Minimize Debt Borrowing

Minimize Debt – Borrow Only What You Need

Given the recent global events surrounding the Covid-19 pandemic, credit use has been steadily increasing. With the rise in unemployment rates and the subsequent reduction in the household income of millions of Canadians, many are faced with the prospect of going further into debt.

If you need to borrow money, whether it is for a car payment, a mortgage payment or simply to make ends meet, it’s important to understand the cost of debt and to have a plan in place in order to pay it back.

What is the Cost of Debt?

The cost of debt is the amount of interest that you are paying on your debt. It’s common knowledge that you have to pay interest when you take out a loan. This is the price we pay to use someone else’s money to purchase something we don’t have the cash for today.

You’ve probably seen it on your monthly credit card statement where interest rates are typically around 19%-25% per year. Well what does this all translate to?

For simplicity let’s use some real life examples of the amount of interest you would pay annually on your credit card, assuming you always paid your minimum monthly payment.

  • A credit card with an average balance of $5,000 will pay approximately $125 per month in interest alone or $1,500 annually
  • A credit card with an average balance of $10,000 will pay approximately $250 per month in interest alone or $3,000 annually
  • A credit card with an average balance of $20,000 will pay approximately $500 per month in interest alone or $6,000 annually

The monthly interest payment is not the only cost of debt. We often forget to mention the emotional and economic toll that carrying debt can have. Here are a few ways debt can affect your well-being:

  1. Interest payments eat up your budget and leave you with less money to necessities or extras
  2. Debt is a deterrent to saving, as those monthly interest payments keep you from being able to create any savings at all.
  3. Debt limits your ability to choose. If you’re making large debt payments you often cannot afford to take a vacation or to go out and enjoy a night out.
  4. Debt will limit your ability to retire when you want too.
  5. Debt can often cause a strain on your relationships. Studies show this can often lead to divorce.

Now that we understand what that cost of debt is, next we need to develop a plan to pay it back.

Paying Off Your Debt: Tips and Tricks to Help You

To help reduce your debts as fast as possible, we’ll discuss some tips and tricks to best help you:

Tip 1: Develop a Spending Budget

The first step to reduce your debt is that you need to know how much money you have available. Developing a household budget will help you do this. All you need to do is add up all your monthly expenses and deduct it from your monthly income.

If you have money left over, great. That can be used to pay down your debt. If you don’t have any money left over then you will need to look at your budget. See if you can make cuts so that you have some extra funds left to make payments towards your debt.

Tip 2: Minimize Debt – Borrow Only What You Need

In order to pay down your debt you will need to ensure that you are paying off more than you are borrowing. If you are constantly using your credit card or your overdraft then it is very difficult to ever reduce your debt load. In fact the best suggestion is to stop using credit and to treat your credit cards or overdraft like another bill.

Tip 3: Pay Off the Debt With the Highest Interest Rate

The best way to reduce the amount of interest you pay is to ensure that you pay off the debt with the highest interest rate first. Make the minimum payments on the debts with the lowest interest rates and use any excess money created from Tip 1 to pay down the balance of the debt with the highest interest rates.

Tip 4: Debt Consolidation Loan – Is It the Right Move for Me?

Getting a debt consolidation loan is not as helpful as most people think. In fact, a bank study from a few years ago found that more than 70% of people who received a debt consolidation loan were not better off financially after repaying the loan. They had re-accumulated the debt.

Tip 5:  Talk to a Licensed Insolvency Trustee

If you don’t feel like any of the tips above will help you obtain any debt relief or if you feel like there simply isn’t any room in your budget to make additional payments on your debts –  then making an appointment with a Licensed Insolvency Trustee may be the next step for you.

A Licensed Insolvency Trustee will take the time to sit down with you and discuss your current financial situation and provide you with a list of options that are best suited for you. As most Licensed Insolvency Trustees offer a free initial consultation there is no risk in reaching out to one to discuss the options available to you.

Len Hiquebran, CPA, CA, LIT

After completing my articling at a local accounting firm, I spent some time working in industry as a controller of a logging company. Subsequently, I joined Derek L. Chase & Associates Ltd. in 2017 and began working in the insolvency field. In June 2020 I completed my studies and was granted a license by the Federal Government to be a Licensed Insolvency Trustee.