Make paying off your debt fast the goal this year
If you are feeling financial stress from your debt, you are not alone. Statistics from 2024 show that the average Canadian carries $21,931 in non-mortgage debt. The longer you take to pay off your debt, the more you will pay in interest overall. With this level of debt, rising interest rates have a tangible impact on your debt. Done with debt? Sick of the phrase ‘how to pay off credit card’ popping up in your search bar? Keep reading to learn how to pay off debt fast!
Where to start
Don’t just throw any available money at the problem without a strategy. Take stock and understand why you got where you are. Understand key numbers, such as your debt-to-income ratio (DTI). Understand what led you to be in debt in the first place. Did you borrow money through loans, lines of credit, a home equity loan, or did you rack up too much credit card debt? Was there an unplanned emergency, a loss of income, or perhaps spending just got away from you, and your card balance ballooned? If you ignore the reason you landed in debt in the first place, it is more likely to recur.
The next step is to compile a list of all your debts. This should include the amounts, lenders, interest rates, and reasons for each. Prioritizing the debts for payoff will help you decide which approach you want to follow.
Learn the strategies.
Whatever debt payoff method you choose, remember that if you don’t make the minimum payment on all debts each month. Your credit score and credit reports will record those missed payments. This will lower your score and lead to bad credit. These methods work by directing any extra cash toward a single debt until it is paid in full. In the meantime, you continue paying minimum payments towards all other debts. As each debt is paid off, you prioritize the next with all available funds.
The Debt Avalanche
The Debt Avalanche method lists all debts by interest rate, regardless of amount. All extra money is funnelled toward the highest-interest-rate debt first. Avalanche has the added benefit of saving you more and getting you out of debt the fastest because it focuses on your highest-interest debts first.
The Debt Snowball
The Debt Snowball method focuses attention first on the debt with the smallest balance owing, regardless of interest rate. This method racks up quick wins, which can be encouraging and help motivate sticking to the plan.
The Debt Snowflake
Some people use the Snowflake approach. It works by making small money-saving habit changes and putting those few extra dollars towards debt. Instead of paying only the minimums on debt, you add a bit more each time. If you have a tight budget, this may provide more flexibility than the more structured snowball or avalanche, and allows you to make small additional payments, no matter how much you have on hand.
Most emotionally heavy
You can also prioritize paying off the debt that causes you the most stress. Some debts bring more emotional stress than others. Perhaps it’s a family debt, a purchase you regret, a money loan taken from a cheque-cashing organization, whatever the case may be, this can also help motivate you and eliminate a significant financial stressor sooner.
Whatever method you select to approach your debt repayment, remember that consistency trumps perfection, and continuing the process, even with imperfections and mistakes, is the goal. If one method is not working for you, feel free to try another approach.
Stop interest from working against you
It is a myth that paying just the minimum monthly amount will get you out of debt. The longer you carry a balance on your debts, the more the interest charges accrue and compound.
Contact your lenders and try to negotiate a lower interest rate. The worst they can say is no. Zero-interest balance transfer offers may be available from different lenders. You can transfer credit balances between cards. Be sure to fully evaluate whether you’ll be able to clear the balance by the time the promotional period ends, and what will happen if you don’t. Determine if the interest rate after the zero-interest period is higher or lower than what you are paying now. Beware of offers that will land you in a worse situation after the promotional period if they are not paid in full.
If you have multiple debts, a consolidation loan is essentially borrowing money to pay off all of them, then making a single payment by consolidating debt with a single lender. Debt consolidation loans do not reduce the amount owing or negotiate rates, but they can make payment and debt management simpler.
A Debt Management Program (DMP) is another option to investigate if you are seeking help with a debt repayment plan for unsecured debt. A non-profit credit counsellor can help you negotiate and create a plan that works for you. It’s a great option to consider for debt help.
More ways to free up cash
A strategy is great, but if you don’t have any additional cash to put toward it, it’s hard to make progress. Taking a dual-method approach to free up cash by reducing expenses and increasing your income will have the most significant impact!
Reducing cash outflows
Reducing expenses can significantly impact your cash flow. Look at your fixed costs and see if you can negotiate your bill or package rate. Look at mobile, internet and other subscription expenses to see if there is a lower package or loyalty discount you may be eligible for. Shop around for more affordable insurance plans.
Also, look at ways to reduce your disposable spending. Consider a no-spend month or a smaller challenge to boost savings in the short term.
Increasing cash Inflows
There are two approaches to increasing your income. Focus on your 9-5 job – if a promotion opportunity is not available, considering a higher-paying role is a sure way to increase your monthly income. A side hustle or short-term income approach can help temporarily. Whether it’s picking up gig work or a second job, monetizing a hobby, or selling your unused items through garage sales or online, there are ways to bring in a bit more money. However, to avoid burnout, set yourself a goal or an end date by which you will pursue the extra work.
Save while paying off debt. The right way
Prioritizing paying off debt needs to be balanced with saving. If all excess funds go toward debt payoff, there will be nothing left for emergencies or savings, which could result in lapsing back into additional debt. Prioritizing an emergency fund can help ensure you don’t have to resort to debt again. Utilizing a separate high-interest savings account, even in a different institution, can help you separate and safeguard your savings.
Know when to ask for help
If you are having trouble following the strategies independently, consider reaching out to us. Our trained Credit Counsellors can help you create a plan that works for your situation. Being able to identify that you need help is a real asset, helping you get on a personalized plan with earlier intervention.
Progress beats perfection
Getting out of debt fast requires discipline, insight, and practice. Learning which debt payoff strategy works best for you, widening the gap between your expenses and income to free up more cash for debt repayment, and getting help when needed are all great strategies to help you get debt-free sooner! Remember progress beats perfection, and even small steps can take you a great distance!
