It is possible to live debt-free if you set a budget and realistic goals and stick to them, live within your means, avoid high interest rate loans, and pay off outstanding balances.
Set Budget and Goals
The first step to being debt-free is to set a monthly household budget and weigh your income and expenses. Make a list of essential expenses such as property taxes, rent or mortgage, gas, water, and electricity bills, and groceries. Think of other expenses such as coffee, restaurants, baby sitting or daycare, alimony, child support, credit card balances, etc. Make note of expenses that you can cut if the total amount exceeds your income. Then you should list all sources of income in your household. These can be salaried income, wages, real estate investments, unemployment compensation, or business net income. Other sources of income include high-yield savings, compensatory damages, cash rebates, and sick pay benefits. Add up your expenses and your income sources and see whether you will have any money left by the end of the month. If your expenses exceed your income, this is a red flag which- shows that you are financially vulnerable and should adjust your budget accordingly.
Live within Your Means
Whether you are in the low- or high-income bracket, living from paycheck to paycheck is simply making ends meet. But it can be worse. Many people make impulse purchases that they later regret or buy things that they rarely or never use. Some people tend to stock up on food and products that are on sale and spend a lot of money. Instead of buying items on their shopping list, they end up purchasing 10 cans of kidney beans and 50 whole-grain cereal bars. Buying complementary items is also a mistake when you try to stick to a budget.
Do Not Use Payday Loans
Many payday lenders in Canada offer short-term loans with unfavorable terms and extremely high interest rates. This is a last resort for people who face unexpected expenses and emergencies and cannot access better solutions such as low interest rate cards and lines of credit. The problem with payday loans is that charges can be as high as 30 percent of the total amount borrowed. The interest rate is much higher than that of standard solutions such as personal loans and lines of credit. The focus should be on building savings for rough times and unexpected expenses. People who often resort to payday loans are usually advised to try to build a healthy score so that they have access to different borrowing solutions.
Pay off Your Credit Card Debt and Use Only Cash or Interac
If you have multiple cards and excessive debt like many Canadians do, it is high time to start paying off your outstanding balances. One way to go about this is to focus on one card at a time. Compare interest rates and start with the card that goes with the highest rate. Another option is to pay the smallest balance first and then focus on the next smallest balance. If you carry large balances, you should always try to pay more than the minimum. This is also a good way to save on interest charges, especially if you have high interest credit cards. Once you have paid your card balances, you should try to use cash or Interac only to avoid accumulating debt. People usually spend less because they physically hand over their hard-earned money. Using cash also makes it easier to budget by allocating money to different spending categories. With credit cards, it is much easier to lose track of spending and overspend. Of course, whether you use cash or credit depends on the particular situation and your finances. If you only make small, occasional purchases, then you can use your credit card. If you are not organized and are usually late on bill and credit card payments, then you may want to use debit or cash. And if you have excessive debt, it is best to use cash only.
Another option is to use Interac to pay for products and services. Your card will be linked to your savings or checking account to make payments. This allows you to keep track of your purchases and spending. One of the major benefits is that you use your own cash instead of credit. Another benefit is that you can use your card to make purchases online and from different retailers. An added benefit is the fact that many financial institutions in Canada feature Interac Debit, among which CIBC, ATB Financial, West Credit Union, Unity Credit Union.
Never Get a Cash Advance
It is best to avoid cash advances to stay away from financial trouble. The problem here is that this is a type of loan that adds to your card debt. If the fee is 5 percent or $5, whichever is greater, you will pay $15 on a $300 advance. Another problem is that the interest rate is typically higher than the balance transfer and purchase rates, and borrowers also pay ATM fees. An added problem is the fact that there is no interest-free or grace period meaning that charges begin to accrue at the date of the transaction. So, instead of getting a cash advance, it is better to look into alternatives such as a peer to peer or personal loan, salary advance from your company, or loan from family members or friends.
Use Debt Consolidation to Get Your Finances in Order
Using consolidation is one way to get control of your finances if you have multiple debts. In this case, you take out a single loan and combine multiple payments. Many banks in Canada offer this financial solution, including RBC, CIBC, TD Bank. Banks allow customers to combine different types of debt such as personal loans, lines of credit, and card balances. There are multiple benefits for borrowers, and one is that they save a lot on interest charges. If you have two or more credit cards with high interest rates, for example, debt consolidation is definitely an option to explore. The fact that you have a single payment to make, instead of multiple payments, makes it easier to avoid being late. Obviously, you will also feel relief knowing that your accounts will not be turned over to a collection agency. There are downsides as well, one being that financial institutions usually require good credit. If your score is less-than-perfect, you may not qualify. Another downside is that consolidation loans usually go with higher monthly payments because the terms are shorter than standard loans.
Whether consolidation is the best solution depends on different factors such as amounts due, types of debt, income and assets, etc. There are alternatives to consider, including credit counseling, personal bankruptcy, debt settlement, cash-out refinance, HELOCs, and home equity loans. All solutions have pros and cons. Debt settlement, for example, allows borrowers to get lower interest rates but they cannot access credit when they are in the program.