The average Canadian owes more than $1.70 for every $1 of disposable income. This is a terrifying scenario for the country to be in, especially as the Bank of Canada is likely to raise interest rates at least once more in 2018. It isn’t easy living a life in the red. We lose sleep at night, we get stressed out, and we feel like we’re drowning nickel by nickel, loonie by loonie. But what’s the solution?
Well, establish a debt management scheme to get yourself out of debt. Whether it is ditching the credit card or implementing a realistic payment program, there are many measures you can employ to ensure that you eventually become debt-free.
Are you up for the task? Get ready! Here are five debt management tips for the lone wolf:
1. Put Your Plastic on Ice
We love to swipe, insert, and tap with our pieces of plastic. It sends a rush through our body and injects some dopamine in our brains. It provides that instant gratification. But that desire to get your next spending fix is what got you in the mess you’re in today.
So, as you try to get yourself out of debt, you need to put your plastic on ice.
Take your Visa, MasterCard, American Express, and Discovery cards and hide them in your closet. When you leave the house, just carry your debit card and cash. That’s it.
Without your credit cards, you won’t be tempted to spend money you don’t have.
2. Make Payments on Time – And More Than the Minimum
Once consumers get deeper into debt, there are two things that usually transpire: their payments are not made on time and their payments are typically the minimum required.
Both are bad ways to manage your debt. Late payments lead to greater penalties and covering the minimum will leave you stuck on a treadmill.
Moving forward, you need to submit your payments by the due date (or before) and ensure they are much more than the minimum. If you incorporate these simple but effective measures into your debt management scheme, you can get out of debt a lot of quicker.
3. Know Which Debts to Pay Off First
Here are three things to determine:
- How much debt you have.
- Who you owe money to.
- What your interest rates are.
Once you figure this crucial information, then you can decide which debts to focus on and pay off first. Typically, according to financial experts, you should tackle the debts that have the highest rates of interest first. Then, you can start tackling everything else.
4. Limit New Debt for a Year
When you begin your quest to become debt-free, there is one thing you must avoid: new debt.
Unless it is absolutely critical, you need to limit new debt for at least one year. Everything from a line of credit to an automobile loan, you can’t add new debt to your already existing pile. This will only derail plans and cause you to lose any momentum you were recently generating.
5. What’s Your Debt-to-Income (DTI) Ratio?
Banks usually examine the amount of debt you maintain compared to your monthly income. This is known as your debt-to-income (DTI) ratio. Ultimately, your DTI ratio should be kept under 35 percent at all times, which suggests that you’re in great financial shape.
So, how exactly can you crunch the numbers to find out your DTI ratio?
Here is an example: you pay $1,200 per month for your mortgage, $200 per month for an auto loan, and $600 for your remaining debts. This means your monthly debt payments are $2,000. Meanwhile, your gross monthly income is $6,000. In total, your DTI ratio is 33 percent.
Faustian finance has inflicted millions of households across the Great White North. The coquettish Mephistophelean nature leads many of us to make foolish monetary decisions every single day. We need to spend money we don’t have just to satisfy the chemicals in our brains, sending us into debt. It’s a tough addiction to kick, but with the right debt management plan, you can start to lead a debt-free life next year at this time.