8 Realistic Tips to Manage & Reduce Your Debt

Week 2 of Financial Literacy Month is all about managing your debt and determining the best plan to regain control and start paying down your debts more quickly.

Whether it’s a car accident, divorce, job loss, or illness, life sometimes hits you with unexpected events that often turn into unexpected expenses. This can easily land you in a situation where you’re struggling financially and unable to make your monthly payments. Pair this with inflation and high interest rates, and you’re probably feeling more financially overwhelmed than ever.

It’s not all bad news! There are strategies you can put in place today to help ease the debt burden. Let’s take a look at 8 practical tips you can use to effectively manage and reduce your debt.

1. Organize Your Finances

It’s impossible to figure out how to get out of debt wit you don’t have a clear understanding of who you owe and how much you’re owing.

• Make a comprehensive list of your creditors, account numbers, total balances, interest rates, and monthly minimum payments—don’t forget to include overdue cellphone and other smaller bills.
  
• Get a free copy of your credit report and double check to make sure that your list matches up.
  
• Make sure your taxes are up to date. Depending on your financial situation, you could have some significant CRA debts that you need to take care of quickly.

2. Decide Which Debts to Pay Off First

Don’t mistake making your minimum payments for progress. Just making your minimum payments means that most of your payment is going towards interest. Focus instead on paying down your debts, one creditor at a time.

• We often recommend paying off credit card debt first since credit cards usually have higher interest rates than other debts. If you have multiple cards, the card with the highest interest rate gets priority.
  
• Use the list you created above to rank your debts and decide the most financially responsible order to pay them off.

3. Stop Using Your Credit Cards

This one’s simple—but that doesn’t mean easy! If your focus is to pay down your debts, you’ve got to stop using your credit cards. That goes for overdrafts and payday loans, too. To avoid spending money that you don’t have and getting even deeper into debt, it’s key that you stick to using cash or debit instead of your credit card.

4. Get Honest About Your Spending  

If the amount of money you’re spending each month is getting you deeper into debt, it’s time to take an honest look at where you’re spending your money. Part of the process of reducing your debt is limiting (even better, eliminating!) the additional debt you take on. Take a good look, make some tough decisions and cut back where you can.

5. Hands Off Your RRSPs

It can be incredibly tempting to use your RRSPs to make a large, one-time payment towards your debts, but we urge you to carefully consider the consequences of this decision and instead explore alternative strategies.

• You need to pay income tax on RRSP withdrawals which usually means you’ll see a lot less money hit your bank account than you were expecting. Not to mention, you’ll probably end up owing more money to the CRA tax when you file your tax return for the year.
  
• RRSPs are so valuable that they’re federally protected if you ever need to file a Consumer Proposal or personal bankruptcy.
  
• Using these funds now can cause some major stress in the future if you don’t have enough time to save up that money again before retirement.

6. Do Not Prioritize Your Credit Score Over Your Mental Health

Many of our clients put off reaching out for help with their debts because they were concerned their credit score would be negatively impacted. Yes, there are some consequences to your credit report, but filing a consumer proposal or personal bankruptcy does not impact your credit history forever and there is nothing that is more important than your mental health and well-being. Debt stress and anxiety can impact your work, sleep, marriage, mental state, and other areas of your life and should be given the same care and attention as other physical ailments and issues that you’re dealing with.

Your credit score is not an accurate reflection of your financial health (and lenders know this!) and your goal should always be to strive for a debt-free future. Plus, with some time and effort, your credit score will improve in a few years.

7. Recognize the Signs That You Have a Problem with Debt

If you’re questioning whether you have too much debt, you probably do. Click here for a list of signs that you have more debt than you can handle.

8. Reach Out for Help

People often hesitate way too long to reach out for help with their debts because they’re afraid they’ll be judged, mixed in with a little bit of guilt and embarrassment. But we’re here to tell you that there is zero shame in seeking professional help for a very real problem. It’s not your fault—there are so many events and circumstances that are outside of our control (a pandemic, high interest rates, unprecedented inflation…life!) that cause or worsen your financial challenges and that’s why there are federally-regulated, legal solutions available.

Our team of experienced Licensed Insolvency Trustees and Debt Advisors are always available to provide you with unbiased advice on how to manage your debt and discuss the debt relief options available to you. Book your free, confidential debt consultation now.