Dealing with Debt
- The most important step you can take towards controlling debt is to create a budget – this is the best way to have a clear understanding of where your money goes, where you can cut back, how to prioritize your debts, and regain control of your financial health. Remember, it’s ok to hit a financial rough patch – and it’s ok to get help.
The first step is to get a handle on how much debt you actually have. Find those credit card and loan statements to make a list of the outstanding balances and the interest rates each of them are charging. This will give you a clear understanding of how much you owe and will make it much easier to create a budget.
How to create a budget:
- Review your total after-tax income
- Make a list of what you are spending your money on each month;
- Try and cut any unnecessary expenses and stop impulse purchases when you’re grocery shopping or at the mall;
- This will give you a good idea of how much you have leftover at the end of the month to put towards paying off your debt;
- If you have a monthly shortfall, then take another look and see where else you can reduce your spending or monthly expenses.
Once you have a budget created, you’re in a great position to put a plan in place to begin reducing your debt.
- Tackle the highest interest debt first
A great place to start tackling your debt is, to begin with, those charging you the highest interest rates, which is typically your credit cards. They charge huge amounts of interest, up to 29%, and can take years to pay off if you only pay the minimum amount.
Did you know that if you have a $1,000 credit card balance and only make the minimum payment each month, it will take you almost 10 years to pay it off! You will also end up paying over $1,000 interest! So it’s important to try and pay more than the minimum amount each month if you can.
- Review the biggest debt
The next step would be to review your biggest debt, which for many of us is our mortgage payment. With all of the excitement that comes with buying a property and turning it into a dream home, many people are happy to not think about their mortgage again. It’s easy to view it as a monthly expense, rather than a large debt that should be actively managed and paid down as quickly as possible.
- Compare mortgage rates before you purchase or refinance
- Move to accelerated payments
- Take advantage of your mortgage lenders prepayment options.
These steps can reduce the number of years and interest you’ll pay over the life of your mortgage.
- Be a smart shopper
It is a very competitive market and there are many companies competing for your business other than your current bank or credit union. If you’re looking to renew or refinance your mortgage, or shopping for a new credit card, be sure to compare available options in the market and find the best offers to help you save money.