Want to be debt-free in 2013? You're not alone

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In 2006, Pamela MacCollum was nearly $80,000 in debt.

At the time, she was recently out of school and feeling overwhelmed by what was owing on her five credit cards and student loans.

"I had lost control of that portion of my life and at the time I couldn't see how that had happened," says Ms. MacCollum, now a health, safety and environmental consultant for a transportation and disposal collection company in Kitchner, Ont.

"I kept digging a hole and digging a hole and it's like, when you finally start paying attention, you didn't realize how big the hole was."

But Ms. MacCollum, 33, has climbed out that chasm since then. In fact, six years later, she's shaved her debt down to $15,000, and plans on wiping it out entirely within a year – a journey she's documenting on her blog, The Quest to Be Financially Abundant.

"Every single pay cheque gets split in half – half goes to my debt, half goes to my life," she says. "And as far as I can tell, by July 1, 2013, I will be completely debt free."

Becoming debt free is an ambition that more and more Canadians are working toward. According to the second annual RBC debt poll, 26 per cent of Canadians say they carry no personal (non-mortgage) debt, up from 22 per cent in 2011. The poll also found that slightly more than half of Canadians (51 per cent, compared with 49 per cent in 2011) say it is more important to pay down debt than to save and invest for the future.

Richard Goyder, vice-president of personal lending for RBC, says that a long period of low interest and rising home prices have made many Canadians comfortable taking on larger debt loads. But the recent financial turmoil here and abroad has caused many to take a harder look at their finances, he says.

"Even though Canada escaped relatively lightly, we all saw what happened in 2008 and 2009 and it reminded people very sharply of what the risks are," Mr. Goyder says. "Since then, there have been a lot of messages in the media around the level of debt people are carrying, especially from [Bank of Canada ] Governor [Mark] Carney and [Finance] Minister [Jim] Flaherty… and I think it has brought it to their attention and caused people to think about how much debt they can afford to be carrying."

Mr. Goyder says assessing your situation is an important first step to shedding debt. "Get a clear understanding of the debts you have and what your budget is, how much money you have coming in and how much you have going out," he says.

If you need help, you can use online tools like RBC's Debt Reduction Plan or call or visit a bank or financial adviser to get advice.

"The next question is, 'Which debt should I be paying down first?'" Mr. Goyder says. He suggests paying off your highest interest debt first, while still making the minimum payments on all your debts. "Once you've managed to do that, you've freed up cash flow, which you can direct to the next one."

Inspired by Gail Vaz-Oxlade's Slice TV show, Til Debt Do Us Part , Ms. MacCollum went through the arduous task of sifting through mountains of paperwork to get a clear view of her financial situation, and created a plan to pay off her debt. For her, the first step was paying off a family loan. Then, she started to tackle her high-interest credit card debt, one card at a time.

She had two jobs at the time, a full-time and a part-time job, which meant she had enough income to put a serious dent in her debt load, as long as she kept her spending in check. She says it was about "little sacrifices," like forgoing a $30 meal with her friends and instead joining them later for a $5 drink.

"The one behaviour I absolutely changed is I stopped going to malls … because most of what I had done to myself is because I like to shop," she says. "I had to stop using shopping as a sport, as recreation." If she needed something new, Ms. MacCollum would leave her wallet at home and window-shop until she had decided on a purchase.

Another surefire trick? After she made a payment on a credit card, she cut a piece out of it.

"You can't do anything with it when you've cut a chunk out of it," she says. "So it's kind of like a fail-safe."

Another Canadian blogger who goes by her first name, Rachel, to maintain anonymity (a common practice with personal finance bloggers) was $22,000 in credit card debt when she started documenting her debt-shedding journey in March of 2011 on her blog, Little Lamb Wants to Be Debt-Free. She recently celebrated being debt-free.

Like Ms. MacCollum, Rachel went through the process of creating a budget, using a simple Excel spreadsheet to meticulously record all her expenses.

"It's important to be real and honest with your budget. It's no good to put in guesstimates and try to make it work," she says. "If you think you spend $200 in groceries a month but you really spend $400, that money has to come from somewhere. It will eventually end up on credit if you don't account for it."

Rachel also made a point of calling all of her service providers to see whether she could find ways to cut her monthly bills. "In some cases they were able to help me save money right away," she says. "I had to prioritize what was important and what I felt I could do without. If you have a cellphone do you really need a home phone? If you do need a home phone, do you need all the extras on it?"

If you feel like you can't pay back your credit card debt at the interest rate you are paying, Mr. Goyder says you can look into lowering your interest payments through debt consolidation.

"Your bank can identify what the lowest-cost vehicle for borrowing for you is, whether you have the potential to secure it against a property that you own," he says. "Or putting some of your revolving debt – store or credit cards – into an instalment loan, which has a structured repayment over fixed term so that you're not just paying the interest on it, you're paying the principal."

He says with interest rates so low at the moment, it's a great time to talk to your bank about a consolidation loan to fix a low rate and get debt under control. "Because we do know that interest rates are going to go up again… and when they do, the cost of that borrowing is going to get more expensive."

When Ms. MacCollum reaches her goal, her plan is to create an emergency fund and take a trip to see a friend in Africa. Now that she has eliminated her debt, Rachel says she feels the freedom to be able to make her own choices when it comes to money.

"No longer is my paycheque spoken for before I earn it," she says. "My financial goals now are to build up a six-month emergency fund and start saving for a down payment on a home. I have relaxed my budget in some areas because I had it pretty tight while I was paying off debt. I now give myself extra fun money that I don't have to feel guilty about spending. If I want to buy a gift for a friend, I don't think twice about it. That is a wonderful feeling."