When being debt-free seems like a goal far into the future or nearly out of reach it’s easy to get lulled into recurring financial habits and resigned to the monthly practice of making long term debt payments. As Licensed Insolvency Trustees every day we connect with people who are looking for professional insights and advice into how they can better manage their debts and move forward with a financial fresh start. While we work with British Columbians facing many different personal circumstances, from our experience it is virtually always in a consumers best interest to make getting out of debt a top goal.
Read on to learn more about why prioritizing a debt management plan is important for both financial benefits and for our overall personal wellbeing, and some expert tips on how you can get out of debt faster.
4 Reasons to Get Out of Debt Now
Whether you need inspiration for action, or motivation to keep going – here are some key reasons why focusing on addressing debt should be a high-priority goal for almost everyone:
Debt is Expensive
Any time you carry a balance on credit there’s going to be a cost, and when you factor in interest charges, financing fees and more, debt can become outright unaffordable (especially in the long-term).
What’s more, when you owe money it can feel as though your creditors are in charge of your financial wellbeing since you can be impacted by interest rate hikes, policy changes, or even have your rates bumped-up if you miss a payment.
Debt gets particularly expensive if you’re carrying balances from:
- Credit cards
- Be especially aware of the added expense of using cash advances and/or enrolling in balance protection insurance.
- Payday loans
- A 2-week payday loan can equate an annual percentage (interest) rate of almost 400%!
- Canada Revenue Agency debt
- Daily compounding interest plus penalties can add up fast on things like outstanding tax debt.
Maximize your Income
Borrowing means taking money away from your future self, and carrying debt prevents you making the most of your income. Think of all the different uses you could have for your money that is unfortunately going to pay even a few hundred dollars’ credit card balance each month.
Unpaid balances (especially on credit cards) can lead to everything from tight budgets to seriously strained challenges in meeting costs of living, and the claim on your future earnings might stop you from moving towards other goals that would require that cash commitment (like investing in retraining or education or saving for a home or retirement).
Improve your Credit Score
Although many debt experts caution that your credit score shouldn’t be your major focus, if you have a future financial goal such as getting a mortgage in the next few years, it is worth noting the benefit of being debt-free as it relates to your medium-term financial plans.
Clearing your debt can make it easier to borrow for important things you want – and can enable you to do so at “best” interest rates and terms. Being debt-free helps by:
- Freeing up your ‘credit utilization’ ratio (essentially the proportion of your credit limit you are regularly using – lower is better).
- Giving you the time and ability to boost savings.
- Although savings aren’t reflected in your credit score, having sizable savings can certainly improve a lender’s consideration when you apply for credit.
Remember, your credit history is regularly updated and scores are simply calculations at a moment in time that can change dramatically in a relatively short period. Credit scoring is not an exact science nor reliable as a measure of financial health – and sometimes what can lower your score temporarily is a beneficial strategy in the long term.
Whether you’ve experienced a cash-crunch moment or regularly have finances on your mind, being in debt can create a near-constant undertow of anxiety and/or worry; money matters can impact us tremendously, financially, emotionally, even physically. Getting to debt-free can help us to:
- Stop constantly thinking about debt, improving peace of mind and even our overall health and relationships with others.
- Allow us space to enjoy and get more of the things we want (whether to do or to have), without accompanying guilt.
- End debt-stress and the mental nag of monthly payments.
When Isn’t Paying Off Debt a Priority?
There are of course exceptions to every rule, and there may be a (very) few instances where a person would want to continue making their debt payments but focus some of their extra cash into other areas, even temporarily.
This strategy may be the case in scenarios such as where:
- Your debt is essentially down to just your mortgage and you need to focus on retirement funds.
- Where the interest rate on your debt is very low and you have no emergency savings.
Save Money or Pay Down Debt?
Having savings is important – and at minimum we recommend consumers should generally aim to at least have a modest emergency fund set aside. Without even a small cushion of savings many people end up relying on credit to cover unexpected costs that inevitably come up.
- Start small – if you can – even having $1,000 in savings can make a difference in a cash-crunch (car repair, dental emergency, unexpected day off work, etc).
Unfortunately, having a surplus cash-flow that allows you to even temporarily set money aside to accumulate savings can be almost (if not completely) out of reach for some people. If you’re in a situation where your debt payments are leaving you straining to meet your costs of living, or unlikely to pay off your debt in the next 5 years, seek a Licensed Insolvency Trustee to get some debt advice and learn about your options for debt management.
For example: If you can afford to repay part of your debt, a Consumer Proposal can be a great way to substantially cut your monthly debt payments, freeing up room in your budget for savings and more.
Try the “Rule of 60” math:
- Divide your total non-mortgage debts by 60 – does the number look like a monthly payment you could consistently afford to pay so that you can have all your debt paid off in 5 years?
A Common Debt Payment Trap to Avoid
Many people end up essentially trapped in a debt cycle of borrowing, paying, then re-borrowing.
It may not be obvious, but sometimes simply keeping up with your debt payments won’t be enough to successfully pay off debt or keep a debt problem at bay. One common area of concern we often see people stalled in is “the minimum payment trap”.
- Getting comfortable with making just your minimum monthly payments, especially on credit card debt, is risky and many people can get stuck in decades-long debt repayment cycles, not really making meaningful progress towards being debt-free.
- Your minimum payments on a credit card could be contributing very little per month to reducing your debt load, with the rest of your payment going to (ongoing) interest charges and fees.
- Be aware that new interest charges can easily outpace your payments and even push balances past your credit limit – from there finances can unravel quickly.
- Check your credit card statement to see how long it would take you to pay off your balance only making minimum monthly payments.
Over 3 in 5 Sands & Associates clients surveyed said “overwhelming stress” was how they eventually knew their debts were a problem. “Only making minimum payments” and “Accumulating more debt” were two other top-reported signs of a debt problem. – 2020 BC Consumer Debt Study
Strategies and Solutions to Get Out of Debt
If you have an income-to-debt ratio that is favourable (ie. higher income with lower debt levels), you may consider one of these first two payment strategies to help you pay down your debt:
- Focus on Highest Interest Debts First – The idea with this strategy is to save money by reducing interest charges where possible.
- List all your debts, with the highest interest debt at the top.
- Make all your monthly payment requirements across all your accounts but focus extra money you’ve identified in your budget towards the debt at the top of your list.
- Once it’s paid off, move your extra payments on to the next one.
- Focus on Smallest Balance Debts First – If you do well being motivated with adding up all the small victories, this might be a different debt strategy to consider.
- List all your debts, with the smallest balances at the top.
- Again, make all your payments but focus extra funds on the smallest balance debt first.
- Once it’s paid off, keep the ball rolling…
For those who want or need to take a more proactive approach to debt management – consider consolidating with a Consumer Proposal so you can:
- Consolidate virtually all types of debt without borrowing
- Save money by cutting debt by up to 50-80%
- Get breathing room from creditors and protect your assets and income
- Simplify your finances AND generally have the lowest monthly payments possible
- Have a definite date of being “debt-free”
As debt management professionals we are all too aware that unfortunately some strategies and actions can end up creating additional challenges, and often simply drag out the overall stress of the situation.
Many people pursue various debt strategies on their own such as:
- Borrowing from friends or family
- Applying to extend credit limits or get consolidation loans
- Using assets to pay down debt
It’s important for Canadians to know there is no cost to connect with a Licensed Insolvency Trustee for a confidential debt consultation so you can make an informed choice about how to deal with your debt.
- We can help you regardless of your credit score, and consultations to talk about your situation, answer all your questions, and assess your options are always free. We’re here to help you find your best solution to get on track, meet your goals and become debt-free for good.
- Sands & Associates can even work with you over the phone or via video conference, so you can get support from a qualified professional without leaving the comfort of home.
Whether you’re facing a difficult situation with your debt, want to explore options to cut debt, or pay off your debt with a guided debt-free plan – connect with a Licensed Insolvency Trustee to have a confidential debt consultation and get unbiased professional advice about all your options.
Got an hour? It could take less time than to get a debt-free plan that changes your life. Connect with a caring Sands & Associates debt expert today – book your free, non-judgmental debt consultation.