If you find yourself literally swimming in past due bills, trust me, you’re not the only one – the average Canadian’s non-mortgage debt is over $25,000!
Fresh out of university and in my first “real” job, I racked up $11,000 worth of credit card debt in just one year (what do you mean I can’t afford $500 shoes on my entry-level salary?). When my credit card was declined while trying to buy groceries, I realized that I had to change my ways, or face financial ruin.
You might say, “Quit being such a Buzz Killington and live a little!” Okay, but do you want to wake up at 60 years old, and realize that you have absolutely nothing saved for retirement?
- What happens if you’re laid off?
- What if you need to take a leave of absence to care for a loved one?
- What if you date a musician!
You need a personal finance strategy. This bootcamp will help you develop one.
So, how do you get on track to start rapidly paying down your debt? When my credit card was declined at the supermarket, I left my purchases at the checkout counter, sulked back to my apartment, tail between legs, and devised a plan of action:
Step 1. Figure out exactly how much you owe, and to whom
I wrote down exactly how much I owed, to whom, and the minimum payment amount. At this point, you might decide that your debt is so huge that seeking assistance from your local banking representative, or a credit counsellor is necessary.
Your banking rep or credit counsellor can give you more options for paying off debt, such as applying for a consolidation loan to cover your debt, and then making a single payment towards that loan. A consolidation loan combines all of your debt together so you only have to make one monthly payment at a more reasonable interest rate. A consumer proposal is another more extreme option where by you reach an agreement with your creditor and only pay part of the original debt. Bankruptcy, often called the last resort solution, is another option whereby you become insolvent. With bankruptcy, your credit rating will be negatively affected and you will have difficulting obtaining credit in the future. If you decide to go through any of these three routes, kindly skip to Step 4.
Step 2. Prioritize your debt and invoke “Operation: Snowball”
Which bills have been overdue the longest, and which ones have the largest balances? Once you determine these, you can then apply the Snowball Method of paying down your debt. The Snowball Method of debt repayment works like this:
Make the absolute minimum payment on all of your outstanding bills, always and on time. This will prevent your credit rating from complete obliteration.
Start with your smallest debt, and make aggressive payments towards it, while still making minimum payments on all other bills.
Once your smallest debt is paid off, attack the next smallest debt until it’s paid off, while still making minimum payments on all other debts.
Repeat the process until you hit the home stretch of paying off your most daunting bill last.
There are different strategies for paying down debt, but I prefer the Snowball Method because it focuses on small wins: breaking down your debt-repayment into manageable and more achievable pieces. This process is much less intimidating than facing a pile of bills and not knowing where to start.
Step 3. Cut out or minimize immediate expenses
Stop your debt from accumulating at the rate that led you to this mess by immediately cutting and minimizing expenses wherever you can. For me, this meant:
- Cancelling my cable
- Reducing my cell phone plan
- Suspending my fancy gym membership for a few months and taking long walks instead
- Cutting out the $5 lattes. Now, I keep a box of tea bags, ground coffee and my French press at the office
- Bringing my lunch as much as possible. One of my favourite tricks is to keep instant soup cups, trail mix, and granola bars in my desk at work for the days I can’t bring myself to pack a lunch
- Avoiding boozy nights out with the girls for a while (winter hibernation is a convenient excuse)
- Getting roommates
Later on in this bootcamp we’ll review how to track expenses so that you have a clearer picture of where your money is going every month, and making the necessary adjustments to minimize expenses, or as I like to call it, optimize spending.
I know, I know, confronting your debt looks like a scary, gargantuan task, but it doesn’t have to be. Just remember that you’re not alone and by taking steps to get your finances under control, you will feel more empowered and in control of your own life in general. The confidence and calm you’ll gain once you start working towards financial security will trickle into every other area of your life as well, from career, to family to relationships.
Welcome to bootcamp.
Written by M. Alice Allen