Manage your household debt in 8 easy steps

While the Bank of Canada’s trend-setting interest rate target remains at just 0.25%, Canadians are said to expect borrowing costs to pick up soon.

Kelly Ho, a certified financial planner with DLD Financial Group Ltd. Any rate hike would certainly put additional pressure on Canadians who already have a significant amount of debt accumulated, said the Vancouver-based company.

“For things like mortgages and car payments, if families have maximized their borrowing capacity, they barely earn,” she told in a phone interview. It is clear that any form of interest rate hike will wreak havoc on household cash flows.” on February 9th.

Jason Pereira is a senior financial advisor at Woodgate Financial Inc. is based in Toronto, and is the president of the Financial Planning Association of Canada. He says people with variable-rate mortgages are particularly vulnerable to rising interest rates, as are those who already have a significant amount of credit card debt.

He told on February 10 in a phone interview: “If there are consecutive increases, it will basically increase the monthly payments and it will put them in a difficult position. on less cash flow. “The bottom line is, if you’re someone who lives a dime-and-division lifestyle and is barely paying off debt, this isn’t good news for you in any way, shape or form.”

A new report published by MNP Ltd. shows that Canadians are reporting record low levels of confidence when it comes to their personal finances and ability to repay debt. According to the MNP’s Consumer Debt Index calculated for December, 43% of Canadians are concerned about their current level of debt, up 5 points from the previous survey conducted in September. Meanwhile, 55% of Canadians are confident in their ability to comfortably cover their living expenses in 2022, down five points from the previous survey.

For anyone whose finances have been severely impacted by the rate hike, Pereira says it’s important to find a way to stop living off a razor’s budget.

“If a one percent change in interest rates is going to put you in a hard-to-find situation, you’re too close to the edge,” he said. “You have to take the initiative to take steps [to] spending cuts. ”

Pereira, Ho and other industry experts share their top tips for managing household debt:

1. Assess current spending habits

An important first step in managing household debt is to look at current spending habits for savings opportunities. Part of this involves determining your fixed costs, Ho says.

“You really need to know what non-negotiables are,” she says. “What are those costs that flow out that you have absolutely no choice?”

Examples include mortgages, rent or any housing-related bills, she said, as well as transportation-related expenses like car maintenance or insurance and even retirement savings. These are all payments that should be prioritized.

It’s also key to assessing your monthly net income and determining how much it’s actually going for in these required payments. According to Ho, this could lead to some important revelations about how the money is actually being used and how to redirect the cash flow if necessary.

“Unfortunately, for people who are in dire situations, sometimes a little reality check is needed,” Ho said.

2. Develop a cash flow plan

According to Ho, most people struggle with controlling their discretionary spending — or, in other words, spending on things they can’t live without. While this often involves travel, entertainment, clothing, and even takeout, each person will have their own definition of what is considered discretionary and how much should be spent on those purchases.

Instead of telling her clients how to spend their money, Ho said she will work with them to develop a cash flow plan that involves weekly spending limits on items like food and clothing. . Plans should be based on each person’s income and specific financial goals, she says.

“If you spend no limit, if you don’t have that number weekly over what you can actually afford to spend without affecting your ability to pay for those non-negotiables. , would that break your situation?” she speaks. “Unfortunately, there are a lot of people who don’t think so.”

Ultimately, deciding what to keep and what to cut is a personal decision, Pereira says, that should be based on personal preferences and values. For some people, buying a cup of coffee in the morning seems like a waste of money. For others, it’s a valuable investment that gets them through the day. These are all things that should be considered when developing a cash flow plan, he says.

“You have to decide for yourself what is not important to you, what you are happy to live without,” he said. “And hold on to it because the alternative is just putting you in a really bad place when it comes to financial trouble.”

3. Consider getting rid of your credit card (or putting it in the freezer)

Greg Pollock, president and CEO of Advocis, the Canadian Association of Financial Advisors, says people who are having trouble paying off their credit card balances monthly, says it might be an idea. It’s a good idea to swap credit cards for debit cards.

“Credit card interest rates are exorbitant,” he told in a February 9 phone interview: “Credit card interest rates are outrageously expensive,” So if you’re paying interest on your credit card, I think you should. get rid of credit cards.”

It’s important to note that ditching a credit card can affect a person’s credit score and their ability to take out a loan, Ho says. Instead of canceling the card immediately, Randolph Taylor, an accredited financial advisor with Credit Canada Debt Solutions, suggests putting the card in the freezer to avoid temptation.

“Reducing the ability or access that someone has with debt is always a good thing,” he said in a phone interview with on Feb. 10. “It can be a good tool. to ensure that no further purchases are made. ”

Instead, Ho would recommend that its customers use a reloadable prepaid credit card for everyday expenses. Similar to gift cards, these can be preloaded with a certain amount that matches a weekly spending limit, keeping people on track, she said.

4. Aim to pay your bills on time

If possible, it’s important for people to pay their bills on time to avoid late fees and unnecessary debt, Pollock said.

“In general, people should pay off their debt when they arrive,” he said.

Pereira also recommends looking at the possibility of scheduling mortgage payments and other debts. Often due at the same time each month, calculating these payments in advance can help with organization and budgeting, he says.

Discipline is also key.

“Scheduling your savings and paying off debt will go a long way in taking away [spending] the capacity you have is available to you,” he said. “Knowing that I can’t spend more than I have in my account, it’s a form of discipline… you don’t have to sit down and budget for everything you end up spending.”

5. Consider consolidating your debt

Often, the best option for effective debt management is to consolidate it, Pereira said.

“Normally, people will get a car loan here, they’ll get a mortgage here, they’ll have a line of credit here, they’ll have some of their loans elsewhere and a credit card balance,” he said. I said . “It’s better for them to use a home equity line of credit to pay off all of their unsecured properties.”

A form of refinancing, debt consolidation involves taking out one loan to pay off a number of other, smaller loans, often with more favorable payment terms. Finding ways to refinance at lower interest rates can save money in the long run, says Pereira.

The key is not to make matters worse by continuing with high spending.

“If you’re making it worse, you just need a little more time to dig yourself deeper,” he says.

6. Think about a savings plan

While each person’s financial situation is unique, creating a savings fund will help provide some level of future safety and help manage any debt that may arise in the interim, Pollock said. coming, Pollock said. A great place to start is to set aside 10% of your net income.

“You’re starting to build some assets that you can then use to invest where you want to invest, whether it’s in the TFSA, whether it’s in the RRSP, whether it’s in investments other,” he said.

To better manage day-to-day expenses during an emergency, creating a personal rainy day fund is also worth considering, says Pollock. A general rule of thumb is to set aside enough money to cover six months’ worth of fixed expenses for any unexpected events, such as job loss or an injury that forces you to miss work.

7. Understand that financial plans will change over time

When developing a financial plan, it’s important to remain flexible, says Pollock. No one knows what will happen in the next year, next month, or even tomorrow, so financial plans need to constantly be reevaluated and adapted to current situations and needs as they arise. , he said.

“If people think you make a financial plan and now you have this miracle that you just stick to and it will solve all your problems, it is not,” he said. . “You need to revisit this on a very regular basis, say semi-annually or annually, and reframe it based on the current circumstances.

“There’s no one size fits all.”

8. Find a financial advisor

For those who are really struggling with household debt, says Pollock, working with a third party can be helpful in re-checking your spending.

Along with discussing income and expense goals, financial planners can also offer advice on debt resolution options, Taylor says, whether that involves consolidation or refinancing a property.

“We go through everything to put a person in a position to have enough information to make the best choice,” he said.

Finally, reaching out to a financial planner can also encourage people to avoid being too loose with their spending habits, Ho said.

“What a certified financial planner has to do is educate people not to max out their debt capacity and really look at their entire situation to [determine] whether they can withstand the rate hike,” she said. “When you don’t have that part of the accountability, who are you really accountable to?”

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