You know you need to tidying your financial house , reduce your debt and create a plan that will help you stay ahead of those relentless bills. But where to begin?
First things first
Start by consolidating your debt, advises Jenna Roundell, an associate advisor with RBC Dominion Securities. “(That) means lumping it all together at one institution. It’s easier to keep track of this way, and you’ll probably get better service from that institution rather than having it spread out across several institutions.”
Once you’ve done that, Roundell suggests attaching collateral such as your home or investment account to your debt. The reason: a secured debt comes with a much lower interest rate than an unsecured one.
Adds Roundell, “If you need to have debt, a home equity line of credit usually offers the lowest interest rates.”
Paying down debt
When tidying your financial house, always pay off your higher interest debts first, says Nick Bachusky, a mortgage agent with mortgageinottawa.com. And “if you are carrying an amount from month to month on a credit card, call the credit card company immediately and switch to their lowest rate card. The rewards (from the more expensive card) will not be worth the (extra) interest.”
Remember, too, that a line of credit charges less interest than a credit card, so borrowing from your credit line to pay off that card makes sense. Just one warning: it may be tempting, once you’ve got your credit card balance to zero, to start using it again. Don’t, even if it means you have to destroy the card.
Shrinking your expenses
Look for every opportunity to save money and thereby turn debt into savings. Restaurant and take-out meals, lottery tickets (you don’t really think you’re going to win, do you?), subscriptions to magazines that you never read: you’d be amazed how much you can shave off your monthly expenses and still enjoy life.
While you’re at it, why not car pool or switch to public transit? According to the Canadian Automobile Association’s online calculator, driving a compact car 20,000 kilometres a year in Ontario will cost you close to $3,800 annually. And that’s without the cost of buying the vehicle.
Financial reviews
Do a comprehensive financial review, advises Forbes magazine. “Take the pulse of all your accounts regularly. This includes reviewing your insurance policies, annuity contracts, retirement plans, and educational savings accounts. Are you on track to achieve your goals? Do you need to make adjustments? Are your beneficiary designations up to date?”
Doing this keeps you aware of what you’re doing right and wrong in your financial life.
And don’t forget to build an emergency fund, says Forbes. You should have enough to cover expenses for three months in case of loss of income.
Debt that’s OK and when to congratulate yourself
Don’t be afraid to carry debt if and when it makes sense, says Roundell. Interest rates have increased recently but are still low, so “it might make sense to invest rather than pay down your debt. This strategy is not for everyone, but if you can earn more investing than the amount of interest you are being charged on your borrowing, you’re profiting on the spread between the two rates.”
She says to make your debt tax deductible if possible, for example by borrowing to earn income from a business or property.
Bachusky points out that you are entitled to feel good about your financial accomplishments. “Look at the interest earned on investments from month to month and become satisfied with the compound interest happening. You will want to keep it up!”
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