What Costs Less the More You Pay? Debt

Debt that you owe and repay to your creditors consists of two parts. The first part is the money you originally borrowed. The other part is the interest (and sometimes fees).

Interest is calculated based on the interest rate you are being charged and the length of time you take to repay the borrowed money. The longer it takes to repay the debt or the higher your interest rate, the more you pay.

If you pay more on the debt each month and are able to repay the debt sooner, you pay less interest to the creditor overall.

How do I pay more on my debt if my income doesn’t increase you ask?

Here are some suggestions to reduce your expenses and increase available funds so you can pay your debt down quicker.

First, you need to estimate the amount you will be spending in the future each month for each type of expense to determine if any amounts can be reduced. This is called a budget or budgeting. To determine what amount you may be spending in each category of your budget in the future, you start by looking at what your expenses have been in the past. This can be done by reviewing bank or credit card statements from past months and then adjusting for any future changes, such as, an annual rent increase or another car.

Your budget consists of three types of expenses: fixed expenses, almost fixed or regular expenses and irregular expenses. Irregular expenses include items such as car repairs. People who aren’t budgeting might say that “I had an unexpected car repair last month.” Car repairs are not unexpected, you just never know when they may happen. So, to determine a reasonable average monthly amount for irregular expenses, you may need to go back for a longer period than you would for regular expenses like groceries.

A simple method of tracking your actual spending each month will help your budgeting process by ensuring your budget is accurate. Once you have your method to track your spending, you total each category in your budget at month end. Once you do this for a few months, you will see averages starting to develop in each category - and there’s your budget. You may also see from your tracking that seemingly inconsequential expenses such as the daily coffee run or children’s expenses add up to more than expected. You may also see that the irregular expenses may not be the amount that you initially thought once you average them over a sufficient period of time.

Once you have been tracking your expenses and comparing each category monthly, you will see that there are expenses you must pay each month and others that you might be able to cut out. These are called discretionary expenses. These are expenses that you may have the option of not incurring such as entertainment expenses. By eliminating or reducing some of these expenses you will have more money to pay your debts sooner.

To ensure that you aren’t spending more than you budgeted, consider using cash to pay for your expenses as it makes it easier to decipher what you have spent and have left.

Another option to pay off debt sooner is to set up automatic payments with your creditors as part of your budgeting process so payments are made on time. Extra interest or late charges won’t be incurred. Directing any extra funds that you have toward the higher interest rate debt will reduce that debt quicker.

If you want to lower your overall expenses consider comparison shopping and using coupons.

So, have a budget; track expenses; check discretionary spending; use cash, automatic payments, comparison shop and coupons where possible; and pay high interest debt with extra funds. Following those simple steps will put you on track for reduced debt and a stronger financial future!

Joe Wilkie is a Licensed Insolvency Trustee serving our Halifax region. To learn more about how MNP Debt can help you, contact our local office at 902.454.7934.