Being in debt can be overwhelming, especially when you have large balances accruing interest, making it more difficult to overcome. However, the good news is getting out of debt is possible – it just takes a little time.
While taking on debts can be necessary in certain scenarios, such as buying a car or home, it’s important to deal with other debts that are causing stress. The key is to take debt repayment little by little, breaking down what you owe, finding extra funds to direct toward debt payments, and avoiding unnecessary debt going forward.
Clinton Orr is Senior Wealth Advisor and Senior Portfolio Manager at Becker Orr Wealth Management, part of Winnipeg-based Canaccord Genuity Wealth Management. He has broad experience in financial planning, investing and asset management. His insights into managing debt are valuable for those looking to find their way to a better financial situation.
“The problem with our world today is that debt is so normalized that we think it’s just a natural part of life,” explains Orr. “And while in certain cases that’s true, I believe we are far more comfortable with living in debt than we should be. When it comes to actually addressing debt, an honest conversation followed by a plan is essential.”
The key is to take debt repayment piece by piece, breaking down what exactly you owe, finding extra funds to direct toward debt payments and avoid unnecessary debt as you move forward. Here are a few steps Canadian wealth advisor Clinton Orr recommends to help get yourself out of debt and remain debt-free.
List everything you owe
Take a detailed inventory of your debt to get a clearer picture of where you are, and where you’re headed financially.
Write down all of your debts – note everything you owe, including credit card balances, personal loans, auto loans, student debt, your mortgage and any other debts. If you aren’t sure exactly what you owe, check your credit report to get a clear view of your debts, including any in collections. Keep in mind that your lenders will have the most up-to-date information on all of your balances.
Next to each debt, write down the interest rate, minimum monthly payment and due date. Calculate your minimum monthly payment by adding up the minimum payments of all of your debts to find the bare minimum amount required to pay every month to stay current on your debt.
Decide how much you can pay each month
While making all of your minimum monthly payments on your debts will keep your payment history in good standing, it will also mean staying in debt longer and paying more in interest. The more you can pay above the minimum each month, the faster you can get out of debt. Of course, this is easier said than done, especially if money is tight.
“Working with a financial professional can be beneficial when it comes to breaking down your debts and planning a way to get out of them completely,” says Manitoba wealth advisor Clinton Orr. “Contrary to what people believe, financial advisors don’t just provide advice on investments, many of us are fully capable of building a complete financial plan – including managing debts.”
In calculating how much you are able to pay each bill cycle, add up your monthly expenses. Using a spreadsheet or a budgeting app, calculate how much you spend on basic expenses each month, such as groceries, cell phone bill, utilities, gas, rent/mortgage, and so on. For expenses that vary, such as your electricity payment, try taking the average over several months.
Next, compare your expenses to your income. Tally up your monthly net income, which is what you take home after taxes. Subtract your total expenses from your monthly income, including necessary expenses noted above, and discretionary expenses, such as entertainment and other nonessential expenses. If the amount you have left over isn’t enough to pay down your debt, you’ll have to take action to improve your cash flow, by cutting expenses or increasing your income.
Multiply income, subtract expenses
One of the keys to eliminating debt is to look for opportunities to save money. According to Clinton Orr, it’s important to regularly review all of your expenses and consider ways to spend less, such as by cutting back on dining out and unnecessary retail purchases.
Be creative in your cost-cutting. Does your family maintain two vehicles, but you could easily get by with one? Used car prices are at historically high levels, and selling that extra vehicle to Carmax or an established dealer can help you pay down debt quickly. Some popular late-model vehicles are actually bringing more in the used car market than they did when new, says Orr.
Once you’ve explored ways to cut expenses, the other side of the coin is to look for opportunities to supplement or increase your income. Find a side hustle, take on extra shifts at work, ask for a raise, or start your own business.
“When you create your own business, you open your future to a whole range of new opportunities,” says Orr. “And if starting your own venture is part of your family’s debt-reduction plan, there’s an added bonus: You’ve already learned the importance of limiting and managing debt, which will pay tremendous dividends down the road for your business.”
CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA
The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representatives of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability.
Tax & Estate advice offered through CG Wealth & Estate Planning
