How to Manage Debt

Managing Debt: A Comprehensive Guide for Canadians

Debt management is a significant concern for many individuals, especially in today’s economic climate. This guide seeks to provide a comprehensive approach on how to manage debt in Canada.

Understanding Debt

First and foremost, it’s crucial to understand what debt is. It’s simply money that you owe to another party. This could be due to loans, credit card bills, mortgages, or any other form of borrowing.

The Psychology of Spending

Before delving into the technicalities of managing debt, it’s essential to understand the psychology behind spending. Most individuals’ desires and wishes often exceed their incomes, leading to unplanned borrowing and consequently, debt.

“You can have almost anything you want; you just can’t afford everything you want.”

This old adage rings true for many. The key is to adjust your priorities and be satisfied with less than what you ideally want, at least temporarily. This approach allows you to save money to pay down your debt.

The Cash Versus Credit Debate

Studies have shown that people tend to spend significantly more when using credit instead of cash. For instance, McDonald’s found that customers spend 56% more when they use credit instead of cash. This trend also applies to vending machines and event tickets, where credit users are likely to spend 100% more.

As a rule of thumb, if you’re aiming to get out of debt, opt for cash payments and refrain from using credit until you’ve significantly reduced your debt.

Developing a Debt Management Plan

Now that we’ve covered the psychology of spending, let’s dive into the technical aspect of managing debt.

Step 1: Identify and Understand Your Debts

The first step in managing your debt is to identify all your debts. Make a list of everything you owe, including the interest rates, monthly payments, and due dates.

Step 2: Create a Budget

Creating a budget is the next critical step. This involves tracking your income and expenses and planning how to allocate your income to meet all your financial obligations.

Step 3: Prioritize Your Debts

Some debts are more urgent than others due to their high-interest rates or the consequences of not paying them. Identify these debts and prioritize paying them off.

Step 4: Implement a Payment Strategy

There are different strategies for paying off debt, such as the snowball method (paying off the smallest debts first) or the avalanche method (paying off the debts with the highest interest rates first). Choose a strategy that best suits your situation.

Step 5: Seek Professional Help If Necessary

If you’re struggling to manage your debt, don’t hesitate to seek help from a reputable credit counsellor. They can provide you with a debt management plan and guide you through the process of paying off your debt.

Dealing with Rising Interest Rates

Interest rates can rise due to various economic factors, and this can increase your loan payments. It’s essential to have a plan for managing your money when interest rates rise.

Seeking Help from a Credit Counsellor

A credit counsellor can provide you with valuable advice on managing your debt. They can guide you through the process of creating a debt management plan and help you understand your options for repaying your debt.

Using a Debt Settlement Company

A debt settlement company can negotiate with your creditors on your behalf to reduce the amount you owe. However, it’s essential to do your research and understand the pros and cons before signing up with a debt settlement company.

Filing for Bankruptcy

Bankruptcy is a legal process that helps individuals who are unable to pay their debts. It’s a last resort option and should only be considered after exploring all other options.

Dealing with a Debt Collector

If a collection agency contacts you, it’s important to know your rights and how to deal with them. Never ignore a debt collector, as this could lead to legal action.

In conclusion, understanding how to manage debt involves a holistic approach that combines psychological adjustments, strategic planning, and professional assistance if necessary. Remember, it’s never too late to start managing your debt and regain control of your financial health.

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