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How to pay off your debts and improve your financial situation

To the point In this article, we present six steps to pay off your debts and improve your financial, physical and mental health.

If you’ve accumulated debt and can’t pay it off, you’re probably having trouble sleeping. First of all, you’re not alone. According to the Financial Consumer Agency of Canada (FCAC), money problems are the biggest source of financial stress and insomnia for half of all Canadians. The good news is that there are options for paying off your debts and improving your financial situation. Of course, it takes time, patience, motivation and discipline. But you can get out of this tricky situation and improve your financial, physical and mental health.

In this article, we present six steps to paying off your debts and best practices in debt management.

6 steps to paying off your debts in Canada

Step 1: List your debts

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.

Step 2: Pay off your debts quickly with the snowball method

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.

Step 3: Increase your income with an additional job

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.

Step 4: Build an emergency fund

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.

Once you’ve finished paying off your debts, you can continue to replenish your emergency fund. Ideally, you should save the equivalent of three to six months of expenses to have a fully funded emergency fund.

Step 5: Draw up a plan and stick to it

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.

Step 6: Don't be too hard on yourself

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.

What do you do when you've finished paying off your debts?

Paying off your debts is a long road and requires a great deal of discipline to succeed. You’ll see your financial, physical and mental health improve. And, best of all, you’ll sleep much better. Once your debts have been paid off and your financial situation has improved, you might want to celebrate your success… in moderation so you don’t fall back into debt!

Best practices in debt management

Which debt should you pay first?

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?

Taking out a consolidation loan to pay off your debts: is it a good solution?

In many cases, applying for a debt consolidation loan can help you pay off your debts. This strategy generally enables you to obtain a loan with a financial institution at a lower interest rate. It also reduces the number of creditors, which can reduce the mental burden associated with debt management.

However, this is not always the best strategy. Debt is usually a symptom, not the cause of the problem. The cause varies from person to person, but it can be impulse buying or overspending. So address the problem first to stop the bleeding. Then proceed to pay off your debts using the method explained in this article (step 2), which often allows you to pay off your debts faster than with debt consolidation.

If you need help with debt management, don’t hesitate to contact your local ACEF (Association coopérative d’économie familiale).

Who should you contact if you need help paying off your debts?

As mentioned above, you can contact your local ACEF (Association coopérative d’économie familiale). These non-profit organizations offer a range of budgeting and financial education services. But they also provide information on consumer protection. On the ACEF website, you can obtain clear, objective information and personal finance tools for all age groups.

Alternatively, you can contact your financial institution for assistance. Finally, you can contact a trustee in bankruptcy to discuss options such as debt consolidation and a consumer proposal.

Bottom Line

In short, if you’re in debt, there are several options for paying off your debts as quickly as possible and improving your financial situation. Draw up a plan and follow it to the letter. Then, once you’ve paid off your debts, build up an emergency fund to avoid going back into debt as soon as an unexpected expense arises.

Frequently asked questions about debt repayment

How can you get out of debt quickly?

To pay off your debts quickly, you need to eliminate unnecessary expenses so you can put as much money as possible toward debt repayment. You can use one of the best-known methods, such as the avalanche method or the snowball method.

Who can help me pay my debts?

To help you pay off your debts, you can contact your local ACEF (Association coopérative d’économie familiale). These non-profit organizations offer budgeting and financial education services, as well as personal finance tools. If necessary, don’t hesitate to contact a trustee in bankruptcy to discuss your options.

How do you pay off a big debt?

To pay off a large debt, you naturally have to repay as much as you can each month. You can do this by reducing your expenses or increasing your income (e.g. by working overtime or getting a second job). Depending on the nature of the debt and the ratio of debt to your ability to pay, other options are possible. Contact your financial institution or a trustee in bankruptcy.

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Vincent Morin
My name is Vincent and I've been a stay-at-home parent to two young boys since achieving financial independence in 2021 (FIRE). Previously, I worked for 12 years in financial technology for a major US investment bank (G-SIB). I'm passionate about personal finance, stock market investing, reading, writing, cycling and gardening. I'm also the founder of Retraite 101, a personal finance blog followed by over 20,000 people on social networks and quoted in several media, blogs and finance books. Despite early retirement, I continue to write about personal finance to share my passion with Quebecers and motivate them to take charge of their finances.

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