According to a financial report by Equifax Canada, increased lending and higher spending have pushed total consumer debt to $2.32 trillion in the second quarter of 2022. Rising inflation has affected essentials including housing, energy, and goods and services, which is why many Canadians are scrambling to support higher costs of living. Unfortunately, the financial stress this has caused has negatively impacted consumer credit, whether in the form of day-to-day card spending or non-mortgage debts such as auto loans.
Understandably, many feel forced to amass debt just to make ends meet. However, amassing a large amount of debt is equally troublesome, especially if you’ve already missed payments. That being said, we’ve gathered five tips that can hopefully help you reduce your personal debt:
- Create a budget to track expenses
Although this first tip is the simplest on the list, creating a budget requires a lot of forethought and preparation. After all, it isn’t as straightforward as following a strict monthly spending limit. Instead, you should separate your spending into categories and assign a percentage of your income to each. First, take note of your monthly after-tax income to see how much money you have. Next, catalog fixed and variable expenses like groceries, personal care, utilities, insurance payments, and minimum debt payments. Ideally, you should spend 50% of your income for necessities, 30% for nonessential expenses, and finally, 20% for debt payments. If you can’t meet this guideline, you can simply adjust it to accommodate your expenses until you can pay off your debt. This way, you are properly allocating your money instead of skimming around.
- Consider side work or passive income generation
If you have the time and the capacity, pick up work on the side. Any income from a side gig can go a long way in lessening your personal debt. Nowadays, there are many ways to earn without committing to an eight-hour desk job. CNBC listed transcribing audio and resume writing as lucrative opportunities. Apart from those, you can also post your services on online community boards. If you’re interested in house-sitting or babysitting, such a platform can help you connect with prospective clients. Slowly but surely, side work can boost your funds and make a difference in your personal debt.
- Bump up your prepayment percentage
Staying on top of payments is crucial to reduce your debt. But apart from making timely payments, you should look into bumping your prepayment percentage. Of course, Sound Dollar’s guide on how to pay off a personal loan early explains that prepayments depend on your unique circumstances. While paying off a personal loan early can entail fewer interest payments, if you have a low-interest rate, it won’t really save you much cash in interest. Additionally, certain lenders charge a penalty fee if you pay off your loan early. And if you’re truly tight on funds, extra payments can be burdensome to make. All those considered, if your loan is amenable to early payments, pursuing this can reduce your debt-to-income ratio.
- Research the best interest rate when consolidating your debts
You can potentially manage your debts better by securing a debt consolidation loan from a bank. This is because, instead of making several payments to your current lenders, you only need to make one to the bank. One thing you have to note, though, is that you should conduct research on the best interest rates. Canada’s central bank recently implemented a 50-point hike, in its interest rate. And for reference, that can add around $30 every month to every variable rate loan (for every $100,000 owed). A borrower who previously paid 4.25% on a $400,000 mortgage, for instance, may see their monthly payment jump from $2,159 to $2,270. As such, it’s important to evaluate whether the bank or your lenders can offer you the best rate.
For more insights on how to manage your finances, do read through our latest Financial posts.