Are you aware that the average Canadian owes almost $1.77 for every dollar of disposable income? That’s a huge amount of debt! If you are one of the many people who are struggling with this, do not lose hope. With a little bit of effort on your part, it is possible to take control of your finances and manage your debt quite easily. So, where do you begin? What are those strategies and how do you implement them? Let’s take a closer look and solve this problem together.
Understanding Your Current Debt Situation
How much do you know about your current debt situation? Do you have an idea of every single penny you owe or is it only an approximation?
Knowing your debt situation can help you formulate a strategy to clear your debts. You need to at least know the open amount for each debt, who you owe and the rate of interest associated with each debt.
You can’t simply pay your bills every month and cross your fingers. You have to make honest efforts to understand your debts in order to formulate a plan to pay them off effectively.
Sometimes, debt can be perceived as a small problem, however it is much more profound than most people tend to think. Indeed, it can turn into a recipe for disaster.
Create a Comprehensive Budget Plan
With a perfect assessment on your current debt status, the next phase is to create a well-crafted budget plan. This will become your financial guide when working towards a debt free future.
Putting up an effective budget plan requires consideration of the following three steps:
- Identify your wealth To calculate the amount net income you bring home every month is your starting point.
- Document your shifts Set money aside to cover necessities first and put a moat around your personal wants.
- Set achievable goals You might want to consider put savings aside for those emergencies, or look towards spending less, but always remember to set the bar low at first.
Pay Off Your Highest Interest Debts First
While you are sticking to your budget plan, do not forget to allocate some funds to working off high-interest debts. These debts accumulate quickest because of the interest rates charged and ignoring them can lead to debt by a snowball effect.
Working these debts down will greatly relieve your overall debt balance. Begin with listing all your debts and remember to take note of the associated interest rate. The ones with the highest rates are your top priority.
Make sure to try and contribute more than the minimum payment each month. This is crucial as it saves you money in the long run since you’ll have to pay less interest. It will also save you money overall if you pay more towards the balance every month.
Understanding Debt Consolidation Approaches
Once you’ve dealt with the high-interest debts, you could still be facing several monthly obligations which are tough to keep track of.
That is where debt consolidation comes in. It is something that could make your life easier and possibly even align most of your interest rates.
So what’re three options that you can try out for debt consolidation?
- Debt Consolidation Loans: A type of loan where you take one big loan to pay off all your existing loans. This way, you only have to make a single monthly payment.
- Balance Transfers: Transferring existing debts onto a credit card that has lower, or even no, interest rates is a great way to save.
- Home Equity Loans: This option is quite straightforward, you can use your house equity to consolidate your debts if you are already a home owner.
Finding the one that suits you best will save you a lot of time and headaches.
How to Create an Emergency Savings Fund
Regardless of how much you focus on paying down your debt, creating an emergency savings fund is essential. It helps when unexpected situations such as job loss or medical emergencies arrive. Put aside a small amount of cash each month towards your savings. Once you meet your goals, increase it progressively.
Conclusion
So, you thought that debt management means keeping all your expenses to a bare minimum? It’s much broader than that. It’s about managing your finances effectively. Figure out what debts you have to tackle, prioritize, and carefully budget for them. Never be afraid to consolidate when it can help take some of the burden off your shoulders. And that emergency fund? Consider it a necessity. It’s funny how these steps to manage your debt can actually give you a step towards financial independence. Debt management in Canada is not that intimidating, it’s a matter of strategy. So strategize smartly.