Having debt cannot only affect your credit score but can cause a lot of stress, depression, fear, low self-esteem, and even denial. Many Canadians face piling bills, empty checking accounts, and debt in the form of car payments, credit cards, mortgages, and personal and student loans. The good news is that there are easy steps to follow and achieve financial security and freedom.
Step 1 – Make a Budget
Creating a budget is the first step to getting your finances in order and under control. To create a good personal budget, you may want to start with an itemized summary of your expenses and income. Check your financial statements, including utility bills, rent/mortgage payments, investment accounts, and bank statements. Then list all expenses and sources of income. Sources of income to record include your paycheck, investments, alimony, bonuses, rental income, and dividends. Then record your expenses, including utility bills, groceries, insurance coverage, car payments, and mortgage or rent payments. Compare your income and expenses and if you are over your budget, divide expenses into fixed and variable. Variable expenses include gifts, dining out, entertainment, etc. This is the category that allows you to make adjustments and cut down on expenses.
Step 2 – Start Paying off Your Outstanding Bills
Paying off outstanding bills is an important step to becoming debt free. Interest accumulates if you only pay the minimum balance, and it will take you longer to pay off card debt. If you have high-interest cards, it is best to start with the card that carries the highest interest rate. If you have a large balance, this means that you pay less toward the principal and more toward interest charges. When you are done paying your card balance, you may want to focus on the card that carries the next highest rate. Make sure you pay your utility bills on time as well. If you are significantly behind on electricity, gas, and water bills, your providers are likely to report late payments to the credit bureaus. This will affect your credit score and ability to obtain low-cost loans. Not only this but even when you are done paying all cards and loans, your credit score will still be affected.
Step 3 – Negotiate for a Lower Interest Rate
Negotiating a lower interest rate helps make payments more manageable and affordable. There are different ways to go about this, and one is to focus on the oldest credit card that you have. Credit unions and banks are more willing to work with loyal and established customers and are likely to lower your rate. If you have other credit cards, it pays to simply call and ask. Make sure that you have the required information such as your current interest rate, outstanding balance, due date, grace period, and other card terms.
Step 4 – Do a Credit Card Balance Transfer
This is another way to lower the current interest rate and pay down debt faster. Many financial institutions offer balance transfer credit cards, including CIBC, Scotiabank, MBNA. Banks feature very low or zero introductory rates during the promotional period, allowing customers to save on interest charges. However, it is also important to check other terms such as annual fees, balance transfer fees, late payment penalties, and grace periods. Some providers also have minimum income and credit score requirements. Ask your issuer about perks and incentives such as low annual fees, comprehensive insurance, awards schemes, car rental discounts, and return guarantee.
Step 5 – Set Financial Goals
To set financial goals, it is important to consider what matters to you, whether saving for retirement, paying college tuition, buying a new car, or going on vacation. Then consider whether it is within reach and how long it will take you to achieve your goals. The next step is to create a budget and set money aside on a monthly basis. Make sure your budget is realistic. You may want to open a separate savings account and transfer money from your debit account. Monitor your progress to see how close you are to accomplishing your goals.
Step 6 – Use Cash
Experts claim that using your hard-earned money makes it less likely to splurge and overspend. This is what behavioral economists call the pain of paying. The main reason lies in the physical component of paying cash. Getting to an ATM to withdraw money also has a physical component and is inconvenient for many. A good way to save is to follow the cash envelope budgeting system. It involves withdrawing money at the beginning of the month and dividing it into different categories, including groceries, gas and transportation, entertainment, etc.
Step 7 – Avoid Expensive Hobbies
Some of the most expensive hobbies to have include scuba diving, yacht racing, flying a plane, model railroading, to name a few. Needless to say, you should avoid expensive hobbies like these and will save tons of money. The majority of people have hobbies such as photography, bicycling, swimming, and reading books which are low-cost and fit into a tight budget. Unlike them, ballroom dancing, ice sculpting, and hot air ballooning can be very expensive and are not everybody’s affair.
Step 8 – Avoid Eating Out
Eating out can be expensive even if you only eat at fast food chains. Spending $10 a day at your favorite fast food chain adds up to $50 a week and $200 a month. To save money, it is best to avoid eating out during the workweek, prepare meals at home, and bring the lunchbox at work. This is also a way to ensure that you have a healthy and balanced menu. It is a good idea to create a meal plan for the week and buy the products that you need. In this way, you will only buy items that you need instead of wasting money on groceries. Another way to save money is to stock on inexpensive convenience items and prepare meals when you are short of time. Such items are bagged greens, canned beans and tomatoes, and pre-made pizza dough. You may also think of products that come together for a healthy and cheap meal. There are great inexpensive meals to cook, for example, cheese olive bread, spaghetti with meat sauce, curried chickpeas with spinach, and tuna casserole. Combining inexpensive products is also a good way to cook on a tight budget. Cheap grocery items include baby carrots, cottage cheese, tofu, whole grain pasta, brown rice, and chicken bread.
There are plenty of good reasons to get rid of debt, the most important being that you will enjoy a higher credit score, free income, and less stress. Many are aware of this but keep their old habits instead of prioritizing debts, paying off outstanding bills, making a realistic budget, using cash, etc. Being financially literate and savvy about money also helps borrowers to become debt free and make wise choices. People with a good financial literacy know how to set realistic goals and manage their finances. They save toward retirement, have an emergency fund and a balanced investment portfolio, and know their responsibilities and rights as taxpayers, borrowers, and consumers.