Championship winning ways to cut down on your debt

Every day we receive dozens of questions on our website, on social media, and during Free Confidential Consultations wondering how to overcome or alleviate debt without filing a Bankruptcy or Consumer Proposal.

If you cannot keep up with your minimum debt payments and monthly expenses, we encourage you to schedule a Free Confidential Consultation with a Licensed Insolvency Trustee to discuss your options.

However, if you’re merely concerned about your worsening debt situation and want to take proactive steps to get it back under control, following are several effective steps you can start taking right away.

Make your game plan

Imagine you’re trying to win a hockey game: You could have the five best players in the league on your top line, but it’s little help if they lack cohesion and direction. A more coordinated and strategic opponent will win a seven-game series four games to zero. What you really need is discipline and a strong game plan to turn all that talent into a winning machine.

Step 1: Outline your resources

Make a list of all the resources you have at your disposal to start chipping away at your debt. This will likely include:

• How much income do you earn?
• How much savings do you have?
• What non-essential assets could you sell?
• Do you have time for a temporary part-time job?

Step 2: Study your opponent

Make a list of all the financial challenges you’re experiencing and what’s preventing you from reducing your debt. This will likely include:

• How much debt do you owe in total?
• How many creditors do you owe money to?
• What are all your regular monthly expenses?
• Where are you spending your discretionary (non-essential) income?

Step 3: Build your strategy

Now that you know what you have to work with and what you’re up against, begin positioning yourself to break through your opponent’s defenses while shoring up your own. Some helpful steps will likely include:

Create a monthly budget that factors for all the expenses you expect to pay.

• Fixed expenses (e.g. rent/mortgage, car payments, insurance, etc.) stay the same from month to month.
• Almost fixed expenses (e.g. groceries, utilities, debt payments, etc.) fluctuate slightly from month to month. You can estimate these by averaging your spending over the past three to six months.
• Irregular / unexpected expenses (e.g. auto maintenance, gifts, etc.) occur only occasionally and are difficult to estimate. Use a 12-24-month average to estimate these.

Reduce your discretionary spending as much as possible (cut back on dining out, cable / subscriptions, shopping, etc.)

Choose a debt reduction strategy:

• Snowball — Pay as much as you can afford on the debt with the lowest balance while still making the minimum payments on all your other debts. Once the lowest debt is paid off, focus on paying down the next lowest, and so forth.
• Avalanche — Same as snowball, except you focus on the debts with the highest interest rate instead.

Track your income and spending throughout the month to ensure what you’re doing lines up with what you’ve planned.

Track your progress every three to four months to evaluate whether you’re winning the battle against your debt, or whether it’s time for a new strategy.

Step 4: Stay out of the penalty box

People often make several common mistakes in trying to reduce their debt. While these can seem to help in the short term, they’re not sustainable and can quickly result in more — and often worse —financial difficulties than before.

• Do not pay off debt with emergency savings — If you encounter a large emergency expense (e.g. job loss, home / auto repair, etc.), you will have little choice but to go back into debt.
• Do not pay off debt with RRSPs — You will pay a significant amount of tax to cash these in. Most Registered Retirement Plans are also protected in Bankruptcy or Consumer Proposals.
• Do not skip payments to other service providers to increase debt payments — Some people intentionally miss payments to utility providers to help pay down their debt faster. This will harm your credit just as badly as missing a payment on your debt.

Every coach needs a good assistant

You have many options to address problem debt besides doing it yourself or filing a Bankruptcy or Consumer Proposal. If you’re struggling to put your game plan into action, consider reaching out to a Licensed Insolvency Trustee to discuss other strategies. They can review your entire financial situation, identify potential challenges you may not have noticed, and connect you with resources you may never have thought to look for.

A Licensed Insolvency Trustee can also discuss the Bankruptcy and Consumer Proposal processes with you and explain when and why either one might be the most cost and time effective strategy to get the financial fresh start you deserve.