Strategies for Staying on Top of Debt

Have you ever woken up and realized you have accumulated more debt than you’d like? If you have, you’re not alone. Debt accumulation can be a gradual process that leads many to eventually take stock of their finances and wonder, “How am I going to pay this down?” I can tell you that the first step to staying on top of your debt is to have a plan.

What types of debt are there?

There are two common types of debt: variable loans, like credit cards and lines of credit, and fixed loans, like car loans and mortgages. The difference between the two is how they’re set up. With a variable loan, the amount that you owe changes, based on your usage and you must make monthly payments on the outstanding balance. With a fixed loan, you borrow a total amount, usually for a specific purpose, and then pay it back in installments over a defined period of time.

The type of debt I see people asking for help with most often is credit card debt. It’s so easy to keep tapping when you think you can pay for it next month. Creating and sticking to a budget is a great way to keep yourself on track, making it easier to prioritize your needs vs. wants and avoid going further into debt.

What is the best way to pay it off?

According to Statistics Canada, the average Canadian household has approximately $1.79 in debt for every dollar of disposable income. Many Canadians hold a mix of variable and fixed loans. When it comes to the question of which debt to tackle first, I recommend focusing on paying down your highest interest loans first — such as credit cards  — while continuing to make the regular payments on your fixed loans. That said, there is no one-size-fits-all approach to paying down debt.

In order to choose a repayment strategy that works for your situation, I want you to think about how you feel you can best make progress. For some people, paying off high-interest debt first makes the most sense because it can make a big difference in the amount of interest you pay in the long run. Others prefer focusing their money on paying down their smallest outstanding debt because they see that amount decrease rapidly and feel motivated by the progress. For some, using savings to pay down debt may be a good option if it eliminates their outstanding balance and frees up money to begin saving again. Finally, if you’re feeling overwhelmed by the amount of different debts you have, a consolidation loan may be a good option to get back on track.

What should I do if I find myself with extra money?

If you find yourself with extra cash, it’s usually best to apply it to your highest interest debt or put it into a savings account. It can be appealing to put extra money on your mortgage or car loan but these loans usually have lower interest rates, and therefore, it is often more effective to pay off a high-interest credit card or line of credit first. If your line of credit and credit card are paid off, consider adding to your savings account or investing for your future. While managing our debt, we often also have multiple saving priorities, like having a healthy emergency fund, saving for a child’s future education or an upcoming vacation. If your savings goals are also well in hand, applying the extra cash to the principal of your mortgage or car is a great option to save yourself in interest over time!

How do I keep myself out of debt going forward?

Once you have your debt paid down, you may be wondering how to keep yourself from sliding back down that slippery debt slope. I have three pieces of advice for people to help create a plan to keep their debt levels down:

1. Create a budget to help keep yourself on track. If you’re not sure how, you can get started by downloading CUA’s monthly budget worksheet or by booking an appointment with one of our Financial Advisors, who would be happy to help.

2. Consider the way you’re spending your money. I never suggest that people cut out all their indulgent or fun spending but instead, look for ways to be more mindful so that your spending aligns with your goals.

3. Pay yourself first. An emergency fund will make a huge difference in the instance of unexpected expenses.

Do you have more questions about managing your debt? Give us a call at 902.492.6500 and a member of the CUA team would be more than happy to work with you.

Revised Jul. 20, 2021

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