1. Identify the problem
Being in debt does not necessarily mean that you have financial problems. Very few people would be able to buy a house or a car otherwise. However, certain red flags should be taken seriously.
Do any of the following statements apply to you?
- You have many credit cards and you sometimes use one to pay off another.
- You've had to refinance your home to support your lifestyle or pay off debts.
- You are unable to pay off more than the minimum amount required on your credit cards.
- You delay or skip certain payments.
- More than 40% of your gross income goes to paying off debt.
- Your financial situation is a source of stress.
If so, you'll need to take some steps to correct the situation.
2. Make a budget to help you resolve your financial problems
The first step towards managing your financial problems is making a budget. You can use:
- Budgeting software
- An online budgeting tool
- A mobile app
- Or simply a piece of paper, a pencil and a calculator
Writedown all your sources of income and all your expenses.
To avoid underestimating your expenses, save all your bills and receipts for a month.
Also consider occasional expenses like school supplies, gifts, vacations, your driver’s licence, etc. Don't forget to budget for paying off your debts.
Reorganize your debts
Don't forget to include debt repayment among your expenses.
Start by identifying your debts and listing their amounts and interest rates. Then pay off the debt with the highest interest rate, or consider debt consolidation. Consolidating your debts into a single loan with a lower interest rate will help you pay them off faster. In this case, make sure the interest savings are used to accelerate debt repayment, or for long-term savings. If these savings end up as expenses, the problem will persist.
→ To find out more, read our article Debt management: How to pay off your debt
Good to know: Many consumer associations offer training on budgeting and debt managment. You should have a look!
3. Lower your expenses
Analyze all of your expenses to see which ones you can reduce or eliminate.
Think about reviewing various packages, such as your telecommunication services. You could save by ensuring all they do is meet your needs—nothing more and nothing less. You could also start looking for deals, make a food budget and limit the cost of eating out by packing your own lunch.
4. Pay in cash
Paying in cash can help you stick to your budget. Debit and credit cards are convenient, but they can make it harder to track your expenses.
Budget tip: Put your cash in separate envelopes for groceries, entertainment and clothing.
→ Looking for new tips to help you save? Read our article: 35 tips to help you save money and optimize your budget.
5. Stop taking on debt to avoid aggravating your financial problems
If you tend to make impulse purchases and regret them later, you may want to start leaving your credit card at home.
Avoid taking on additional debt by living within your means. Make sure you have enough to repay your credit card balance and other debts.
6. Avoid buying new
There are many alternatives to buying new.
- Buy used or exchange goods. Check out thrift stores, online classifieds ads and Facebook pages for neighbourhood sales. There are many bargains and opportunities for trades.
- Borrow or rent. This is a good option for items you will rarely use. For example, sign up for a library card to check out books and magazines.
- Do it yourself. Over the long term, using a coffeemaker is much cheaper than buying coffee every day.
- Take advantage of freebies. For example, there are many free shows and activities at festivals.
7. Meet with your advisor to discuss your financial problems
Your advisor can help with your financial problems. They will help you review:
- Your banking package
- Your banking fees
- Your insurance coverage
- Whether you should apply for a reduced interest rate credit card (with an annual fee)
→ For tips on optimizing your credit card use, read our article: 6 smart ways to use your credit card.
8. Increase your income
Think about ways to increase your income to deal with your financial problems. Here are some options:
- Ask your employer if you can work overtime.
- Offer products and services for extra income.
- Sell items that you no longer use.
- Find a roommate.
- Get a second job.
Be wary of ads that claim you can earn money easily. These are often scams.
Use your emergency fund
In the event of a problem, you can dip into your emergency fund instead of putting yourself into debt. However, make sure you don't make a habit of it. As the name implies, it should only be used in exceptional circ*mstances.
Your emergency fund is a cushion to help you deal with the unexpected, such as losing your job or a broken electrical appliance. Ideally, it should cover between 3 to 6 months of expenses, so be sure to use it wisely!
Pro tip: avoid dipping into your retirement savings, especially your RRSPs. Your withdrawals will be taxable, and you'll also lose contribution room that could be useful in the long term.
→ Read our article on withdrawing funds from an RRSP in the event of debt to further understand the potential implications.
9. Be realistic when it comes to resolving your financial problems
Realistic goals will help you stay motivated and reduce your financial stress. If you've overspent for many years, you can't expect to pay off your debts in just a few weeks.
Just like a diet, significantly restricting your expenses will only increase your appetite to spend. Plan a little wiggle room in your budget to treat yourself.
10. Improve your credit score and adopt good habits
Do you have bad credit? That means you'll be offered higher rates on financing. Why? Because you present a greater risk for the financial institution. Here are a few tips to improve your credit score:
- Pay your bills on time.
- Try to keep your credit card balance well below your limit.
- Don't submit too many credit applications.
Once you have managed your financial problems, continue taking care of your personal finances. The money you save will allow you to create an emergency fund. Ideally, this fund should equal three to six months of expenses. If you run into issues, you'll be able to withdraw money from the fund instead of going into debt.
Next,you can start saving to finance other goals, like retirement, travel or your children's education.
Nobody is immune to financial problems. A stroke of bad luck or a poorly controlled budget could happen to anyone. The important thing is to take action and get help from our team of specialists when necessary. With the right support, you'll be able to manage your financial problems.
