Debt is a normal fact of life for most Canadians. But if you’re in a cycle of dwindling savings and increased debt levels, it’s time to regain control of your finances. Finding money for debt reduction can seem like an impossible task. But worry not; with the right strategies, you will soon be on your way to a much healthier financial situation. In this article, we will guide you through 5 simple steps to help you budget for manageable debt reduction.
Start by assessing your debt picture
We’re only human. Sometimes it’s far easier and less stressful to bury our heads in the sand about the debt we have. So, first things first, it’s time to confront your situation. Whether you have a couple of low-interest loans or several large debts that are spiraling out of control, it’s important that you start by being honest with yourself about the road you have ahead.
Begin by listing all of your current debts in detail. For each debt, list the amount you owe now, the interest rate, your current payments, payment due dates and any penalties that you pay to each of your creditors. We will later use this as a starting point to prioritize which debts you should focus on first.
Go through everything you can think of with a fine-toothed comb. From your store cards right through to your mortgage loan. Some debt will be much more expensive than others, which can be easy to forget when you’re just paying off the minimum amounts each month, so take your time with this step. It’s better to do it thoroughly than rush it.
The purpose of this task is not to overwhelm or depress you. Quite the contrary. This is an empowering first step to help you gain control over your finances. By educating yourself about where you’re currently spending money and where your debts are growing, you will have a clear picture of how to create a manageable budget to get on top of things.
Take a deep breath and make yourself a coffee (or something else that makes you happy). If you’ve got this far, you’re way ahead of most people, so take a few minutes to feel good about having the courage to step up and take action. If you’re stuck, you might find it helpful to speak with a financial advisor for help analyzing your current debt liabilities.
Audit your income and outgoing expenses
The next stage in budgeting for manageable debt reduction is to figure out how much money you have left after your living expenses. Make a list of everything you earn, spend and save today and note it down in this free excel personal budget worksheet.
This step is harder than it may initially seem as there are so many small, irregular expenses that you may not even realize you have. You need to note everything down: from the big things – like your mortgage or rent; to the little ones, like that cheeky glass of wine you have after work to wait out the commuter rush. Only then can you build a solid picture of what you have coming in and out each month.
Once you have your numbers, subtract the amount going out from the amount coming in. This will be the budget you have left for your debt reduction
We recently wrote an article on how to create an effective overview of your income and outgoings, which you might find helpful to read through before starting this step.
Create a debt reduction plan
You can now create a plan of action to bust your debt once and for all.
Hopefully, your answer from step 2 is a positive number. If so, now you need to decide how much of what you have left each month you’re willing to commit to cutting down your debt.
We suggest about 50% so that you still have a buffer zone. So, if you have $200 more coming in than going out, you’d start by committing $100/month to get out of debt.
For most people, it makes sense to begin paying off your most expensive debts (i.e. the ones with the highest interest rates). However, if you are someone who benefits from seeing some quick wins to stay motivated, you might instead find it better to pay off your smallest debts first. Starting with the smallest debts allows you to see results quickly, which for some people is a great motivation to keep going.
If, on the other hand, step 2 showed that you have more going out than coming in, go back to your expenses and figure out how you can either reduce the amount going out or increase the amount coming in each month. Don’t worry if this is the case; the most important thing is that you now have a clear picture of your current situation and can start to make positive changes. The great thing about your finances is that small, incremental changes have a big impact on the overall picture, so even if it feels like you have a long way to go, don’t worry. With consistency, patience and perseverance, you’ll achieve a debt-free life before you know it.
Track your payment progress
Once you have decided how much you are going to budget each month to pay towards your debt, it’s time to start actually doing it. Which, for most of us is easier said than done.
We recommend keeping a daily record of everything you spend to ensure that each month you have the amount you plan to pay towards your debt. Simply make a note on your phone of the things you buy throughout the day, and then log it in the Tracking tab of our free excel personal budget worksheet.
Each month you should also track how much of your debt you are successfully paying off. There’s nothing more motivating than seeing your red numbers turn green, so having a visual record of your finances that you can monitor over time will help you stay focused.
Celebrate your successes
Too often, we keep our focus on how far we still have to go, and we forget to recognize (and celebrate) how far we’ve come. Celebrate every milestone along your debt-busting journey, every extra payment and every debt that gets paid off.
Regaining control of your finances is one of the most empowering things you can do, so you should try to make the experience as positive as possible. Be kind to yourself if you slip up from time to time. The important thing is that you recognize your less-than-budget-savvy behaviours and try to limit them.
If you find that you are consistently unable to stick to your budget, then it’s totally fine (and sensible!) to revisit your plan and adjust it to fit what you can realistically commit to.
And there you have it – a simple budgeting guide to manageable debt reduction! Good luck, and remember that each small saving you make is a positive step in the right direction to living debt-free, so stick with it!
If you are unable to get out of debt on your own, don’t be ashamed to seek professional help from a reputable, experienced debt advisor. Sometimes all it takes is an objective set of eyes to help you assess your situation and put in place manageable steps to get you back on track.