With Canadians binging on credit to the tune of $1.4 trillion, policymakers are worried about our ability to pay it all back. Interest rates are on the rise, making it harder to keep up with those debt payments. It’s little wonder we’re stressing about all that money we owe. But while hardcore debt repayment might seem like the right medicine for these debt-ridden times, it’s actually not the best way to keep yourself out of the red. In fact, it could make things a lot worse. If you’re overly focused on debt repayment you could be neglecting other areas of your finances, such as your savings. This can lead to the yo-yo debt or pay-spend-pay cycle where supersizing your debt payments leaves you without any savings to cover other major expenses — ultimately, shoving you back into debt.
So how can you break the cycle?
1. Set balanced goals
Consider putting 20 percent of your monthly take-home pay towards your financial goals. Those goals should include retirement savings, building up an emergency fund, as well as debt repayment.
2. Find extra money for debt repayment elsewhere
Now that you’re putting 20 percent of your income towards your financial goals, you can still turbo-charge your debt payments by cutting back elsewhere in your budget. Identify any variable expenses — groceries, entertainment, clothing — and find ways to trim your costs. Any extra cash can go right towards your debt.
3. Don’t neglect your cushion
Yo-yo debtors often lack something important: the funds to handle an emergency expense. Building up a cash cushion will help you avoid going into additional debt if something unexpected happens. Just one month of living expenses can help you handle a financial curve ball without racking up debt.
4. Lower your interest rate
If you’re carrying your debt on a high interest credit card, consider using a lower interest line of credit or loan to pay it off. Lowering your interest rate can help you pay down your debt faster.
5. Look beyond your debt
Remember: your debt does not define you. Sure, it can be stressful to owe money, but by setting goals and saving, you will slowly shed the load — and end up further ahead financially.
Have you successfully got our of debt? Share your stories in the comments section below.
Follow Caroline Cakebread at @ccakebread.