Week 7: How Much Debt is Too Much?
MONEY SMART CHALLENGE
Money Smart Weekly Conversation Fact: 60% of debt is held by those under 45 years of age. Mortgages, credit cards and lines of credit are the most common types of debt.
After all your expenses and debt obligations (credit card, mortgage, loans, line of credit) are paid each month, you should have funds left over for savings (emergency fund, down payment for a home or car, vacation or purchase or saving for retirement). If you are finding that you are starting to live paycheck to paycheck and skipping your savings, it is time to reassess your general financial picture.
Before you borrow money, it’s a good idea to ask yourself, “What will I do if I can’t make my payments? What’s my plan?” Many things can change in our lives which we don’t expect such as; getting laid off; becoming ill; getting a divorce; having an accident.
Before you borrow money, it’s a good idea to ask the institution you are borrowing the money from, “What happens if I can’t pay this loan back? What will it cost me? What steps will you take?” Make sure you understand the consequences and your options before you go into debt.
Warning Signs of Too Much Debt (from www.nomoredebts.org)
How do you know when you may need help managing debts? There are some definite warning signs, which may indicate that you need assistance with debt management. These warning signs can include:
1. difficulty paying bills on time
2. receiving collection calls or past due notices
3. living in your overdraft or line of credit
4. losing sleep worrying about debts
5. spending more than your income allows
6. not paying credit cards in full each month
7. impulsive spending due to financial worries
8. hiding spending or debts from a partner
9. allowing bills to stack up because you can’t pay them
10. a decline by your financial institution to give you a loan or mortgage
11. no budget or spending plan in place
12. feelings of hopelessness that you’ll never get out of debt
Does any of this sound familiar? Assess your debt situation with this self assessment tool. http://www.nomoredebts.org/debt-help/warning-signs.html
If you scored MANAGEABLE, read on and maybe you can pick up some tips which will prevent you from getting to CONCERNING.
If you scored CONCERNING, take action on your own or with some professional help before your situation gets any worse.
Contact your financial institution or the holder of your loan and explain your situation to them. Believe it or not, it is in their best interest and yours to try and come up with a solution. In initial stages of debt problems, there are OPTIONS such as arranging to skip a mortgage or loan payment; looking into consolidating your debts into a home equity loan or consolidation loan to reduce your interest cost, negotiating a new repayment plan, etc. Once you start to incur late charges and miss payment and your account is passed to collections and your credit rating is affected, the options your bank can offer you begin to diminish.
Based on what’s going on with your finances right now, you may need to take some immediate action before you end up in a tough spot.
You can either…
start working on this yourself
call your financial institution for an appointment
speak with a free Credit Counsellor from the Credit Counselling Society to assess your situation and help you create an action plan. To make an appointment with a Credit Counsellor, call 1-888-527-8999 or email firstname.lastname@example.org Their help is always free, non-judgemental, and completely confidential.
If you scored NEED HELP NOW, contacting a Credit Counsellor is probably your next best step. It would be difficult to get out of debt on your own. IN Week 8, we will be reviewing options for people who are drowning in debt.
If you’d like to tackle things on your own, we have some ideas below that should be able to help you get things back on track.
How to Reduce Debt – Power Tips, Ways, & Methods
If you are wondering how to reduce your debt as fast as possible, we’ll show you the best ways to reduce debt in Canada, how to pay off credit card debt quickly, and the strategies and tips that really work. We’ve arranged these tips and insights into two sections that line up with what you need to do first. The first thing you should do is free up some money to work with, and the second thing you need to do is use that money strategically to pay down and eliminate your debts.
1. Create a budget, review your spending, and find monthly expenses to either cut or reduce. Look for ways to downsize and economize. This isn’t a life-sentence. You just need to tighten you belt until your debt is paid off, then you can re-assess things and make a new plan.
2. Stop using credit – while you work on paying off your debt. Studies seem to show that we all spend at least 15% more when we buy things on credit. So do yourself a favor, stop using credit until after you’ve got your debt paid off. This means stop using your overdraft too. Open a new chequing account if you need to and treat your overdraft like a loan until it’s paid off.
3. Reduce your credit card debt. Review your cards and separate them based on rates: low interest versus high interest. Start to make the minimum payments on your credit cards with low interest rates and then maximize payments on cards with high interest rates. After a debt is paid off, you can use the extra money to pay down the next credit card with the highest interest rate. Another solution is to tackle credit cards with low balances and focus on paying off these cards in full, then closing the account. Details about these options at http://www.nomoredebts.org/blog/debt/ways-and-how-to-reduce-debt-in-canada
4. Change your mindset towards money and credit. Our society tends to encourage people to get what they want whenever they want it. Unfortunately, this approach is financially unhealthy and often doesn’t end well for a whole lot of people. Instead, learn to live on less. Trim your spending until you actually have money in the bank to spend. Save up for everything you buy. Save credit for emergencies and smart purchases that make sense. Don’t feel you’re entitled to things. Instead, earn the right to things by saving up for them.
5. Find extra money everywhere you can and put it towards your debt. Go back to Week 5 and review Where to Find Money to Save Each Month.
6. Free up cash by selling some of your stuff and use the money to pay down your debt. Sell more valuable things on local Buy and Sell Sites, Craigslist, Facebook, or eBay or Consignment Stores. You could hold a garage sale to sell cheaper stuff.
7. Temporarily Divert Monthly Contributions into RRSPs, your TFSA, or RESPs into Paying Off Your Debt. You’re likely paying a lot more in interest on your debt than you’re receiving from your savings. Diverting any savings to paying off your debt will help you do it a lot faster so you can resume your saving as soon as possible. Please note, you may have some valid reasons to continue your savings program while you work at paying off your debt. Receiving matching funds from your employer on RRSP contributions would be one example. We’re just offering this point as something for you to consider.
8. Look for ways to increase your income in order to pay more on your debt. Get a second job or cash in on the skills you have by teaching them to others through a local nonprofit organization like Camrose Adult Learning Council. Use a hobby to make extra money. Google “how to make extra money” and choose what fits for you.
START the MONEY SMART CHALLENGE TODAY by ANSWERING this QUESTION:
Money Smart Week 7 Question: How did you score on the debt self assessment and what steps are you taking to pay down your debt?
Now, What Do I do?
Email your answer to the Money Smart Week 7 Question and your full name and mailing address to email@example.com
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