Five Steps to Get Out of Debt
- Make a Budget
You need to understand where your money comes from, how you use it when you have it and finally, where it goes. A monthly budget will help you organize your expenses and perhaps recognize where you can save some extra money and put an end to wasteful spending. A budget can also help you better understand bad and good spending habits and how you can change them. Start by keeping track of what you spend in just one day, and you might even surprise yourself when you see where your money goes.
- Examine and Change Your Spending Habits
Are you spending more money than you make? Do you use debt to pay off other debt? These are examples of bad spending habits. You can correct a lot of these mistakes after you make a budget. If you’ve already completed number one on this list, then congratulations, you have already learned and practised a good spending habit. Other good spending habits include keeping your spending within your budget and carefully following your goals for saving.
- Pay Off Loans with the Highest Rate of Interest First
It’s not really the amount of the debt that’s important, it’s the interest rate. If you examine the interest rates on your debts, you will discover that you will save more money in the long run by concentrating on the debt with the highest rate of interest. Even though this seems counter-logical, especially if the debt with the highest rate of interest is substantially bigger, it will save you money in the long term.
- Re-structure Your Debt
If you find you have too much debt and it is out of control you may need to re-structure it. For those with good credit this usually entails getting a lower interest rate loan from a bank to procure funds to pay off your high interest debt thus improving your cash flow. But what if you have poor credit and are unable to get a loan or your monthly payments are still too high with the lower interest loan? In this case you may consider filing a consumer proposal where the interest is stopped, a portion of the debt is forgiven and the remaining debt paid off over a period of up to 5 years. This is a complex process and you should approach 4 Pillars for further advice on this subject.
- Put Financial Windfalls Towards Your Debt
Resist the urge to spend a bonus or inheritance on a big ticket item, like a vacation or a car. Use that money to pay down your debt instead. Remember that you are accumulating interest on those loans the longer you carry them, so some short term discipline can alleviate some long-term pain. This is not to say that you shouldn’t reward yourself when you keep a savings goal or maintain your budget. Try to remember that there will be more cause to celebrate when your debt is paid off.
If you live in Burnaby, Coquitlam or Westminster and want to know more about debt settlement options please contact Gurinder Dhaliwal by visiting my Burnaby website or calling me directly at 778-340-4002 to arrange for a free consultation to review your options.
