In case you missed it, Liberal Finance Minister Bill Morneau announced an $18.4-billion deficit in February. That’s a far cry from their original plan to keep the annual deficit at under $10 billion. This shouldn’t be terribly surprising considering how the Canadian economy has been doing as of late, but it does show how quickly things can turn around.
Just take a look at Alberta. Not too long ago many experts were convinced nothing could happen to the province due to the oil industry. Well, when oil falls from $80 a barrel to $30 in less than two years, that can affect a lot of people; jobs have been cut, office vacancies are up, and real estate prices and sales have continued to fall. Preparing your finances is a must since unforeseen circumstances can come up at any time.
Getting your finances in order
In September of 2015, a survey conducted by The Canadian Payroll Association found that 48% of Canadians are living paycheque to paycheque. That’s an astonishing figure especially considering that Canadian debt loads have continued to rise.
Cash flow should always be a concern, but consumer debt should be eliminated at costs. Racking up credit card debt can be an endless cycle. The high-interest rates can make it hard for us to pay down our balances. Once our cards start to get maxed out, our bank will be happy to refinance our loans. This may sound like a “positive,” but if we’re responsible with our credit, then this debt doesn’t occur.
Some would argue that building an emergency fund with 3 – 6 months’ worth of expenses saved up just in case we get laid off should come first, but I personally disagree. From a straight math perspective, it makes more sense to pay down our credit card debt which has an average interest rate of 20% as opposed to keeping money in a savings account which might not even earn us 1%. There’s no way we can get ahead when we’re buried in consumer debt.
Start tackling your debt
To be fair, debt happens. We all make mistakes, so we shouldn’t beat ourselves up about it; instead, we should focus that energy on a debt repayment plan so we can get out of the red.
The idea is to take the money we have available and start applying it to our debts, we would essentially build it right into our budget so we’re making regular debt repayments. How we prioritize our debts is up to us, but there are two logical trains of thought.
Some experts suggest starting with our smallest debts first, regardless of the interest rate. This gives us a small emotional boost every time something is paid off which will encourage us to tackle our debt. Motivation trumps speed and saving in this scenario.
Although emotions do come into play, addressing high-interest consumer debt first is always a smart move since it’ll get us out of debt faster. It can be near impossible to get ahead if we’re making just minimum payments.
With a debt repayment plan, we would list all our debts, how much we owe, and what the interest rate is. From there we would decide which debt we want to tackle first and divert all our excess cash there while making minimum payments on our other debts.
During this time, we may want to consider getting rid of the temptation to spend more; that means cutting up our credit cards (or lowering the credit limits).
The final word
Debt can affect anyone, even those who make a good salary. Just because we’re struggling doesn’t mean there aren’t any options or that the only way out is to declare bankruptcy. Preparing your finances is never a bad idea since we’ll never know what curveballs life will throw us.