All Canadians have to deal with debt at some point in their life. Whether it’s for paying for school, buying a house, or getting a car, there will come a time when you will have to take on debt to help you achieve the goals you have.
But this isn’t a bad thing. Taking on debt is how you build healthy credit, which allows you to ask for larger loans when you need them. But where do you draw the line between frivolous spending and credit building?
In a word, managing your debt all comes down to planning. You have to know what you’re taking out in loans and credit cards so you can keep on top of your fees and due dates. This way, you can start developing smart saving habits that will serve you for when you want to take a trip or finally want to retire.
We’re going to take a look at some of the best strategies you can use to take control of your debt before you feel over-encumbered with its responsibilities.
Know Your Net Income
A lot of people can get hung up on how much they’re making in any given month. When you finally see that pay cheque come in, you may have the idea this dollar amount is for anything your heart desires. Well, this isn’t the case.
Before you can start planning that next big purchase, you must first determine your net income every month. Your net income is how much money you make once you’ve accounted for all of your monthly expenses and taxes. In most cases, expenses can be rent, food, emergency fund savings, RRSP and TFSA deposits, and, of course, monthly debt payments.
It’s important to know that interest rates are always attached to your monthly debt payment, so when you use a credit card with a 20% interest rate, that balance will generate a 20% interest cost every month.
Canada uses a progressive tax system that taxes you the more money you make. On top of this, there are several different types of taxes you may have to pay as well.
Let’s break down taxes for Albertans like this:
The average income for Albertans, according to CBC News, is about $36,000 a year per person, meaning that the average Albertan will pay a federal tax of 15% and a provincial tax of 10%, both based on their income (you can lump these figures together at 25% to make it a little easier to understand.)
Some employers may withhold a part of your income for your taxes, but if you’re self-employed, you will have to keep track of the taxes you owe by yourself. Self-employed workers and business owners are also subject to GST/HST taxes and charges.
Plan a Budget
Now that you’ve determined your net income, it’s time to take what you’re actually earning in a month and start developing a budget plan. You can make your budget yourself, but you can also use a budget calculator like the one that you can find on the Financial Consumer of Canada website.
But planning a budget is more than just determining what you can and can’t spend throughout the month; it’s also an opportunity to make a plan and set goals for your future. Some short-term goals can be:
- Paying off a credit card
- Build an emergency fund (one that lasts about 6 months)
- Reducing your regular expenses
Long-term goals can look like:
- Saving for your child’s education
- Paying off a mortgage
- Saving for retirement
Prioritize Your Debts
It’s time to get into the nitty-gritty of handling your debt. Since you now know how much you’re making a month and have some goals you want to achieve, it’s time to put that plan in motion.
Your next step is to prioritize your debts.
In most cases, you’re going to want to pay off the largest debts with the highest interest rates the quickest. These debts usually include your credit card or other unsecured types of loans. Credit cards in Canada have an average interest rate of 20%, with some reaching as high as 30%.
It’s important to pay off your credit card because many credit card companies offer reward programs that you can collect regardless of how much your monthly payment is. It’s better to be collecting these awards with as little debt as possible so you can make the most of them in the future.
In other types of debts, you might want to consider different strategies like consolidating loans, negotiating with your creditors, or simply searching for some financial counselling. You should never feel ashamed or afraid to talk about your financial situation with a licensed professional; they can help you see opportunities you otherwise would not have noticed.
As a general rule, always pay more than your minimum monthly payment.
Know the Value of a Dollar
Any financial advisor will tell you the same thing: if you’re struggling with budgeting or debt management, you have to make smarter spending decisions. Now, this doesn’t just mean reducing how much you spend on food or entertainment; it means how much, on average, you need to spend each day or week. Solutions for this are far more straightforward than you might think. Things like meal planning, carpooling, and even shutting off unused utilities in your home can start to add up in your favour over time.
Develop Alternative Income Streams
We all have to work our regular jobs, but we also have something we’re passionate about, whether that’s a hobby, a show, or simply keeping up with current events. In any case, you may have an opportunity to develop an alternative income stream just by creating a project and placing a dollar amount on it.
What a great strategy might be for you is taking the extra money you might make from a blog, e-commerce store, or podcast and placing it in a high-interest savings account or long-term investments. This will help slowly grow your wealth over time, and depending on the strategy you might use, you can put it towards eliminating your debt for good.
If you’re struggling to see any light at the end of a debt-filled tunnel, be sure to call our professionals today for help.