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Reduce Your Debt and Feel The Freedom

September 4, 2013

FreedomI have never really been comfortable with debt.

When we paid off our mortgage several years ago, I remember feeling like a huge weight had been lifted off my shoulders. Now, all our money really was our own rather than the bank’s! Like a salary increase or small lottery win.  No longer having debt made me feel happier and more in control of my life. Things that we had put on the back burner became possible once again.  Like more travel, additional retirement/education savings,  even a new, less demanding career.  For me,  just dreaming about these possibilities was as much fun as actually experiencing them.

Canadians on average owe $161 for every $100 they earn- the highest level of debt in many years.  Few people escape debt at some point(s) in their life;  student loans, mortgages, car loans, lines of credit or credit card debt.  The secret to managing debt is to think critically about it BEFORE you take it on.  Go in with your eyes wide open. Understand the sacrifices you will need to make in other areas of your life.  Figure out how much is manageable and don’t get in over your head.  Evaluate your current/future earnings power against the amount of debt you are considering.  If you need it, get professional advice or a second opinion before taking on too much debt.

One of the best (and simplest) ways to improve your financial situation is to diligently and regularly pay down your debt.  Prepare a plan and know when you expect to have it paid off.  If you put your plan on “automatic pilot” i.e. regular, automatic payments, you can rest easy and know that it will happen with little effort.  Always easier said than done but its a great goal to shoot for!

A few more tips:

Know the difference between “good” debt and “bad debt”

Incur debt for things that will increase in value like a home or education to improve your career potential/marketable skills .  Using debt to pay for consumption today will catch up with you tomorrow and make  your future life more difficult.  From my experience, it is much better to be in a position to increase spending over time rather than reduce it!

Work hard to improve your credit score

Pay your bills on time.  Pay off your credit cards in full each month and keep well below your actual credit limit.  Establishing a consistent, strong track record of paying your bills improves your access to the best interest rates possible.  Even a 1% reduction in interest on a loan can make a huge difference in the total cost over time.

Be realistic/know your limits

Does the proposed debt fit with your spending priorities?  Will incurring debt create problems in other areas of your life?  If  having debt will create anxiety or prevent a good night’s sleep, it is a poor choice.

Prepare a plan

Know what your debt will cost you and when you expect to have it paid off.  Think about the impact of rising interest rates.  Realize that if you can accelerate your repayments, you can save substantial dollars.  Remember that having debt will increase your “fixed” expenses and reduce the amount available for discretionary expenses.  Also, don’t forget to consider a contingency plan for the unexpected like a job loss or medical illness.  Having adequate insurance to manage these risks will give you and your family piece of mind.   Debt repayment must be a top priority.

Tools at your fingertips

On-line debt repayment/interest calculators are available on all bank websites.  Spend some time to play with different scenarios to see the impact on your total cost and repayment time.  The results may surprise you and give you the motivation you need to reduce your debt even faster.

There is nothing like the feeling of being debt free.  If you haven’t tried it yet, I would highly recommend it!

(Note:  I help people improve their money skills and personal finances.  Please do not hesitate to contact me if you would like more information)

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