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Debt reduction is the personal finance theme for 2011.

Wait, I said that a year ago, didn't I?

"Snug and smug we Canadians are as we borrow and spend our way into the new year," I wrote in December, 2009. "But the dream is almost over. A financial squeeze is coming in the next year or so and the risks are serious enough that Bank of Canada Governor Mark Carney has twice warned about them in the past seven days."

Okay, Mr. Carney and I were a little ahead of ourselves. The financial squeeze was delayed by persistent economic weakness that kept interest rates close to the lows they hit during the financial crisis. Canadians continued to capitalize on low rates by ramping up their borrowing, although the pace of growth has slowed.

Now, Mr. Carney and I are at it again. A few weeks ago , the central bank governor warned of how complacency can lead to a reckoning if rates snap back hard from today's low levels. I'm chipping in with five modest steps you can take to curb your debt in the year ahead:

Go with a fixed-rate, five-year mortgage

Sure, studies have shown that variable-rate mortgages are the better choice (meaning you pay less interest) most of the time. But floating-rate debt is a luxury for people who have lots of financial flexibility. Because they haven't borrowed up their eyeballs, they can accept the risk of escalating borrowing costs in exchange for the chance to pay less than people with fixed-rate mortgages.

And let's remember something very important about all the history that says variable-rate mortgages are best. Rates have been in decline a lot more than they've been on the rise in the past 15 years. Variable-rate mortgages get cheaper as rates fall because they're benchmarked to your lender's prime rate.

Today, the one certainty in the outlook is that interest rates can't get significantly cheaper than they are today. But rates can get higher, perhaps a lot higher over the next few years. With a fixed-rate mortgage, you're a spectator to all of that.

Use mortgage double-up payments

The details differ depending on your lender, but many mortgages allow you to sporadically increase your regular mortgage payments by up to 100 per cent. If you don't have a credit card balance - always pay off high-rate debt first - then a double-up payment is an ideal way to parlay as little as a few hundred dollars into significant debt reduction.

The key here is that the extra amount of your mortgage payment goes directly against the principal. So $500 paid in a double up is a $500 reduction in the outstanding balance on your mortgage.

Treat your credit card like a charge card

A charge card is a way to postpone purchases for a few weeks - you're supposed to pay in full by the due date on the statement.

The charge card mentality doesn't preclude you from using your plastic as you normally do. You can use it to pay for groceries and gas to maximize reward points, and for larger purchases as well. The acid test is whether you can pay in full when the card bill comes in. If not, then keep your card in your wallet.

An easy way to control your monthly card bill is to pay as you go. If you buy a cartload of groceries and put the bill on your credit card, pay that amount off when you get home using online banking.

American Express is one of the few financial companies to offer a true charge card. If you don't have a card of this type, pretend you do.

Turn off your line of credit

Using a home-equity line of credit (secured by your home and thus offered with a low rate) is smart borrowing. Overusing your credit line is reckless borrowing. You'll know you're overindulging if, every time you get close to a zero balance, you go out and buy something else.

Credit lines should mostly be unused, with occasional draw downs to finance big purchases. If that's not your situation, turn off the tap and make a zero balance your goal.

Save automatically

Find an online bank offering a good rate of interest on savings and arrange to have money electronically transferred from your chequing account to a savings account each time you get paid. A $20 transfer every other week gets you a painless $520 in a year, plus interest.

Check rates using the savings rate and GIC comparison tool on Once you find the right bank, open an account, send in a void cheque and then go online to arrange your transfers. Easy savings, affordable to many.


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