According to Statistics Canada, the Canadian household-debt-to-income ratio was an astonishing 176.9 per cent in Q1 of 2020. That means on average, Canadian households owe $1.77 or every dollar they bring in. That’s an increase from 175.6 per cent which was previously reported in Q4 of 2019. Clearly a global pandemic has wrecked our finances.
The truth is, Canadians have record debt levels and as many people have quickly learned, a loss in income can quickly impact their ability to service their debt. That has left many people wondering how to get out of debt fast?
Unfortunately, there’s no quick way to get out of debt. It’ll likely take you years to get back on track and there will probably be some bumps on the way. That said, here are 15 ways for how to get out of debt.
Update your budget by slashing expenses
If you want to know how to get out of debt, the first thing you need to do is update your budget. First, cut any unnecessary expenses. I’m talking about almost anything that isn’t required for you to survive. Now take a look at the remaining expenses such as your cell phone plan or grocery bill, are there any ways you can reduce those expenses? Now put all that money saved towards your debt.
Keeping your expenses low is important, but you don’t need to cut everything out. Having one streaming service is okay since you’ll still need entertainment, but you definitely don’t need three. These cuts will hurt, but they’re meant to be temporary. Once you have a handle on your debt, you can start increasing your spending again.
Always pay your full balance on time
In an ideal world, you’ll always be paying the full balance on your credit card every month. By doing this, you’ll avoid any interest payments. If you didn’t know, the average interest rate is around 20% for credit cards, which is a steep price to pay. If you’re always paying your full balance, you can take advantage of travel or cash back rewards that come with your credit card.
Pay more than the minimum balance
Okay, if you’re in debt, the odds are you’re not able to pay the full balance every month, but you should at least strive to pay more than the minimum balance. Take a look at your credit card statement, if you look to the side, it’ll show you how many years it’ll take you to pay off your debt if you’re just making the minimum payment. Trust me, you’ll be in shock.
You may also want to read about how credit card interest works. Once you realize how much this debt is costing you, you’ll likely want to pay off your balance ASAP.
Use the debt snowball method
With the debt snowball method, you start by paying off your smallest debt (by dollar amount) first before moving onto the larger ones. The idea here is to get instant satisfaction whenever you eliminate one of your debts which will, in theory, encourage you to pay off the rest of your debt.
Keep in mind that you still need to make the minimum payment on your other debts to avoid any missed payments, but any extra money available should be put towards your smallest debt first. Once that debt is paid off, move on to your next one. Repeat this process until you’re debt-free.
Try the debt avalanche method
The debt-avalanche method is similar to the debt snowball method, but in this case, you start with your highest interest debt first. In most cases, this would be your credit card debt or car loan.
Since credit cards have high interest rates, it makes the most sense to pay those down first compared to a lower interest debt. The obvious advantage of the debt avalanche method is that you’ll pay less interest in the long run.
Work more or get a side hustle
If your job allows you to pick up more hours or to work overtime, do it. That extra income will go a long way. Some people assume that working more isn’t worth it since you’ll be taxed more, but that couldn’t be further from the truth. All you need to know is that more work means more money in your pocket.
Another thing you could consider is picking up a side hustle. If you have any hard skills, consider making your services available on Upwork or Taskrabbit. You could even get a second job doing deliveries or working retail. If you want to get out of debt fast, earning more income will help you do it.
Use a low interest, balance transfer credit card
If you want to know how to pay off credit card debt, then look at one of the best low interest credit cards that have a balance transfer option. Balance transfers are great because it allows you to transfer the balance from one credit card to another. This is beneficial because the new credit card will usually have a promotional period where you’ll pay less interest.
How much lower are we talking about? It depends on the card, but you could pay 0-3.99% interest for 6-9 months. You can do some serious damage to your debt during that time. Even if you don’t manage to pay off the entire balance during the promotional period, you’ll likely still get a lower interest rate compared to most credit cards, so it’s a win-win situation for you.
Switch to a prepaid credit card
Studies have shown that people who use credit cards spend more than people who use cash. It makes sense since using credit allows you to pay later, whereas you physically see your money leaving your wallet whenever you make a purchase with cash. It can be difficult to go cash-only, so a good solution is to use a prepaid credit card.
A prepaid Visa card such as KOHO only allows you to spend what you’ve preloaded onto your card. This is a good way to keep your spending in check while giving you access to credit networks which are essential if you’re doing any online shopping. In additional, some prepaid credit cards allow you to earn rewards on your spending.
Get a budgeting app
No one said you have to get out of debt on your own. To help you with the process, you could use a budgeting app. Every app does things a little different, but I like Mylo and Hardbacon since they automate your savings which will help you reach your goals quicker. You could also take a look at Mint as it allows you to link to all your financial institutions giving you a detailed look at your finances.
Apply for a consolidation loan
This is a single type of loan which traditionally comes from a bank. The way it works is you would get a new loan with a lower interest rate. You would then take that money and pay off any outstanding debt. Now you only have one debt which should make paying off your debt easier. That said, you’re getting access to more money, so if you’re not responsible, you could end up owing even more.
Avoid the small purchases
If you’re still trying to figure out how to get out of debt, start looking at your daily spending. If you can avoid small purchases such as coffee, snacks and take out food, you can redirect your money towards your debt.
You’ll likely end up spending more on groceries as a result of cutting back on the smaller things, but you can keep things under control by coming up with a meal plan. By doing this, you’ll only be shopping for groceries that you need and you’ll avoid food waste.
Watch the big purchases
Alternatively, if you avoid the big-ticket items, you can keep your debt under control. It doesn’t matter how many daily coffees you skip, if you go out and finance your laptop or vacation on credit, you’ll never get ahead.
I’m not suggesting that you skip out on spending completely, you just need to decide how badly you need things. Remember, any money you don’t spend can go towards helping you become debt-free.
Spend less than what you’re approved for
When getting a loan for a car or home purchase, many people end up using the entire amount that they’re pre-approved for. Yes, this will give you more buying power, but it also means you’ll end up paying more in the long run. The sales rep may try to get you to look at costs on a monthly basis so things seem more affordable, but since you’re the one paying the bills, you need to think long term and how this debt is going to affect your lifestyle.
Shop around for your insurance
It doesn’t matter if you’re looking for term life insurance or auto insurance, you need to shop around before you commit. Generally speaking, when added up, insurance can be one of your major monthly expenses. It doesn’t have to cost you a lot, but at the same time, you want to pay as little as possible while getting the coverage that you need.
Speak to a licensed insolvency trustee
For those who have crippling debt and can’t seem to find a way to get out of it, you need to speak to a licensed insolvency trustee. They can give you an unbiased opinion based on your current financial standing. One of the solutions they may present to you is a consumer proposal. This could interest some people in debt because it allows them to keep some of their assets, but debtors need to agree to the plan. Another option is bankruptcy, but that’s a worst-case scenario when you’re trying to get out of debt.
No one said getting out of debt would be fast or easy. It’ll take a lot of work and potentially a lot of time. However, if you follow some of the tips above, you’ll find yourself back in the black in no time.