Did you know according to the 2019 statistics Canada has the 4th largest debt to income ratio worldwide? As of 2020 Statistics Canada has shown that Canada’s debt to income ratio is 176.9%. That means for every dollar Canadians have to spend we actually spend $1.77. That’s a big problem especially when you consider lost income from a worldwide pandemic. Stats Canada has also shown that lower income households typically have the highest debt.
Before you beat yourself up I sympathize with you. You don’t know what you don't know. Worse you don't even know you should be trying to learn it since you are unaware. Debt has become so normalized in this country. As long as you’re doing better than “fill in the blank” you’re good...right? Financial awareness and health isn’t taught in schools and unless you were fortunate to come from a family that taught you this how would you know? I wouldn’t even blame teachers or parents as a lot of them have never learnt this and if they don’t know how are they going to teach you?
Debt can be so overwhelming and sometimes you get to a point where you just say “screw it! I’ll just rack up more since being debt free seems like an unrealistic dream.” That’s why I want to help you!
Now let's dive in! Start off by printing this worksheet. It will help you stay organized and prevent you from forgetting things.
If you have debt from different sources start by listing all of your debts. This could include credit cards, student loans, money you owe friends and family, vehicle payments, furniture payments etc. Use the template above to help you stay organized. I've included extra spaces at the bottom for additional categories you might have. Next to each line write how much you owe, your minimum monthly payment, the interest percentage/rate and how much is still owing. Now take it one step further and find out how long it will take you to pay it off if you only make the minimum payments. This is easily found on the bottom of your credit card statements and on your financing paperwork. In the case of owing money to friends and family write down the expected repayment date.
You want to make sure you are continuing to make the minimum payments for each of the debts you just listed. If you continue to make the minimum payments without racking up any more debt you will eventually be debt free. However in the process you'll have paid way more in interest than if you had just paid the amount in full or if you had paid it off quicker.
Methods of Debt Repayment
When I am helping a client get out of debt I recommend looking at the amount on your list with the highest interest rate and putting more money towards that, while still making your minimum payments for every other debt, to pay it off quicker. The faster you pay off your highest interest debts the more money you save. This is usually a credit card since typical interest rates are around 18-20%. Once your amount with the highest interest rate is paid off simply move down the list to the amount with the second highest interest rate and so on. Now, however, you should be able to put more money towards the second amount since you add what you would have still been paying on your highest interest amount to the second highest amount.
There is an opposite theory that is held by Dave Ramsey- a financial guru based in America. He calls it the Debt Snowball and suggests you pay off your smallest amount first- ignoring the interest percentages. Once the smallest amount is paid off you can put that payment towards the second smallest amount of debt and so on. A big benefit of the Debt Snowball method is that it helps you stay motivated since you are crossing items off of your list quicker at times than if you were going based on interest rates. That gratification and sense of accomplishment will help keep you motivated to reach your goal. Although this way you will probably be paying more in the long run than if you started with the highest interest amount first.
Ultimately you know yourself best. If you can have the delayed gratification to grind out paying the highest interest amount first I would say DO IT! But if you know you won't stay motivated without seeing progress quickly then give the Debt Snowball a try. Either way you're getting out of debt and can't go wrong with that!
Just make sure that while you might be doubling down on whichever amount you have picked to pay off first you don't neglect the minimum payments for each of the other debts you have.
Debt Repayments & Your Savings Account
I also get asked the question a lot about saving while in debt. My advice is get out of debt first and then start contributing to a savings account. The reason I recommend this is because of interest percentages. Let's say you have $1,000 in a savings account. That savings account is giving you anywhere from 1%-7% back in interest. However, at the same time you owe $1,000 on your credit card that charges you 19% interest on that balance each month. Without pulling out your calculator or doing mental gymnastics we know that the money in the bank is only earning us 1-7% while we are essentially paying our credit card company 19%. If we take 19-7 we have a deficit of 12%. This means it actually COSTS me more to have my money in a savings account versus using it to pay off my credit card debt.
I know we were told our whole lives to save and sometimes it can feel good to open up your bank account and see a small nest egg sitting there but always do a quick interest calculation. If the interest rate on your debt is greater than your interest rate in your savings account it's costing you more!
Once you are debt free I would then take those debt payments and flip them over into your savings account. However, I'm not a financial advisor so be sure to run your plan by your financial advisor.
A Final Thought
I want to be upfront with you the road to debt freedom is HARD! It takes consistent discipline and effort. You will need to be strict with your budget and yourself. You will have to deny yourself things and delay your gratification. You will probably pass through a wasteland of despair where the enthusiasm has worn off and money is going to your debt but it doesn’t seem like it’s doing anything (it is, trust me!). That ugly mid part where it seems like it will never end and you just want to go shopping or go to Mexico because let's face it winter in Canada is miserable.
At this point come back here and read this:
My name is Laura and I’m your friend. Debt freedom is SO WORTH IT! Trust me, I know. It is a hard grind but it is making you stronger. You’re learning and once you’re debt free you will do everything in your power to not put yourself back in this situation again. You will sleep better, eat better, and breathe better when you cross the finish line. You will enjoy your vacations more and your stress levels will be significantly reduced. Take this opportunity to prove to yourself that actually you can be disciplined and you can be consistent. You can follow through and you can do hard things and that you finish what you start. Everything you want is on the other side of this awful wasteland you’re in. Just keep going, even when it seems like it will never end, it will. You owe it to your future self. Plus, if you stop now you’ll be right back in the same painful situation that made you want to start this journey anyways. Remember when you started you were desperately wishing to be where you are now. It might feel good temporarily to take the pressure off but in a few months, a year or a few years you’ll have wished you stayed the course. By then you’ll probably be in more debt making it even harder to climb out. I sincerely don’t want that for you! So keep going! You got this!
Good luck and see you next week where we tackle budgeting,
Laura Wilson
I came across you on the FYP on Tiktok. I love what you're doing here and look forward to reading more Blog posts.