up to about $200 a year. I bet you could think of some great things to do with $200 — and “giving it away to the bank” almost certainly wouldn’t make the list!
3. Challenge your spending. Look at where your money goes and ask yourself if you’re getting good value from it. One of the key points in budgeting is a spending analysis and reset- see my full article here.
When you’re buying items, especially non-essential ones, ask yourself: how long will I have to work to pay for this? Am I happy working X hours for it? Is it good value- will I be using it in a few years? If it’s a purchase that will incur interest, be sure to factor that into your thinking too. You’ll find that a lot of purchases drop off when you make a conscious choice about them. These can add up over time like the bank charges, every little bit helps.
As a bonus, you’ll find you genuinely appreciate what you do buy — and you’ll need less storage space too.
4. Sell off unused items. Whether it’s stuff you’ve been paying to store or an old car sitting in the driveway because it needs repairs, if you’re not actively using — or even missing — something, you can probably do without it. Selling it off means you’re no longer paying to keep it (storage, insurance, etc.) and you can put the money generated toward repaying debts or building your savings.
5. Pay off debt strategically. Make sure your money is working hard for you — allocate funds to paying off debt as a priority. Interest can be a real killer, so aim to pay off debts as quickly as you can. Your money works hardest when directed at the highest interest rate first.
If your debt is a challenge and you’re struggling to get the principal down, speaking with a professional like Creditaid can make a real difference. Credit counselling will typically eliminate or dramatically reduce interest on debts, which can change the whole picture.
6. Then, pay yourself through saving. Once you have a handle on debt repayment, turn your attention to savings — short-term emergency funds first, then long-term funds. Emergency funds are critical because they reduce or eliminate the need to take on new debt when life throws you a curveball. After you have a reasonable emergency fund in place, switch focus to long-term savings. It may not be the most exciting step, but it’s where you get to harness the power of compound interest working in your favour.
When deciding between debt repayment and savings, your money works hardest when directed at the highest interest rate first. Typically this means repaying debt before saving, since interest on debt is usually higher than returns on a TFSA. That said, if you’re already in a repayment plan like credit counselling or a consumer proposal, extra money will often work best going into savings.
Its always best to consider your unique circumstances and what makes you comfortable rather than blindly following a set of rules. The ultimate goal is to challenge yourself and make conscious, deliberate choices about how you use your money.
You work hard to earn it- make sure it works just as hard for you!