Five steps to manage finances and debt

Key takeaways

✓ Look for lower interest rate options and pay more than the minimum repayments

✓ Pay down highest interest loans first

✓ Save for emergencies and unplanned expenses (3 to 6 months of expenses)

✓ Consider stop using your credit cards and using cash/debit cards

✓ Ramp up your savings with money saved from debt repayments

Here are five steps to make this the year you take control of your ﬁnances—and get out of unhealthy debt for good.

1. Look for lower interest rates

It's diﬃcult to get out of debt when interest keeps piling up. When you can’t immediately pay off a loan, make sure that more of your payments go to reducing the amount owed by looking around for low-interest balance transfer oﬀers or loans. You may even qualify for 0% interest promotional rates. Be careful though as there is typically a fee to transfer a loan balance: for example, 3% of the balance transferred. Paying the fee and getting a lower interest rate may still make sense if paying down the entire balance is going to take time. Do the maths to ﬁnd out if you'll save money by transferring a balance—or use an online balance transfer calculator.

Knowing how much debt you have and how much that debt is costing you in the long run may help curb your use of using credit. To understand how much your debt is costing you, make a list of your debts, the total amount owed on each, the monthly payment, and the interest rate each lender is charging you to borrow.

Attack your debts one by one. If you have several loans and credit cards, focus on the debt with the highest interest rate ﬁrst. Continue to make the minimum or scheduled payments on other credit cards and loans. Once you’ve paid oﬀ or transferred the highest interest debt, start paying as much as possible of the next highest interest rate debt.

Getting out of debt can be difficult—but the payoﬀ is empowering

Just think: All that money spent paying interest on past purchases could be money saved for your future. You can better save for emergencies and/or planned expenses. But it takes a committed and consistent plan to get out of debt and to stay debt free.

2. Pay more than the minimum on credit cards

Making only the minimum payment on credit cards can leave you in debt for years. By paying just the minimum, a credit card balance of 1,000 at a 12% interest rate with a minimum required payment of 35 would take 34 months to pay oﬀ. Your total payments would equal about 1,184—which means you'd pay 184 to borrow money for nearly 3 years.

Increasing the payment to 50 per month would pay oﬀ the balance in 23 months and cost 121 in interest. Paying 100 a month would pay oﬀ the debt in 11 months and cost 59 in interest.

In some cases, the minimum payment shown by your lender would not be enough to pay off your debt at the interest rates shown, resulting in a constantly increasing balance that would take years and significant extra cost to pay off in the long term.

Review your spending

Adding a little bit more to your monthly payment can help you pay oﬀ the debt more quickly. But ﬁnding extra money to pay off your debts more quicky can be difficult.

Finding things in your monthly spending where you could cut back is the most likely source of extra money. The best way to ﬁnd them is by examining your spending. Look at your spending history through your bank account or track your spending for a period of time. After you see where your money goes, look for areas where you may be able to reduce expenses to free up more money to put toward debt—even just a little bit will help save you on interest.

For example, you may be spending extra money shopping on the internet, or maybe you can reduce your cell phone data limit. Maybe you could save money on groceries. You don't have to give up all of your non-essentials, but nearly everyone has areas where they can make some savings.

A general rule of thumb you can work towards is to keep your essential expenses under 50% of your take-home pay; this should allow you to pay down debt and save for the future too.

3. Have money available for emergencies and unplanned expenses

Getting out of debt while having nothing saved for unexpected emergencies can be difficult. You do all the work to pay down debt and before you know it, an expensive unexpected event occurs such as a major house or car repair. Without easily accessible savings, turning to loans (such as credit cards, relatives, bank overdrafts, or payday loans) may be the only option to meet these expenses. We encourage people to set aside an emergency fund for such circumstances.

Think of your emergency savings fund as a bill. With housing payments, contributing to a savings funds, and various living expenses, you already have a lot to balance. But if you turn saving for an emergency fund into a monthly priority, you will get in the habit of contributing to it regularly. Continue to save until you've accumulated between 3 and 6 months' worth of expenses.

4. Make it harder to spend

It's nearly impossible to get out of debt if new purchases keep adding to the amount of debt. If you still want to use your credit cards, avoid charging more than you can pay oﬀ in one month and always make your payments on time. Consider hiding your cards so you can't keep using them—or just leave them at home when you go out. Some online retailers oﬀer the option of saving your payment information. Decline the option if you have the chance— making it a little more diﬃcult to spend money is often all it takes to skip unnecessary purchases.

While it may seem to be a step back, using cash for purchases can help reinforce how much things actually cost and what you’re spending. Try it for a limited period and see what impact it has on your spending. Using debit cards is another option to avoid overspending.

5. Learn to use credit wisely

Following a few basic rules for credit can help you learn to use it wisely. If you do ﬁnd yourself with a balance that follows you from month to month, make it a priority to pay it oﬀ so that you can use your money to achieve your ﬁnancial goals—especially saving for your future. Do not be deceived by the various rewards offered by credit card companies – these generally come with a much higher interest costs and annual fees.

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