No one plans on going into debt, but sometimes it happens. If you’re carrying a little bit of debt, it can be easy to clear as long as you have a plan. However, if you already have more debt than you can handle, figuring out how to pay it back may feel like an impossible journey. Fortunately, knowing how to manage your debt may be easier than you realize.
Figure out what you owe
The first step to managing your debt is figuring out what you owe. Make a list of how much you owe, who you owe it to, the minimum monthly payment, and the interest rate. Some of the debt that you owe could include:
● Credit card balances
● Car loan
● Student loan
● Line of credit balance
● Payday loan
● Taxes owed
● Unpaid utilities
With everything laid out in front of you, you’ll have a better understanding of your financial standing.
Update your budget
Let’s assume you have a budget. If debt is a significant concern, you’re going to need to look at where your money is going and see if you can make any improvements. The first thing you want to do is cut back on any non-essential spending. That would include things such as entertainment, eating out, and shopping. That’s not to say you can’t have fun – you just need to try and spend less money while doing it.
You’ll also want to see if any of your recurring expenses can be reduced. For example, is it possible to lower your grocery bills by shopping at a cheaper grocery store or buying different products? How about your cell phone and internet bills? Can you renegotiate your plans so you’re paying less each month?
Any money you cut from your budget can be immediately applied to debt repayment. That can save you big in the long run.
Decide which debts to pay first
Making the minimum payment for each debt is an obvious must, but you can still decide which ones to focus on first. Generally speaking, there are two strategies to take when deciding how to manage your debt.
Debt avalanche: With this method, you’d focus on your debt with the highest interest rate first. By doing so, you’d pay less interest, and you’d get out of debt quicker. Take a look at your debt list and just divert any extra funds towards the one with the highest interest rate. For most people, that would be payday loans and credit cards. Don’t worry about how much you owe; the focus should be on the interest rate since that’s what’s costing you more money.
Debt snowball: Alternatively, you could start with the debt with the smallest balance. Even if this debt has a lower interest rate than your other debt, it could be worth focusing on since it might give you a mental boost once you’ve cleared it. With one less debt, you may be encouraged to concentrate even harder on repaying your debts.
Don’t forget about friends and family
If you’ve borrowed money from friends and family without a repayment plan, you may want to speak with them. Let them know that you’re still struggling, but you want to develop an ongoing payment plan that works for all parties.
Once you’ve agreed to this plan, put it in writing. Better yet, write some post-dated cheques or set up automatic payment transfers. You want to show them that you’re committed to repaying them. More importantly, the last thing you want is to create a rift between your loved ones because you haven’t paid them back.
Consider a consolidation loan
When you have multiple debts, managing everything can be hard since you need to be on top of the minimum payments and payment dates. However, suppose you were to get a consolidation loan. In that case, you could repay all of your debts, and then you’d only have one obligation to worry about. Two of the most common consolidation loans are as follows:
Line of credit: Many financial institutions offer their clients a line of credit. The advantage of getting one is that it’ll typically have a lower interest rate than the debts you’re looking to pay off. However, while the benefits are obvious, it’s still another loan. In other words, you could technically pick up more debt if you don’t use your loan effectively. In addition, consolidation loans aren’t guaranteed. Your lender needs to qualify you first to see if you’re eligible. That said, every lender has different criteria, so you could shop around.
Balance transfer credit card: It may sound odd to get another credit card to reduce debt but hear me out. Some low interest credit cards allow you to balance transfer any existing credit card debt to your new card. This is beneficial because the balance transfer can often come with favourable terms. For example, you might pay 3.99% interest for 9 months. Once the promotional period ends, you’d pay the regular low interest rate. Since your interest rate would be lower, you’d be paying less overall.
Managing your debt is no easy task, and it requires a plan. There will be times where you feel discouraged but believe in yourself. If you get to a point where you just can’t handle your debt anymore, speak to a licensed insolvency trustee as they may have other solutions available.
Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.
Barry Choi is a paid spokesperson of Sonnet Insurance.