1. Identify your debts and draw up a balance sheet
Identifying your debts is the first step in creating a solid game
plan. To do this, make a list that includes:
We also recommend taking the time to create a balance sheet. This
portrait of your personal finances, which includes your assets and
liabilities, will give you an overview of your situation and level of
debt. You’ll then be able to make informed decisions about the most
appropriate course of action.
We’ve got a tool to help you take stock of your finances:
Make a balance sheet
2. Restructure and negotiate your debts
Restructuring your debts means consolidating them to improve your
financial situation and reduce the interest you have to pay each month.
What’s debt consolidation? It’s the process of combining all your debts into a single loan with a more preferential interest rate whenever possible. For example, if you have a credit card balance with a high interest rate, you could pay it off with a loan at a lower interest rate. This allows you to save on the interest you’ll have to pay on the balance.
This option may be available from your financial institution under certain conditions such as an acceptable credit score and a reasonable income.
→ Check out our article to learn more about debt consolidation.
Negotiate your debts
Good news: Some debts can be negotiated. Don’t hesitate to contact the people or institutions from whom you’ve borrowed money and ask them to adjust certain aspects of your loans.
Credit companies and financial institutions are sometimes open to
offering better terms to ensure that they’re repaid. They might, for
example, push a repayment deadline and reduce your monthly payments,
allowing you to avoid penalties and delays that could damage
your credit score. If you have tax debts, it’s also possible to
negotiate terms with the tax authorities.
Keep in mind: If you’re behind on several payments, contact
your financial institution’s collection department. They can help you
restructure your debts and potentially make arrangements to get your
repayments back on track.
Sometimes debt can feel insurmountable. In worst-case scenarios,
there are more radical options, including consumer proposals and personal
bankruptcy. In some situations, this may be the only option for
restoring your financial stability. But although this approach can
help you free yourself from certain debts, it will remain on your credit
score for at least six years. Keep this in mind before choosing to
go this route.
→ Visit the Office of the Superintendent of
Bankruptcy website to find out more about consumer proposals.
3. Review your budget
Once you’ve drawn up a list of your debts, you need to work out how
much you have available to pay them off. To do this, you first need to
draw up a budget or adjust the one you already have.
The 50-30-20 rule
The 50-30-20 rule is a good way of freeing up money to pay off your
debt. It involves dividing your income as follows:
- 50% for your basic needs – rent or mortgage, utility and telecom
bills, groceries, etc.
- 30% for non-essential expenses – restaurants, outings, gifts, and
- 20% for debt payment – put this amount towards your debt using the repayment method of your choice.
Should you continue to save while paying off your debt?
Yes, it’s a good idea to devote a portion of your income towards savings, even if it’s less than you’re used to. In other words, save less, but keep saving.
Here are three good reasons to keep putting money aside:
Save on taxes: Depositing money in an RRSP or TFSA reduces
your tax bill and earns you a tax refund that could go towards
paying off your debts. Two birds with one stone!
Avoid future debt: Saving up to build an emergency fund for
unexpected expenses can help you avoid going into debt later
Securing your future: Putting money aside regularly, even a
small amount, can help you carry out a project or ensure a more
comfortable retirement. Despite your debt, you need to keep thinking
4. Determine your repayment method
The high-interest method
This involves prioritizing debt with the highest interest
rates. If you have two debts of equal value but with different
rates, you’ll know which one to pay off first. As a general rule,
credit cards have the highest interest rates while student loans have
the lowest. This method will help you to pay off your debts as
efficiently as possible and reduce what you pay in interest.
The snowball method
This involves paying off the smallest of your debts first and then
proceeding in order of size. This method is interesting from a
psychological point of view. It allows you to reduce your
number of debts quickly, which keeps you motivated since you feel like
you’re making progress. Note, however, that this method could cost you
more in interest.
Other considerations to keep in mind
Whatever method you choose, these two key factors should help guide
- Mandatory payments – Even if you prioritize the repayment of one debt over another, make sure you continue to make the minimum payments on all your debts.
- The deadline for repayment – If a debt has a specific deadline, make sure to account for it when making your repayment plan.
5. Rebuild your credit and maintain a good credit score
Accumulating debt can have a major impact on your credit report, especially if you miss payments. As a result, your credit score can suffer. But don’t panic, since there are ways to put things right. Here are some tips for rebuilding your credit and maintaining a good credit score in the future.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at National Bank Financial to learn more. Don’t have a specialist in charge of your file? Make an appointment.