Got Debt? How Do I Get Started On Resolving My Debt?

It can be extremely daunting and frustrating when you are trying to pay down debt. Especially as you watch your balance decrease when a payment is made, only to see it go up again with interest charges, service fees, loan insurance premiums or even as you withdraw money to cover bills and costs of living. With a few simple steps you can finally start to decrease your debt and achieve relief from financial distress. The steps are: First, identify the cause(s) of your debt; second, developing a realistic budget; third, developing a plan for sticking to your budget; and fourth, paying down your highest interest debt first.

1. Identify the cause of your debt

In order to effectively reduce your debt, you need to first determine what caused your debt in the first place. Was it a one-time abnormal event, such as a health issue, change in the economy or job loss? Or was it a recurring issue, such as, insufficient income, family growth, compulsive spending or not planning for irregular expenses (i.e. car registration, back to school fees, birthdays or holidays).

You should then develop techniques and strategies to deal with the cause. For example, if you are a compulsive spender you may want to consider making a list before going shopping, only taking cash to the store in the amount you are planning on spending or simply reduce the number of trips to the store. 

By identifying the causes of your debt and then developing strategies to deal with those causes you are then ready to develop a realistic budget that will help you pay down your debt. 

2. Developing a realistic budget

The next step is developing a realistic budget. Start by listing your monthly expenses, including a monthly amount to be put away for annual or irregular expenses such as school fees, vehicle registration, and holiday expenses. Make the list as detailed as possible so that you capture all of your expenses. Be sure to include your debt payments.  It is important to note that debt payments are not the same as your minimum interest payment. Instead, it should be a payment that helps reduce the principle balance owing so that you can pay the debt off in a reasonable timeframe.

The next part of budgeting is to compare your expenses to your income. From there you will need to determine if your budget works. For instance, does your income sufficiently cover your expenses and debt payments, or do you need to make some changes to your budget by either decreasing expenses or increasing income.

3. Developing a plan for sticking to your budget

Your next step is to develop a plan for sticking to your budget. This can be the difficult part, but if you are able to stick to your budget you will be able to pay your monthly expenses and deal with your debt. Some strategies to help you stick to your budget include:

• Using the envelope and cash system – this strategy is very effective and will help you stick to your budget. You allocate cash into various envelopes, each representing an expense category on your budget. As you spend money you take the cash from the appropriate envelope and replace it with the receipt.
• Tracking income and expenses – this strategy is similar to the envelope and cash system. You allocate the income in your bank account between the different expense categories on your budget and then monitor and track your bank account balance as you spend funds directly from your bank account. 
• If you are in a relationship, be sure that you and your spouse are both aware of the situation and help each other control spending and stay within your budget.
4. Pay off your highest interest debt first

Making larger payments to high interest creditor cards before lower-cost personal loans will reduce your overall borrowing costs and help you become debt free faster. If possible, consolidate high rate credit card balances to a lower rate credit line or personal loan and stop using the credit card you just paid off. This will reduce your overall cash flow requirements and borrowing costs.

Identifying the cause of your debt, developing a realistic budget, developing a plan to stick to your budget and paying off your highest interest debt first will help you deal with your debt. You will finally make progress towards becoming debt free!

What to do if your debt payments do not fit within your budget
If after you have developed a realistic budget you find that your debt payments are more than you can handle and you have been unable to consolidate your debts into one bank loan, then it’s time to seek some help from an MNP Trustee. We can review your budget and look at several options with you which could help you become debt free.