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According to Statistics Canadathe ratio of household debt to personal disposable income in 2011 was 150% up from 66% in 1980.
Did you know that in 2009 two-thirds of Canadian households had outstanding debt that averaged $114,400.
Is a debt repayment plan right for you? Do you need to think about credit card debtconsolidation? If you have debt, then the answer is YES to a debt repayment plan more importantly if you are struggling to pay back debt to potentially consolidate.
If you are struggling it is very important to let the people you owe money to know that you are working on paying them back. Let them know you have a plan of action. Creditors want to know they will get their money so communicate with them and tell them. If you don’t they may sell your debt to another company who may charge you a bigger interest rate. Some creditors would rather make something than nothing but the third-party will stop at nothing to get it out of you.
It’s also a good time to mention that at least once a year you should order your free Canadian credit reportso you have it in front of you to review. This report will give you a breakdown of the people you owe, that they know of. Only you know the real score!
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Once you have finished communicating to the people you owe you need to get down to business. If a piece of paper and pen is your thing, get it out and your credit report if you have it. If you like to use the computer turn it on, you will be documenting every debt that you owe.
Information You Will Need:
- Who you owe the money to?
- How much is the debt?
- What is the minimum payment due each month?
- What is the interest rate?
First, you must include every debt even if it is a relative or friend you owe money to including the mortgage. Arrange the list from highest interest rate to lowest interest rate. Now you should have a clear picture of your debt as well as the grand total of what you owe once you add it all up. Don’t let this scare you, or you will promote self negativity before you begin.
I often tell this to my friends I train at the gym who give up mid-point. If you give up now you won’t be able to get to the next weight level, you have to push, you have to fight to win. Sometime’s you have to sweat alot to make small strides… but it works.
Second, you MUST and I stress MUST have a budget and I don’t care if you are the next rock star or CEO of a company you need a budget. You can follow my budgeting series to read about “How We Designed Our Budget” and learn about what we did with our family budget. Don’t factor in your debt repayment until the end.
One part of the budget some people tend to forget are those expenses you pay once or twice a year. It’s imperative that you factor every projected expense into the budget. Divide the cost by 12 and save for it every month all year-long. If you don’t you will have to find the money to pay when these bills come in.
Once you plug all the figures into your budget you will then see how much money you will have left for debt repayment. So if you have $2000 left and 7 credit cards to pay and a mortgage you now know how to divide the money.
After you pay the mortgage payment you now have to pay down the other debt ie: credit cards. You always pay down the highest interest cards first whilst paying the minimum payment on the others. Some people choose the opposite for the mere satisfaction of seeing debt disappear faster but it may not be the cheapest way.
Here’s an Example: Depending on your credit card terms figures will differ.
If you have a credit card with $3000 at 20% interest rate and paid the minimum payment of 3% or $90 a month, it will take 4.16 years to pay and cost you $1415 in interest.
Increase the payments on the same card balance on the same card to $180 a month and you’ll reduce the length of time to 1.6 years and cost of borrowing the money will fall to $544.
You’ve doubled the payments but reduced the cost and length by almost 3 times.
The same balance but with a 10% interest rate would look like this…
$3000 at 10% with a minimum payment of 3% or $90 would take 3.3 years and cost you $529 in interest.
$3000 at 10% but double the payments to $180 would take 1.6 years and cost you $243 in interest.
This time you doubled the payments but only saw the cost and time frame reduce by approximately half.The impact of reducing you debt is significantly higher by increasing your payments on the higher interest rate card.
You can clearly see which card is giving you more bang for your buck if you pay it off quicker.
Once you finish paying off the highest interest credit card you then take the money you were putting on that card (ex: $90 a month) and apply that to the next highest interest card on your list.
So if on the second highest credit card at 10% you were paying only the minimum monthly balance of $90 now you can pay $180 a month. Some call this the snowball effect where you pay off one debt then apply that money to the next and so on until all your debt is gone. The overall idea is to pay the minimum payment on your debts while focusing on paying one of them down quicker.
If there’s no more debt and yourmortgageis paid then save the money in youremergency savings or invest it, plow it into RESP‘s for your children, it’s your choice.
Keep in mind this is not something that is going to be blown away in a short period of time. I imagine it took you time to build all the consumer debt so it will take time to get rid of it. I’m hoping by the end of it you have learned the difference between a “need” and a “want”.
If you can’t balance your budget you have another problem. You need to balance your budget without relying on overtime. You need to get rid of anything in your budget even if that means cable and cell phones. Stop justifying it, justify why you need out of debt.
You can also make/save money to pay down your debt faster by:
- Working extra hours (You should never rely on overtime in your budget though)
- Sell things that you can make a good profit on and put the money on the highest interest credit card
- Hold a garage sale
- Sell your vehicle take the bus
- Get a second job
- Use Coupons
- Shop sales or price match
- Eat in vs Out
Alternatively you could look intodebt consolidation loans, but make sure you go over everything with a fine tooth comb.
What is a Debt Consolidation loan?
In a nutshell a debt consolidation loan is a loan where you borrow enough money to pool several debts into one. But it’s a lot more than that so talk to your local bank or financial group. You can also get free debtconsolidationhelp in Canada with a free assessment you can do right online.
Keep in mind if you don’t pay you may risk losing your house depending on the terms and conditions of the loan. Don’t do it if you are not committed. As I always suggest with anything research, and don’t stop until you have all the answers.
Debt Consolidation Example: If you have 7 credit cards that you are struggling to pay then you can pool them all into one loan and have one payment instead of 7.
Other pro’s to debtconsolidationbesides one payment is potentially a lower interest rate,lower monthly payments,you aren’t spending all that money on interest and having your debt in one place, according to RBC Royal Bank.
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Warning…
Sounds great to consolidate your debt but the only problem is if you keep using those credit cards. Put them away, there’s no time to be thinking about adding more debt to debt. You are not free and clear because you consolidate you still owe money.
You have to stop and ask yourself when you are looking to purchase something. If you don’t have the cash to pay for it, why are you buying it? Stop making excuses up or banking on bonuses and overtime or gifts and inheritance. Come on, we are all adults here so play with your money like an adult not like you are playing monopoly. This is the real world and you can lose everything you’ve worked so hard for. No one will want to hear the sob stories and excuses when they are owed money.
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Remember you put everything on the line every time you dig a deeper hole of debt. If you can’t give a crap about pulling out of debt one of 2 things may happen or maybe both. You may go bankrupt and you may see your relationship breakdown. It’s not easy for both partners in the relationship but you have to work as a team.
I’m not being insensitive either and for the love of marriage vows not many people stick around when the going gets tough when it comes to money. It’s reality and too many people think it will never happen to them, open your eyes. Money is one of the top reasons people fight and a huge relationship killer.
I urge you not to use credit cards unless you can pay it off at the end of the month. It’s not worth the heartache and stress of debt. Don’t let anyone into your head, not even a sales person because at the end of it, you hold the bill.Don’t let anyone tell you need or want something, you decide and on what terms.
When will you be debt-free? Check herewith this free debt reduction plannerto see if you are on track.
Keep your goals in check, motivate each other or yourself by writing down your feelings. There is an ending to every debt reduction story, but the ending depends on the owner of the debt. You write the chapters of your life which means you can alter them, so do it. Make the changes today with a debt reduction plan, and be ready to walk the path to debt freedom! You can do this!
Mr. CBB
Come chat with us on Facebook HERE or Twitter Here… it’s all about saving money.. are you In or Out?
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