When It Comes To Your Financial Future Every Effort Adds Up

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 what seems to be an ever increasing cost of living. Managing debt and finances in today’s economic climate can be overwhelming. But believe it or not, with just a few simple changes, you can finally start to decrease your debt, increase your savings and start working towards a strong financial future where both your short and long-term goals are attainable. Let’s explore: Identify the true cost of your debt In order to effectively reduce your debt, it’s important to understand just how far your payments are taking you. For instance, if you owed $3,000 on a credit card (with a 19.9% annual interest) and only made the minimum 2% payment each month, here is how it would break down: Total debt:    $3,000 Minimum payment (2%):    $60 Years to pay your debt off:    53 Total interest paid:    $12,709 Now if you were to create a thorough budget and find a way to free up more money to put towards that debt on a consistent basis, here is what it could look like: Total debt:    $3,000 Fixed monthly payment:    $100 Years to pay your debt off:    3.5 Total interest paid:    $1,184 Those are some pretty significant differences in terms of both the amount of time you are locked into your debt and the reality of how much it could cost you in the long run. Naturally, if you were able to increase the monthly fixed payment on that same amount of debt, the amount of time to pay off the debt would decrease, as would your total interest paid. Develop a realistic budget This is a crucial step towards rebuilding your financial security. 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. As you compare your expenses to your income, you will be able to assess just how much of a commitment you can make towards increasing your debt payments and savings. After developing your budget, you will need to determine if it actually 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? Develop a plan to stick to your budget The next step is to develop a plan for sticking to your budget. This can be difficult, especially if you have had the same spending habits for some time. But if you are able to stick to your budget you will be able to pay your monthly expenses, manage your debt and even set aside savings. 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. ​ Save, save, save Establishing and sticking to a manageable budget will likely free up extra funds you didn’t even know you had. Setting aside these funds for unexpected costs such as vehicle or home repairs or a sudden job loss will help keep you from becoming credit reliant in times of financial need. You can also divvy up your savings – creating one savings account for the unexpected and another for long-term financial goals like a mortgage or retirement. This level of saving might seem unattainable or unrealistic, when in fact, it only requires a little bit of compromise. For instance, if you were to simply spend $7.00 less a day, here is what you would be able to save in the long run: 1 Week:    $49 30 Days:    $210 1 year:    $2,555 5 Years:    $12,782 10 Years:    $25,564 20 Years:    $51,135 And that’s just at $7 a day. Imagine how quickly your savings could add up if you were to reduce your spending by $10 a day! With just a little bit of trimming, your financial goals are a lot more achievable that you may realize. What to do if debt payments and savings 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, you still have options. A Licensed Insolvency Trustee will be able to help you fully assess your unique financial situation and help you choose the best and most manageable route for tackling your debt so you can get back on course and start working towards a debt-free future. Grant Bazian is a Licensed Insolvency Trustee and President or MNP’s Insolvency Practice. To learn more about interest rates or how MNP Debt can help you, contact Grant directly at 604.685.8408.