Managing Debt: Its all about habit !!

[ashedfc]

12 ways to defeat your debt
Is it your goal to pay down debt this year? We've got some strategies to help.

Debt: surveys say we’re deeper in it, but we’re more eager to get out of it too. Debt has become an ugly word in recent years, and it’s no surprise that paying it down tops many New Year’s resolutions lists again this year.

Just before 2011 started, Canadians got a bit of wake-up call when new numbers showed we hit a record high for household debt. According to a story on CBC News , household debt increased by 6.7 per cent over levels from just a few years back. Our debt to income ratio — the amount we earn after taxes versus what we owe — is at its highest level in 20 years at just over 148 per cent. We’ve even surpassed the U.S. when it comes to the average amount of household debt.

Why is this worrisome? Experts warn we could be in for a fall. Economic growth isn’t what it should be, and some analysts warn we could be in for another recession due to the financial crisis in Europe. Also, as interest rates rise so too will debt payments — and that’s going to make household budgets even tighter and make it more difficult to save. What about retirement? Recent figures suggest more boomers will enter it still carrying mortgages and credit card debts, according to a story on CTV News.

So what’s the solution? Experts warn to get out of debt — and stay out, especially costly consumer debts.
How, exactly? Different strategies work for different people, but here are some steps experts recommend for dealing with debt.

Tips for eliminating debt

1. Know your numbers. Unfortunately, it can be easy to overlook the ugly total when debt is spread over credit cards, loans and lines of credit. Many people don’t know how much interest they’re paying, or how long they’ll be in the red making minimum payments. Know what you’re up against: make a list of debts including the outstanding balance, monthly payment, billing date and interest rate. Rank them according to how urgent it is to eliminate them.

2. Tackle “bad debts” first. While it’s necessary to make minimum payments on all debts, experts usually recommend targeting one or two debts for some extra attention — especially those with high interest rates like credit cards and unsecured loans. How much extra should you contribute? It depends on how much you can afford. Author David Bach recommends doubling the minimum payment on your top priority as a start. Once you’ve scratched your #1 debt off the list, pour the extra cash into the next item, and so forth.

3. Pay more often. Just like with a mortgage, increasing the number of payments can help you save on interest charges — especially on larger balances. Find out if you can arrange two monthly payments instead of one or how you can make extra payments through an automatic transfer.

4. Create (or tweak) your budget. Creating or revising your annual budget? It’s a good time to look for ways to free up some cash to pay down debts faster — like cutting back on non-essentials such as eating out and finding more frugal entertainment. If you don’t already do it, tracking your spending and expenses can help you better understand your habits and reveal ways to save even more. Need some help? Try one of these online budgeting tools to make it easier.

5. Bring in extra cash. There’s only so much room to cut back the budget, so it’s often necessary to earn some extra cash. There are a variety of ways to do it — like getting a part-time job, turning a hobby into a side business or renting out a spare room. Even selling unwanted stuff can give your payments a boost. Sounds overwhelming? Try setting a reasonable goal. For instance, make it a point to bring in an extra $500 or $1000 dollars over the next year to put towards debt.

6. Pay cash. Cash serves as a physical reminder to make us think twice before we spend — if you don’t have it, you can’t spend it. Many experts like Gail Vaz-Oxlade recommend using a visual system like jars or envelops to help manage budgets. If you’d rather not get out the scissors, put your credit cards in your safety deposit box instead.

7. Consider cashing in investments. Not your retirement savings or emergency fund, but the low earning ones, that is — like GICs or money stashed away in saving accounts. Do the math: chances are you’re paying more interest on your debt that you’re earning.

8. Consolidate… with caution. There’s some controversy surrounding this step, but consolidating your debts to a lower interest plan can cut the amount of interest you’re paying. However, proceed with caution because there are many scams and fraudulent services out there and many people have lost hundreds of dollars for services that didn’t help. Do some background research on the company before signing on through government debt counseling websites. (Industry Canada has more information here .)

9. Work with your creditors. And the earlier, the better. While they’re under no legal obligation to do so, many creditors may work with you to make special arrangements like lowering interest rates or devising a better payment plan, notes the Canadian Office of Consumer Affairs. This step may be an option if you don’t have too many creditors and you have a good history of making payments on time.

10. Attend to your emergency fund. Remember that debt versus savings debate from last year? Most experts now agree that everyone should have some cash set aside for emergencies. It may seem counterintuitive, but this strategy stems the reliance on credit in a crisis. Setting aside money for emergencies is a good habit to get into rather than accruing more debt. How much is enough? A general rule of thumb is 3 to 6 months worth of expenses (depending on your circumstances), but even $1000 is a good start.

11. Plan ahead for major expenses. Aside from emergencies, we have some warning for major expenses like a child’s education, wedding, home upgrades or next year’s holiday spending. Instead of making payments after the fact, let interest work in your favour by paying yourself first. Set up automatic transfers to a savings account as soon as you can.

12. Keep records. True, it won’t help pay down your debt faster — but keep track of your efforts just in case there’s a dispute or error. If you need to seek help from a credit counsellor or consider more serious steps (like a consumer proposal or declaring bankruptcy), you’ll have the documentation you need at hand.

One last word of advice: do what makes sense for you. However, experts don’t always agree on the best strategies, and everyone’s financial situation is different. The trick is to get a sense for the strategies and see if they’ll work for you.

www.edfc.ca

[brunt]

Regarding #12 way to reduce your debt above, the author missed a really important point - and that is one of motivation.

I created a spreadsheet when I started to attack my financial future, and as part of it, I included a graph of my net worth. Seeing that number increase over time was the best possible motivation that I could have hoped for.

I now have zero debt (it was not really a problem to begin with), and have a healthy position, but whenever I need a little motivation to keep chugging away, I just bring up that graph and marvel over how it has increased over time.

On another note, I am a bit concerned that the previous post was included without a citation to its source http://yourmoney.ca/home/12_ways_to_..._debt/9a09afbb. The author - at least - requires credit for her work. Although I am certain that ashedfc did not intend to present the work as his original, it certainly is possible that readers would think that it was his original work.

Please ashedfc, cite the authors of your posts. It is the correct thing to do.

In fact, the original article clearly includes a copyright notice. Using the contents of the article without attribution is illegal.

[ashedfc]

Please ashedfc, cite the authors of your posts. It is the correct thing to do.

In fact, the original article clearly includes a copyright notice. Using the contents of the article without attribution is illegal.

Thanks for your suggestion. In most of my posts where its more technical, I try to acknowledge the source. I have no intention of taking undue credit for some-one else's work.
However, the blog world is different from research/presentation/conference world (where reference is mandatory).
The heading can easily be googled to determine the source..

[ashedfc]

Debt: The video explains the point, however, a simple awareness campaign isn't the answer (atleast its better than nothing).

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