Strategies to Diminish Debt in Ontario – A Comprehensive Guide
With the rising levels of household debts in Canada, many residents of Ontario are seeking effective strategies on how to reduce debt in Ontario. While there isn’t a one-size-fits-all solution to rapidly reduce debt, a variety of techniques and tips can significantly assist in mitigating the burden of debt.
Eliminating debt requires time, patience, and discipline. It’s important to remember that the journey into debt probably wasn’t a swift one, and neither will be the journey out. But don’t let this deter you. The temporary sacrifices you’ll make are a small price to pay for the financial freedom you’ll gain in the long run. If you’re ready to be debt-free but unsure where to start, here are eight actionable steps to begin your journey right now.
1. Design a Practical Budget
The first step towards debt reduction is understanding how you landed in debt, to begin with. The best method to achieve this is by developing a realistic budget. Are you in debt due to overspending, or is your income insufficient to cover basic expenses, or is it a combination of both? A well-planned budget will help answer these questions.
Without a proper budget, it’s challenging to determine how much you can feasibly allocate for rent, groceries, and other expenses. And without this knowledge, overspending becomes inevitable. This is where a budget proves useful. It outlines your monthly expenses (including debt payments), their cost, and whether your income can cover all these expenses. Once you understand what you’re working with, you’re better positioned to make informed financial decisions.
A sound budget will keep you on track with your current debt payments. After reviewing your budget, you might find that you can afford to make accelerated payments, enabling you to get out of debt sooner.
2. Monitor Your Spending and Identify Potential Cutbacks
To maximize the benefits of your budget, track your expenses for a month. Maintaining a record of your spending is crucial for a successful budget, as it holds you accountable for every dollar spent and heightens your awareness of your spending habits. To track your expenses, record every purchase you make over a month, regardless of the amount.
Pay close attention to small, daily purchases. That morning latte, the lunches out, and the pack of gum at the grocery check-out all add up over time and can significantly impact your budget. Once you’re conscious of your spending habits, start identifying areas where you can cut back.
For instance, if your morning coffee runs are costing $50 a month, consider making your coffee at home and carrying it in a thermos. Instead of buying lunch, which can easily cost $10 a day, cook larger portions at dinner and pack leftovers for the next day’s lunch. Various frugal alternatives can free up money that you can allocate towards your debts.
3. Make More Than Minimum Payments on Your Debts and Loans
Paying only the minimum amount on your debts and loans can keep you out of collections, but it also prolongs your time in debt. If you aim to reduce credit card debt, you need to start making more than just minimum payments. With interest rates ranging from 15% – 25%, it could take decades to clear your debt, costing you thousands of dollars in interest charges.
For example, a $10,000 credit card debt at a 19% annual interest rate would take over 35 years to pay off if you were to only make the minimum payments. Over those 35 years, you would have paid $19,000 in interest on a $10,000 debt. Use this debt repayment calculator to calculate how long it would take you to pay off your debt.
If possible, increase your monthly debt repayments by an extra $50 or so. As you pay down more of your principle, you’ll pay less in interest and clear your debt sooner. It can be challenging to find an extra $50 for your debt payments, especially if you’re on a tight budget, but do the best you can. Try to cut back on your expenses (as discussed above), and allocate the saved money towards your debt. If reducing expenses doesn’t make a significant impact, consider other ways to increase your income.
4. Supplement Your Income with a Second Job or a Side Gig
Increasing your income, whether through a second job, extra shifts or freelance gigs, is another effective debt reduction strategy. While a second job may not suit everyone’s lifestyle or schedule, if manageable, it could significantly fast-track your journey to becoming debt-free.
There are various ways to increase your income. Consider seeking a higher-paying job or request a raise from your current employer. If you have spare time during the evenings or weekends, consider a part-time job. Capitalizing on your skills can also boost your income. For instance, if you’re a skilled writer, consider freelancing articles or blog posts for media outlets. If you’re crafty, sell your handmade items at craft fairs or on Etsy.
Resist the temptation to increase your spending when your monthly income increases. Remember, the extra work is meant to pay off your debt, so ensure all your additional income goes towards your debt reduction plan.
Remember, working extra shifts or hours doesn’t have to be permanent. Once your debts are paid off – or your debt is at a manageable level – you can consider scaling back.
5. Let Your Credit Cards Take a Break
Studies show that people who shop with a credit card tend to spend more than with cash. Credit cards are undoubtedly more convenient than cash, and swiping a card feels less painful than handing over cash. However, this convenience can lead to unnecessary spending.
If you’re looking to reduce debt, stick to a cash budget and keep your credit cards out of sight to avoid temptation. When going to the grocery store or mall, carry only the amount of cash you think you’ll need and leave the credit cards at home. This habit can help you distinguish between needs and wants, and protect you from impulsive buying.
If you’re an online shopper, remove your credit card numbers from your profile to make purchases less convenient. This measure forces you to pause and retrieve your card for each purchase, potentially giving you time to reconsider your need for the item.
You don’t need to cancel or destroy your credit cards, but do remove them from your wallet and store them somewhere safe to avoid temptation until you’ve cleared your debt. Some people freeze their credit cards in a block of ice, allowing the time it takes for the ice to melt to reconsider the decision to use the credit card.
6. Embrace a More Frugal Lifestyle
A long-term solution to becoming – and remaining – debt-free is to downsize your current lifestyle to a more frugal one. Living frugally isn’t about penny-pinching or stinginess. It’s about making smart spending choices that reduce overall expenses without impacting your lifestyle negatively.
Start downsizing with big-ticket items like vehicles. If your family has two cars, consider whether one would suffice. Most cities have excellent public transportation routes, and walking or biking can be an option when the weather permits. Opting for a single vehicle could save about $9,000 a year, a significant amount if applied towards your debt. If two cars are necessary, consider selling one for a more fuel-efficient model to save on gas costs.
Consider moving to a smaller apartment further from the city center if you live in a spacious city center apartment. Although this may increase commute time and costs, you’ll save hundreds, possibly thousands, of dollars on rent or mortgage payments.
Next, look at smaller recurring expenses. Monthly magazine subscriptions, trips to the spa, and regular movie outings are all “wants” that should be scaled back or eliminated until your debt is paid off.
Learning to live with less not only increases your savings but also prevents future debt. The key to sustainable downsizing is ensuring the cuts aren’t too extreme, as this could make the lifestyle unsustainable.
7. Consider a Debt Consolidation Loan
If managing multiple debt obligations is overwhelming, a debt consolidation loan may be the solution. This involves taking out one loan to pay off all current debts, leaving you with a single monthly payment.
A consolidation loan typically has a lower interest rate than the credit cards you’re consolidating, potentially saving you money in the long run. The lower interest rate means a lower monthly minimum payment, making it easier to manage your monthly finances. Additionally, with only one bill payment to manage each month, you can focus more on reducing your debt.
However, a debt consolidation loan is only beneficial if you’ve addressed the behaviors that led to the debt. Once you consolidate your credit card debts, the temptation to spend on those cards may persist unless you take the initiative to close them. Falling into this trap could lead to accruing more debt on top of your consolidation loan debt. Therefore, a debt consolidation loan requires a significant change in your spending and saving behaviors to prevent falling back into debt.
When consolidating, it’s crucial to set aside money every month into an emergency savings account. If you’ve paid off your cards with a consolidation loan and encounter a financial emergency in the future, you may need to resort to credit if you don’t have cash reserves. Even a small emergency fund can make a significant difference.
8. Consult a Non-Profit Credit Counsellor to Learn How to Reduce Debt in Ontario
If you’re eager to learn more about how to reduce debt in Ontario, one of the best steps you can take is to consult with an accredited, non-profit Credit Counsellor. A reputable Credit Counsellor will explain all your available options, equipping you with the tools and knowledge to make the best decision for your situation.
Most credit counselling organizations also offer debt repayment programs, which can be an excellent alternative if you’re exploring other options on how to pay off debt fast. If you’re seeking debt relief but unsure where to start, contact your nearest non-profit credit counselling organization and schedule a free, no-obligation appointment with one of their Credit Counsellors. They offer appointments in person or over the phone and are there to help. The earlier you contact them, the more options you’ll have.
Secure a Debt-Free Future by Implementing Changes Today
If you’re one of the many Ontarians wondering how to reduce debt, remember that the key to paying off debt involves making long-lasting changes in your spending habits, rather than seeking quick, unsustainable fixes. While some short-term sacrifices may be necessary, they’re well worth the financial freedom you’ll enjoy in the future.
