If you are having a hard time paying down your debts and staying within your budget you might be going about things the wrong way. When it comes to your finances, you have to make every effort to focus on paying down debt while creating a small cushion for unforeseen emergencies. If you have significant debt you don’t want to save much more then for emergencies as the interest you will be earning on those savings will be much less than the interest your creditors are charging.
When you do this, your finances become easier to manage as you become less dependent on credit. If you are paying down debt but have nothing saved for an emergency, things will have to change. Here are our top recommendations to get out of debt in Toronto, while still managing to save a small amount to help to weather the storm.
Why You Need Savings
Savings are important to anyone’s budget as it provides additional money to cover unexpected costs. This can include car and home repairs, unexpected medical expenses and even funds should you lose your job. Although it is hard to imagine losing your job right now, it can happen to anyone.
Set a Budget
Although you might have a budget in place, if you are facing cash flow issues it might not be tight enough. Revisit your budget to look for ways to save some money. List all of your debt, household expenses including food, entertainment, gas, insurance and anything else you can think of. Then calculate how much you receive on your paycheque to get a realistic number for your income.
Remember if you have creditors with high-interest rates you want to give them as much money as possible every month (preferably well beyond the minimum) or all the money you are paying will be going to interest and you are not actually reducing your debt load. Focus on getting rid of those debts first.
Hopefully, you come out ahead and have some money to spare. If this is the case, the surplus of money can be put towards your savings. If you break even you can always go over your expenses with a fine-toothed comb and review all of your credit and debit transactions. The chances are, you will be surprised at how much you are spending. The more expenses you can reduce the money you can give to those high-interest creditors.
Look for savings opportunities, such as no more coffee and muffins at work, making your lunch instead of buying it, less takeout food and fewer clothes purchases. You can then start putting that money towards increasing the amount you are putting towards your debt. Getting rid of those high-interest creditors will give you more money to work with and then to eventually put towards actual savings.
Assess Your Minimum Payments
Look at your debt and consider the minimum monthly payments. Look for opportunities to pay more than the required. This will help you pay off your debt faster. As suggested you should put money towards the cards with the highest interest and balances to pay them down faster. Once that balance is paid, go onto the next balance adding the extra money you would have used towards the card you just paid off to your payments. This will help pay the debt off more quickly. Continue this process until all of your debts are repaid.
Set-up a Savings Account
Living with just one account for everything can make it difficult to manage your money. Instead, set up a separate savings account. Once you have reached your debt repayment goals you can also set up an automatic deposit from your chequing account into your savings account for a set amount each paycheque. Make sure this is based on what you can afford from your budget. As your savings grow, you can consider speaking to a certified financial planner to help you plan for the future.
Track Your Spending
Most banks provide you with tools to track your spending, such as pie charts that show how much went towards debt, how much to the mortgage, how much through chequing, etc. If you keep track of your budget using a spreadsheet, you’ll have a better handle on your spending and can compare this to the budget you have set for yourself. Make sure to include any money you might use from your savings account.
Look for patterns of spending such as takeout food or car repairs. This will help you look for areas to adjust your budget.
Plan Your Spending
When you have tough months you will be tempted to spend the funds in your cushion savings. Before deciding if this is necessary to consider if you really need what they funds will be sent on (e.g. rent or food) or if you could go without. Avoid splurging on things such as trips, clothes or a fancier car, as this will just get you back in debt. Also, try to make a plan to replenish your savings cushion if you do have to use some of it for an emergency.
Once you have paid off the current debt obligations, you can also set up “expense buckets” in anticipation of expenses that are likely to come up in the future. You can do this based on short, medium, and long-term expenses. Some of the most common expenses include a new car, a down payment for a home or even putting money towards investments or retirement savings.
Best Method to Pay Down Debt
If you find your debt remains unmanageable there are a few things you can consider. As mentioned, you can start by working your way through your debt based on the highest interest rate.
If your debt is becoming a burden due to interest you can look into a debt consolidation such as a consumer proposal. Debt consolidation provides you with a loan at a lower interest rate while a consumer proposal can freeze the interest altogether. This provides more cash flow for savings while also reducing the money you pay towards the interest with more focus on paying down the principal.
Carrying debt should never become unmanageable. These tips will help you get back on track so you can begin building your savings.
To learn more about how to save which getting out of debt, call Kevin Thatcher at 1-866-719-8547 or contact us here.