How to Reduce Your Debt
Plan your spending according to your income
Keep track of spending
One of the smartest things you can do to get control of your finances is to start keeping track of what you spend so that you can see exactly where your money is going each month. You can do this by getting a small notebook or notepad and writing down each payment along with date and to whom, ask for a receipt each time your spend money or refer to your bank statement if you use a debit card. We would suggest using the last alternative to a minimum since you are leaving a digital trail of your spending for someone to obtain either legally or illegally. Once the information is digitized it will always be available to someone else besides yourself.
Make a budget
Once you have kept track of your spending for a couple of months you know will have information that will help you develop a budget. Having a budget and learning to stick to it will help you free up money to reduce your debt. For more information on budgeting, see FCAC’s tip sheet called Making a budget and sticking to it, which explains how to make and keep a budget and includes a budget worksheet.
Put needs before wants
Buy what you need first. Eliminate unnecessary expenses and look for things you can live without.
Don’t get into more debt
Keep your credit card in your wallet and don’t use it unless it is for an emergency
To avoid getting into more debt, use cash or your debit card instead of your credit card. That way, you’ll be spending money you already have.
Avoid “Buy now, pay later” offers
When you’re having problems making ends meet, the administrative fees tied to such offers and high interest rates if you don’t pay on time will only add to your existing debt load.
Reduce small, recurring expenses
Saving a little every day can go a long way. Good examples of ways you can save on costs include taking public transit instead of your car, bringing your lunch to work and reducing your coffee consumption. Eliminating that extra $1.50 coffee each workday can mean over $400 a year in savings.
Reduce your banking fees
Use automated banking machines (ABMs) from your own financial institution. Review your banking package every now and then to make sure that it is still the best one for you. For more information, see FCAC’s Cost of banking guide interactive tool, which lists ABM fees and helps you compare and choose the best banking package for your needs.
Manage your existing debt
Pay down your highest interest rate debts first
If you carry a balance on your credit card, then this is likely the debt with the highest interest rate. Use cash or a debit card while you pay off this debt to avoid accumulating more.
While you pay off the credit card debt, don’t forget to make the minimum payments on other debts with lower interest rates. If you set aside the main part of your income towards bringing the balance down on your most expensive loan, you’ll be surprised at how much you save.
Contact your creditors
As soon as you realize that you are having trouble making ends meet, call your creditors and explain the situation. In most cases, they will work out a modified payment plan that will make it easier for you to pay off your debt.
Get a consolidation loan with your financial institution
This means getting one single loan to pay off all your existing debts so that you have just one payment to make. For this new loan to save you money, it must have a lower interest rate and a lower monthly payment than all the other loans put together. It is also important to stop using any credit cards that you consolidated into the new loan. For more information on a consolidation loan, talk to your bank or financial professional.
Talk to trusted financial professionals
These may include your bank representative, your financial planner or a credit counselling agency. With their help, you will be able to evaluate your current debt situation, determine your present and future needs, make a budget and find ways to pay off the debt. For more information on credit counselling agencies, see FCAC’s Tips for dealing with credit counselling agencies.