While bankruptcy can be one of the most efficient ways to clear your debts, we suggest aiming to avoid getting into this situation in the first place.
This is often done by aiming for financial freedom, understanding how to manage your debts and being more mindful about your spending.
So to help you out, here are 12 of the most effective strategies to use in order to get out of debt.
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1. Prioritize your debts based on interest and amount
When it comes to repaying your debts, it’s wise to prioritize the repayments that are the most costly.
This involves looking at the interest rates of your individual loans and sorting your debts based on the most expensive ones first.
By targeting these, you’ll end up paying less interest over time which results in more money saved.
If you continue using this method while paying off your debts, you’ll end up having the least expensive or most recent debts to pay off last.
This is often referred to as the snowball method of paying off your debts as it helps to reduce the amount of excess interest you have to pay and you’ll see financial progress.
2. Always pay more than the minimum
Another little trick to help you get out of debt faster is to always pay more than the minimum.
This sounds like an obvious tip because you’re still paying off your debts as you should be, but you’d be surprised how much an extra 10% or even $50 per month can help with paying off your debts.
Ideally, you should be paying as much as you can afford without dipping into your living expenses.
This will drastically help with repaying your debts, even if you can only pay a little extra per month.
3. Be more mindful about your spending
Being careful about your spending is absolutely one of the best ways to get out of debt.
Many people end up in debt because of their excessive spending habits and it’s important to try and cut down on unnecessary expenses.
To start, make sure you’re not aiming for expensive items that are outside your paycheck.
It’s not feasible to spend the majority of your paycheck on luxury items and it’s important to realize that you’ve been living beyond your means.
4. Consider value-oriented purchases whenever possible
One helpful habit to start developing is to always look at value-oriented purchases, especially for expensive things such as a car or appliance.
Being frugal will be a great help when it comes to paying off your debts quickly.
It can take a while to develop a frugal lifestyle, but it’s a long-term goal that you can’t expect to achieve in just a week or two.
A great tip to help with developing frugal habits is to differentiate between being “cheap” and being “frugal”.
Being cheap typically ignores the value that comes with spending more money, while frugal is always focused on a cost to performance ratio.
By focusing on the value of a purchase, you can make smarter budgeting decisions which will help you save money.
5. Analyze the biggest expenses in your life
Most of us probably have a lot of expenses such as a mortgage payment, a car or even children.
While a lot of these expenses can’t exactly be avoided, there might be some areas where you can cut down large chunks of your spending.
For example, if you currently own two or more vehicles, you’ll save a lot of money by switching to a one-car household.
This isn’t possible for every family, but analyzing the biggest expenses in your life is a great way to put your spending into perspective.
6. Cut down on essential purchases
While you can’t completely ignore essential purchases, you can still try to define a difference between what’s essential and what’s a luxury.
For instance, groceries is one area that a lot of us spend an unnecessary amount of money on.
Perhaps you could save money by buying certain pantry items in bulk, or maybe you can avoid buying premium-quality items and save them for special occasions.
Frozen food is also a huge cost-saving measure because you can typically buy a lot of it when it’s on sale and store it for weeks or even months.
This will help you save a bit of money each week that can go towards paying off your debts.
7. Attempt to secure a secondary source of income
Establishing a second source of income (or even more, if you’re able to) can be a fantastic way to pay off your debts faster.
The most straightforward way to do this is to get a second job and start making consistent payments to pay off your debt.
Alternatively, you could start working at home by starting a side-business or freelance work that’s related to your existing job.
There are many different routes when it comes to establishing a second source of income, so this is something you’ll need to research before you invest.
8. Focus on budgeting your expenses
We’ve mentioned a lot of money-saving tips here already, but to top it off we highly suggest that you focus on budgeting your expenses.
Calculate your incoming and outgoing by keeping track of every purchase you make.
This will help you get a better overview of your expenses to see where you can save money, where you’re bleeding money and where you can optimize your cash flow.
Budgeting is much easier when you have different types of software available.
You can use cloud accounting software to get more insights into how you spend your money, or you could try smartphone apps if you want a convenient way to add expenses to your budget.
9. Seek credit counselling
How we’ll start getting into more aggressive ways to get out of debt if you’re still finding it difficult to save money and manage your expenses.
First, seeking a credit counsellor is arguably the first thing you should do.
Financial experts make it very easy for you to not only understand your current financial situation, but they’ll also show you how to dig your way out of it.
In addition, they’ll help you look at all of the options available to get out of debt, and this can include filing for bankruptcy.
While it can sound daunting, filing for bankruptcy often has a bad reputation because people aren’t aware of what it implies.
In most cases, you’ll be able to hold on to most of your belongings, even your car and your tools of the trade.
If you’re curious about credit counselling and what it could do for you, don’t hesitate to contact us today to speak to one of our specialists.
We’ll help to analyze your financial situation to see if bankruptcy could be the ideal solution for your debt trouble.
10. Consider refinancing your mortgage
Another option to get out of debt is to refinance your mortgage.
If you own a home, you might have enough equity to consolidate your debts into your mortgage.
This only works if you possess enough equity since you might end up paying for additional fees and mortgage insurance costs if you don’t.
This is a complicated financial option so you should always consult a financial specialist before considering this option.
11. See if consolidation loans can help
An alternative to refinancing your mortgage is to see if you can consolidate your loans.
This is an option that is available to most people and involves gathering all of your debts into a single loan with a lower interest rate.
This is usually the first step in clearing your debt, especially if you’ve been swamped with lots of different smaller debts that have amassed a lot of interest payments.
However, this must be combined with saving your money since you’re still going to be in debt after consolidation.
This strategy should only be used if you’re comfortable with making monthly payments.
If you’re financially unable to do this, then you might need an alternative solution such as claiming bankruptcy.
12. Create a long-term spending plan
Lastly, regardless of what kind of strategy you use to get out of debt, make absolutely sure that you create a long-term spending plan.
We understand that everyone has their immediate expenses to worry about, but it’s usually long-term expenses that need to be your focus.
This could include something like paying for your child’s schooling fees or eventually paying off your car financing.
A long-term plan will ensure that you have goals for your budgeting and will give you targets to aim for.
If you’re in need of more financial assistance, don’t hesitate to contact us today for more information on how you can effectively get out of debt.
Information on Consumer Proposals
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Consumer Proposal Eligibility
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What is Bankruptcy?
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How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?