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Managing debts is no doubt a stressful endeavor. Debts can get out of control quickly especially if it’s not managed properly. Maybe it started out when you acquired student loans and quickly piled up from there or you were too excited when you got your first credit card and got a little to happy go lucky with spending. In any case, the first step to debt management is the willingness to take it head on.
Some of the most common types of debt in Canada
According to a 2019 Canadian Financial Capability Survey, the most common and significant type of debt for Canadians is mortgage debt. 40% of Canadians have a mortgage with the average amount owed at $200,000[1]. Despite the prevalence of mortgage financing, many Canadians still struggle with mortgage terms, interest rates and how to strategize repayments.
The age group with the highest credit card debt in Canada are Millennials and Gen Z[2]. With living costs and expenses continuing to rise, younger Canadians are relying more and more on credit cards to manage their expenses and make ends meet. Heavy reliance on credit cards can lead to high interest charges especially if they fail to pay balances in full.
Like a majority of Canadians, your first experience with debt is probably student loans. This first experience with borrowing can be both an essential tool for advancing your education while also being a huge financial burden as you head on to your adult years. Before receiving a first paycheck, you are already faced with a significant amount of debt which can be a tremendous amount of pressure for a young professional.
Getting from point A to point B without hassle is a significant concern for many Canadians, leading 28% of Canadians to have debt from vehicle loans or leases [3]. What many fail to understand is that owning a vehicle comes with other costs associated than just simply the cost of the car.
Consider these steps to manage debt
Understand the details of all your debts in order to get a clear picture of how each one operates. List all of them down including terms, rates, monthly payments, total amount owed and other details available to you. This will give you the opportunity to look at them all in one place and make it easier to strategize.
Now that you’ve listed them all down, you can single out loans with the highest interest rates. Prioritizing these debts for repayment can save you a significant amount in interest charges.
This is a strategy that you can implement when repaying loans called the Snowball Method. Imagine the cartoon snowballs being rolled down the side of the mountain getting bigger and bigger as it makes its way down, this strategy involves paying off the smallest loans first and making minimum payments on others and building up the momentum and give you a sense of accomplishment to encourage you to keep going.
Alternatively, you can try the Avalanche Method which in the name itself means cascading down and affecting a larger area as it goes on. This method involves paying off the loan with the largest interest rate first, regardless of the loan amount. This will be more cost-effective in the long run since you are wasting less money on interest.
Whichever repayment strategy you wish to employ, it is important to create a realistic budget. This means you have to allocate enough funds to repay debts while still considering your expenses. In addition to this, cutting expenses will be necessary to apply your savings into repaying debt. Cancelling unused subscriptions, eating out less or whatever unnecessary spending you can cut out based on your lifestyle and needs.
Any additional income or unexpected financial gains like tax refunds, bonuses, or the like should go directly to repaying debts. Often times, when we receive these kinds of extra income, we are already spending it inside our heads which is a difficult mindset to overcome for sure but one that is detrimental to do so.
Finally, monitor your progress and leverage small wins to maintain motivation.
Remember, the hardest part of any process is to start.
