How to pay off your debts and improve your financial situation

First of all, you can’t pay your debts if you don’t have all the information in front of you: list of creditors, balance of debts, interest rates, and so on. It’s not the most exciting activity, but it’s essential. Take a moment to review each of your accounts or unpaid bills.

List your debts from smallest to largest, regardless of interest rates. Next to each account or creditor, note the minimum payment required. Add these minimum payments to your monthly budget so you can pay on time and never miss a payment. After all, a missed payment has a negative impact on your credit score, compared to paying the minimum balance.

Once you’ve created a budget with your income and expenses, calculate how much money you have left at the end of the month. If so, this is your margin for paying off your debts. Use this money to pay off your smallest debt as quickly as possible. Once you’ve paid off your first debt, you should be motivated to go on and “attack” the next one. In fact, motivation is one of the key factors in regaining control of your finances.

Now that the smallest debt has been paid off, take the new amount available in your budget and put it toward your next debt. Repeat these steps until all your debts are paid off.

As you pay off a small debt, your leeway to pay your debts increases and gets bigger and bigger, like a snowball. That’s why this method of debt repayment is called the snowball method.

If you qualify, you may be able to take out a low-interest credit card or a credit card with reduced rates for balance transfers. Then transfer your current credit card balances to it to reduce the interest you’ll have to pay while you pay off all your debts.

Sometimes, trying to pay off your debts with your current income can be difficult. Especially when you don’t have the necessary margin. Or, even worse, when your expenses exceed your income. Depending on your level of indebtedness, consider working overtime at your current job or finding additional employment. The additional income can be applied directly to your debt repayments.

Here are a few ideas for additional jobs:

• DoorDash, UberEats, Skip (SkipTheDishes) or other meal delivery (e.g. pizzas)
• Barman or waiter/waitress in a restaurant
• Selling handmade items on Etsy, Shopify or another e-commerce platform
• Writing and selling an e-book on Amazon
• Uber or another transport platform
• Local grocery or convenience store

The possibilities are endless, and don’t forget that multiple jobs are not permanent. It’s a sacrifice you’ll be making for yourself and your family, and it’ll help you get out of debt faster.

Sometimes emergencies happen when you least expect them. When you’re in debt and living paycheck to paycheck, you can’t afford extra or unexpected expenses.

To avoid finding yourself in this situation, you need an emergency fund. An emergency fund can only be used for “real” emergencies. For instance:

• Urgent repairs to the car (excluding maintenance and foreseeable repairs)
• Unexpected medical or dental bills
• Major home repairs, such as a leaky roof or plumbing problem

A good rule of thumb is to set aside $1,000 as a “starter” emergency fund. This is not a fully-funded emergency fund. Instead, set up an emergency fund to cover small, unforeseen expenses while you pay off your debts (step 2).

The best way to save money is to automate your savings so that you “pay yourself first” (so that the money leaves your account as soon as possible)… and before you have a chance to spend it. To do this, open a high-interest savings account (if possible, one with no monthly fees), such as Tangerine Savings Account, Wealthsimple Cash or EQ Bank Savings Account.

When you set yourself the goal of paying off your debts, you need to make a plan and stick to it. In fact, you’re probably in this situation because of a lack of planning, over-consumption or unexpected expenses. You now have a budget, a complete picture of your financial situation (including your debts) and you’re saving for an emergency fund.

If you feel you’re going to deviate from your goals, reassess your situation and look at how far you’ve come so far. This should motivate you to continue your journey towards paying off your debts in full.

Even if you limit your spending, especially on non-essentials, you must avoid being too hard on yourself. You found yourself in this unenviable situation of debt, but you took back control. It’s normal to make an extra expense from time to time. However, don’t let yourself go every time you enter a store. You haven’t finished paying off your debts yet. Good balance is important. In short, make every effort to stay within your budget, and don’t forget to give yourself a little leeway.

There are several strategies for paying off debt. The two best-known strategies are the avalanche method and the snowball method.

First, the “avalanche method” involves paying off your debt with the highest interest rate first. Once this high-interest debt is paid off, you move on to the next one, and so on. This strategy reduces interest costs, as you focus on paying off your debts with the highest interest rates. Although you’ll pay less interest in the long term, you won’t feel the same sense of rapid accomplishment as with the snowball method…

Indeed, the “snowball method”, which was introduced earlier in this article, involves paying off the smallest debt first (while you continue to make the minimum payments on the other debts). As soon as the smallest debt is paid off, you move on to the next, and so on. This strategy creates a snowball effect (the amount you have to pay off your debts increases over time). It gives you a sense of accomplishment pretty quickly. Although the total costs are higher (it’s not the debts with the highest interest rates that are repaid first), it’s encouraging to see a reduced number of creditors. Plus, if interest rates were really the problem, you wouldn’t have fallen into debt in the first place. Right?