Debt Repayment in Canada: Everything To Know About Repaying Debt
One thing is certain about debt.
Even if you ignore it, the debt will not go away.
The only responsible thing to do is find a reasonable way to manage your debt so it doesn’t overcome your finances.
The best way to do this is with continual assessments of your financial wellbeing.
Basically, if you are ever looking at taking out a new loan, consider your existing debt in all of its forms.
Make sure that, with your income, you are capable of paying more than minimum payments.
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Ensure that, for the amounts you already owe, you have a plan in place to pay them down.
Ideally, you would take this approach before matters turn to default payments and collection agencies.
Make a detailed schedule of income, assets, and liabilities.
Use this to properly analyze when and how much you can pay which of your amounts owing.
The best way to maintain financial health is to always make your payments on time and in full.
When Debt Overwhelms Your Finances
Naturally, most develop debt as a with the best intentions.
Fully planning to pay off the debt in more than minimum installments, they start well.
However, life is full of curveballs.
In the event of sudden emergencies or loss of employment, you may find that making even minimum payments is challenging.
In times like this, it is important to reassess.
Take a look at your current situation with a fresh set of eyes and use that information to develop a new plan of action.
A common and popular approach is through the use of a cash-focussed debt repayment strategy.
Cash Only Modelling
More than anything else, this strategy provides a tactile, visible, and clear-cut method of budgeting for your expenses.
When you cannot see the money you are spending, it is far too easy to make irresponsible spending choices.
Pennies slip away – pennies which otherwise could be used to pay off debt.
The model has gained popularity thanks to its simplicity.
If paying off your debt is a top priority for your household, consider using only cash for your expenses.
The first thing you need to do is develop a budget.
Consider first your essential payments.
These include housing, car loans, insurance, and scheduled debt repayments.
Subtract this amount from your overall revenue and now look at your remaining funds.
This is where approaches diverge.
The similarity is taking a fraction of that overage and committing it to making more substantial debt payments.
Since you already budgeted for your minimum amounts, any overage will get you further ahead.
Consider allocating an additional 20% of your revenue to debt repayment.
Once you subtract that, along with your necessary payments, you will have your budget for regular expenses and daily living.
These things include food, hobbies, and entertainment.
Living on Cash Only
Now that you know how much money you have for expenses comes the cash part of the equation.
Withdraw the exact amount of cash you have for your set period of time – most choose a monthly approach.
When you purchase coffee, fuel, food, or other supplies, it all comes out of this central supply of funds.
This way, you know that you do not take away from your debt repayment funds.
Write down every purchase you make.
At the end of the month, tally up how much you spent overall.
If you have an overage, use that amount to add to your debt repayment for the next month.
Next, separate your expenses into different categories.
For example, note what went towards food, fuel, and entertainment.
See if there is anything you can do to reduce those expenses and try to have an overage in each of these departments in the upcoming month.
During the next month, get your amounts separated right away.
Spend only your food cash on food, etc.
This enables you full control of your expenses and gives you a tactile understanding of any spending which you do.
Just like the traditional balancing of the books, your log highlights for you what you spend too much money on.
Focus on Regular Payments
While this philosophy works well to showcase overspending, it only works fully when any overage is used towards debt repayment.
Aim to add payments to loans with higher rates of interest.
This will save the most money over the long term and more quickly allow you to pay off your loans.
As long as you make regular payments, slow and steady can win the race.
Additional Spending Cuts
If you want to go one step further, consider more drastic approaches to cutting your expenses.
If you have a vice, such as smoking, try quitting or at least cutting back.
If you consume alcohol frequently, attempt to reduce the amount – and thus the expense.
Consider small things like buying off-brand food, limiting the number of times you eat out or order delivery, and focus on cooking food from scratch.
Look at ways you can reduce your vehicle insurance or downsize your vehicle.
Over time, these small changes accrue into significant freed funds which you can use to pay down debt.
Not only will this free you from the stress and anxiety of debt accruing over time, it also actively improves your credit.
Some Final Thoughts
As with all financial plans, it is best to start early.
If you wait until minimum payments become too difficult; until you are in default or getting calls from collections, then the plan will have diminishing returns.
The best time to take control of your finances is in the present.
By assessing your budget and taking all possible steps to reduce your expenses and maximize the regular payments you make, you get to stay ahead of the curve.
In the event that you find yourself wondering about other steps, consider reaching out to a credit counsellor.
Operating on a non-profit model, these professionals offer no cost consultations aimed at helping indebted consumers obtain financial stability and get out of debt.
Whether it is a matter of budgeting, debt consolidation, or settlement, there is always a step you can take.
Seize the moment and take control of your financial health – it is never too late to start down the road to a proper budget.
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