It’s hard to feel in control of your life when you’re drowning in debt. Nobody likes to be scrambling to pay the bills every month and dreading unexpected expenses. Why not stop living paycheque to paycheque and get out of debt?
Of course, building a budget and becoming free isn’t simple. If it were, almost one third of the people in Canada  wouldn’t be currently struggling to stretch each paycheque. In fact, Canadian household debt in recently hit a new record high . Many Canadians are doing their best to stretch each dollar, but debt can be a crushing weight on any household. Getting out from under that debt can be simpler than you’d think.
Build a Budget
To get out of debt, you’re going to need to make a budget. A good budget isn’t a restrictive punishment on your spending, it’s simply a spending plan designed to make the most of your income. To make a spending plan, however, you must first know how you’re currently spending your money.
Start by carefully examining all your bank account statements and credit cards. Use the tools your accounts provide to track the types of spending on your various accounts. This can be an emotional and even shocking process when you tally all the numbers up. What seemed like a little bit of a treat here or there adds up quickly.
Once you have your spending outlined in black and white, consider what needs to be spent every month and areas where you have some flexibility to cut back. Build a budget that works for you. One that you know immediately you won’t stick to isn’t going to help.
Reduce Credit Card Payments
Credit card spending in Canada is up. Canadians are spending more on their credit cards, and that can translate into problems for your new budget. Credit cards are an expensive way to borrow money, and if you aren’t paying the full balance off every month, you’re setting yourself up for problems down the road.
Having large balances on your credit cards can lead to drops in your credit score. The minimum payments will barely touch the principal of what you owe, creating a cycle of debt. Fortunately, you have some options on how to reduce the amount of money you’re spending on your credit cards every month.
Installment loans, like a personal loan, will let you pay off multiple smaller credit cards. You apply for a personal loan through your bank or a Canadian online lender. Even if you have bad credit, you may still be able to borrow enough money to pay off more expensive debt. Many online lenders don’t heavily consider or even use your credit score as criteria for a personal loan if you can demonstrate your ability to repay the amounts.
Once you have your debt consolidation loan, simply pay off the balances of your smaller cards with the proceeds. Close or avoid using those accounts in the future while you make the installment payments on the personal loan instead. Often the payment amount on a debt consolidation loan is less per month than the combined credit card minimum payments. Plus, at the end of the payment term on an installment loan, you’ll have paid off all the debt you owe.
Prioritize Your Debt Payments
Getting out of debt can be as simple as making a good spending plan and sticking to it. Using resources like personal loans to reduce and remove credit card payments can free up extra cash every month. Don’t use that extra cash to inflate a non-necessary part of your budget. Instead, use the extra money you’re saving by having paid off one debt to increase payments on another.
Perhaps you’ve set up a debt consolidation loan to pay off three small credit cards. Now you pay $100 less per month on that debt thanks to the installment loan. So instead of using that $100 to treat yourself on a Friday night, roll it right into another, larger debt that you haven’t paid off yet. By increasing the payment on your next debt, you’ll pay it off faster.
How do you know which debts to pay off first? Consider the interest rates. The higher the interest rate on a credit card or loan, the more expensive it is. Pay off the most expensive debts first, perhaps using installment loans with a lower interest rate. Once that debt is paid, use the amount you were spending on it each month to increase your payment to the next most expensive debts on your list until all debts are paid off and you’re able to build a comfortable nest egg of savings.
Set Yourself Up for Success
Managing a budget can be tricky. When you’re working hard for your money every day, it’s tempting to treat yourself with it. A bit here or there doesn’t seem like it will hurt a budget, but it absolutely can. Trying to stay on track? Here are a few tips for success:
- Use apps to help you track your spending. There are many different budgeting apps online, many of which tie directly into your bank accounts so you can see your spending in real time and stay on track.
- Build a bonus into your budget. If you know that depriving yourself of all fun spending will be a disaster, just build a bit of fun into the budget. A small amount of “fun” money can go a long way to making a budget more comfortable for everyone.
- Keep track of your credit score. As you pay off your debts, your credit score will improve, which is a fun way to measure your success. Paying off debts lowers the debt-to-equity ratio measured by the two credit bureaus in Canada, and your score will climb with each big debt payment you make.
- Stop using the credit cards. If you’ve run up big balances on your credit cards, you won’t be able to pay down debt if you’re still using them. Consider using your debit card rather than a credit card to help control your spending and let your debt payments do their work.
- Create some savings right away. As exciting as paying down debt can be, there will be emergencies that can throw your plan off track if you wind up having to use the card again. Consider putting a bit of extra cash in an account or envelope as an inevitable emergency savings so that you don’t lose traction on debt payments later.