12 resolutions to reduce your debt in 2022

With a new year comes new financial resolutions, and for many people that means finally getting out of debt.

Of course, resolving to reduce your debt and making measurable progress toward that goal are two very different things. You’re sure to face temptations and challenges in the months ahead that threaten to sidetrack your best intentions — and it can be difficult to know where to start.

Rather than heading into 2022 with the overly broad and unspecific objective of getting out of debt, perhaps a better strategy would be to make progress on the more actionable resolutions bellow.

Each step will not only bring you closer to the debt-free future you deserve, but reshape your lifelong relationship with money, credit, and your ability to achieve future financial goals.

1. Know how much you owe 

Take stock of how much you owe across all your outstanding debts. Review your bills and statements, and all your online accounts. Centralize all this information in a spreadsheet, including

• Your creditor information
• The type of debt (i.e., credit card, loan, line of credit, etc.)
• Interest rates for each debt
• Current outstanding balance for each debt, and
• Current monthly payments for each debt

Note your largest interest and largest balance debt(s) by either bolding or highlighting these lines. Update this spreadsheet monthly when your latest statements arrive. Examining your debt situation and keeping it front of mind will help you put a plan in place — and stick with it.

If you’re unsure of who your creditors are, TransUnion and Equifax Canada both offer free copies of your credit bureau report every year. It’s good practice to review these reports and notifying the bureaus of any errors annually at the very least.

2. Review your budget

Create a new spreadsheet and record all your income and regular expenses. Be honest with yourself, making sure to include even small or seemingly inconsequential expenses such as online subscriptions and your morning coffee. Make sure to also include lines for discretionary spending (e.g., restaurants, activities, etc.), savings, and your monthly debt payments.

It may be helpful to compare your spreadsheet to your past six month’s bank statements so you can make sure you’re capturing all your regular costs — especially those you pay reflexively, without much thought.

Once you’ve accounted for all your anticipated spending, compare this to your expected income to see if you can pay more toward your debt, or make changes to free up funds to put toward your debt.

Here are links to tools to help you record your income and expenses:

• MNP Budget Tracker Spreadsheet
• Financial Consumer Agency of Canada Budget Planner

3. Reduce your expenses

Review your budget with a critical eye and determine which expenses you could reasonably give up or cut back on to help reduce your debt. Some ideas to consider include:

• Eat at restaurants one less time per month
• Prepare your meals a week in advance to cut back on food waste
• Create a grocery shopping list to avoid impulse purchases
• Purchase regularly used, non-perishable food items in bulk
• Monitor grocery store fliers for weekly sales on regularly purchased items
• Switch from name brand to private label products
• Cut your landline telephone subscription
• Cut cable (or reduce the size of your cable subscription)
• Reduce the number of streaming services you subscribe to every month
• Reduce your thermostat setpoint (e.g., from 21˚C to 19˚C) and turn down the temperature at nighttime and when you’re away from home (e.g., from 19˚C to 16˚C)
• Replace burnt out incandescent or compact fluorescent bulbs with LEDs
• Make use of your local library instead of shopping at bookstores
• Carpool where possible
• Use public transportation where possible
• Comparison shop for better (home, auto, renter’s, etc.) insurance rates
• Comparison shop for a better mobile phone plan (and monitor data usage when away from wi-fi)

4. Increase your income

If you have reduced your expenses as much as you can and still need more money to put toward your debt, you may want to consider increasing your income. If you’re paid hourly, consider asking for additional hours at work. If not, determine whether a part-time job, freelance work, or a side hustle may be possible. 

This is also a good time to consider your wage or salary with your current employer. When was the last time you received a pay increase? If it’s been a while, consider asking for a raise — especially if you can easily demonstrate the value you’re adding to the business. Given the current environment, there may also be value in testing the waters to see if you can earn more at a new employer or in a different role.

Depending on your stage of life, you may also want to investigate future income options such as investment income, pension income, or government benefits such as Canada Pension Plan or Old Age Security.

There are other sources of potential income such as selling:

• Gently worn clothing or gently used items in a yard / garage sale or on online classifieds
• Second, third, or recreational vehicles
• Recently financed vehicles (and replacing with an older model if necessary)
• Mortgaged property (and downsizing to a more affordable home)
• Vacation property (e.g., cabin or cottage)

5. Stop using credit 

The most important thing you can do If you want to reduce your debt is to stop creating more of it. Freeze your credit cards on your online banking apps — and perhaps even literally — so they’re not so easily accessible. If necessary, you might even consider cutting them up.

Note: Cancelling your credit accounts, especially your oldest accounts, will negatively impact your credit rating. However, this may still be preferrable to the impacts of missing payments or making payments late. Be honest with yourself about your credit habits and whether this might be necessary.

Be sure to review all pre-authorized transactions (e.g., streaming subscriptions) being changed to your credit accounts every month, too. If you choose to keep these services when you reduce your expenses, switch the payment method to a Visa-debt or similar card connected directly to your bank account instead. 

6. Contact your creditors

Call each of your creditors and explain that you’re trying to create a plan to pay them in full. Ask if they’re willing to temporarily stop, or at least reduce, the interest accumulating on your debt. This will allow more of each payment to go toward paying down the principal and less toward interest. You may be pleasantly surprised with their response.

If you are paying back a loan, you can also ask to extend your payments over a longer period to reduce your monthly payment. 

If your creditors are not willing to reduce or halt interest, ask whether they offer more affordable options (e.g., low interest credit card) that you could switch to instead. These options will typically have a higher annual fee but may offer net savings in the form of lower interest costs. Just be sure the math makes sense.

7. Create your plan

Choose a repayment strategy that makes the most sense for your financial situation and begin outlining steps you’ll take over the next one, two, or three years to begin paying down your debt.

Some ideas include:

• Focus on a specific debt you want to eliminate. Pay the minimum payments on all debts except that one, which you will focus the bulk of your efforts toward until it’s completely paid off (see Avalanche and Snowball, below).
• Combine your debts into a single, affordable monthly payment (see Consolidate your debt, below).
• Determine an affordable monthly debt repayment amount and set up pre-authorized payments to various creditors in your online banking to make sure these take place automatically.
• Set a timeline for when you want to be debt free and work backwards, setting monthly or quarterly mini goals over that timeframe. For example, say you want to repay $5,000 over the next two years: $5,000 / 24 = $208 per month + interest; or $5,000 / 8 = $625 per quarter + interest). Make sure your goal aligns with your budget and check in at regular intervals to monitor your progress.
• Connect with a financial advisor or Licensed Insolvency Trustee to discuss and assess all your options and better understand the costs, benefits, and drawbacks of each option (see Seek a professional, below).

8. Avalanche method: pay the highest interest debt

Continue paying the minimum on all your debts, except for the one with the highest interest rate — where you will focus the bulk of your debt repayment budget. Once that debt is paid off, increase your payments on the next highest interest rate, and so on.

This option will provide the greatest cost savings because you’ll pay the least amount of interest in the long term. The downside is it can be challenging to build momentum and excitement if your highest interest rate debt also happens to have a high balance.

9. Snowball method: pay the smallest debt

Continue paying the minimum on all your debts, except for the one with the lowest balance — where you will focus the bulk of your debt repayment budget. Once that debt is paid off, increase your payments on the next lowest balance, and so on. 

This option is the best way to keep yourself inspired because paying off balances rapidly creates positive reinforcement on your progress. The downside is it can end up costing you more over the long term as interest continues to accumulate on high cost / high balance debts.

10. Consolidate your debt

Depending on your relationship with your bank and your credit history, you may be able to combine your various debts through a consolidation loan with single monthly payment and a lower interest rate. Not only might this be more affordable, but also easier to manage than the multiple monthly payments you’re currently making — and with a more obvious timeline to when you’ll be debt free.

Several words of caution before proceeding with a consolidation loan:

1. Mind the interest rate: You don’t want to consolidate debts with a lower interest rate than a lender offers on a consolidation loan, as this will increase the cost of your debt.
2. Mind the monthly payments: Just because you qualify for a consolidation loan doesn’t mean it makes sense for you financially. Compare the monthly payment requirements against your budget to make sure you can afford the payment.
3. Resist temptation: While consolidating will enable you to pay off credit cards and lines of credit, continuing to use these accounts risks increasing your total debt and making your situation even more unsustainable.

11. Stay out of debt

Nobody plans on getting trapped in the cycle of debt. But life happens, and sometimes our finances have a way of getting away from us. Take some time to revisit your budget, assess the factors that lead to your debt challenges, and determine how you can avoid similar challenges from recurring in the future.

• Are you prepared for the unexpected? If unplanned or unforeseen costs led your debt to skyrocket, consider folding some (or all) of the funds you contributed to debt repayment into building your emergency fund.
• Were you living beyond your means? Schedule an hour or two every month to review your bank statements and constructively assess which transactions were necessary, and whether your spending habits align with your values and goals.
• Do you keep your future self in mind? It’s tempting to treat yourself now and worry about the consequences later, but using debt for big ticket items (e.g., vacations, furniture, etc.) can be costly. Try to think at least three to six months ahead of any major purchases and commit to saving toward those items instead of paying up front on credit.
• Are you too trusting? Co-signing and joint debt can lead to a lot of conflict and financial stress. While the desire to help a friend or loved one — or share financial responsibilities with a spouse — is certainly admirable, it too often leads to unmanageable and unsustainable debt. Consider other, better ways to financially support and collaborate that won’t result in you being responsible for someone else’s financial indiscretions.

12. Seek a professional

You don’t have to face your debt repayment journey alone. Professional help is available to help you assess your options, compare debt repayment strategies, and accelerate your path to a financial fresh start.

At MNP, our Licensed Insolvency Trustees offer a Free Confidential Consultation to all Canadian residents. These conversations are completely free of cost, you do not have to participate in any of the services we offer, and there is no minimum amount of debt required to schedule an appointment with MNP. Together, we’ll review your entire debt situation, discuss your specific challenges and goals, and identify opportunities to eliminate your debt for good.

Reaching out to a professional will almost certainly make it easier to resolve your debt this year — whether you end up pursuing a Bankruptcy or Consumer Proposal, or simply gain a better understanding of how you can apply the resolutions above.