If you’re carrying debt, you’ll have to include your monthly repayments in your budget.
Four questions to ask yourself
- What debts should you pay off first? Usually, you’ll want to pay off the debt with the highest interest rate sooner. For example, credit card debt is more costly than a mortgage.
- Could you pay more each month? Find where you can cut your spending until you clear your debt.
- Could you combine your debts with a consolidation loan? This reduces the overall rate of interest on your debts.
- How can you avoid taking on any more debt? For example, use cash, not credit cards, for everyday purchases like groceries and gas. Store credit cards often charge 20% or more in interest. If you owe $1,000, you could pay as much as $200 in interest in the first year. Credit cards from a financial institution also charge high interest rates.
5 steps to pay down debt
1. Budget a set amount each month
Look for ways to cut your spending so you can free up money to pay off debt. Even a small amount each month will start to reduce the amount of interest you pay.
2. Pay off high-interest debt first
Your biggest loan may not cost the most. Your mortgage may be the biggest debt you have, but it’s probably the cheapest. To figure out which debt is costing you the most, look at the interest rate you’re paying, not how much you owe. For most people, credit cards are a good place to start.
Store credit cards often charge 20% or more in interest. If you owe $1,000, you could pay as much as $200 in interest in the first year. Credit cards from a financial institution also charge high interest rates.
3. Consolidate your debts
If you have a number of different debts, consider a consolidation loan. This means you take out a loan or increase your mortgage to get enough money to pay off all of your other loans. The advantage is you lower the overall interest rate so it costs you less to pay off. This only works if you don’t rack up more debt.
4. Set up automatic withdrawals
When you have extra money in your chequing account, you might be tempted to spend it rather than use it to pay down debt. If the money is withdrawn from your account automatically, you won’t have a chance to spend it. See if your bank can make an automatic withdrawal from your account every month. The amount withdrawn could go into a separate account that you use for debt repayments. Or it could be automatically applied to the debts you’re repaying. If you use online banking, you can likely set up these automatic withdrawals on your own.
5. Make extra mortgage payments
Many mortgage lenders will allow you to make extra payments against the principal. Paying down your mortgage by even a small amount can dramatically reduce the overall cost of this loan over the years.
Watch this video of Lesley Scorgie, author of Rich by thirty: A young adult's guide to financial success, with Rob Carrick from the Globe and Mail discussing how to avoid financial traps.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca