How to manage and repay debt
With cost of living on the rise, staying in control of your finances can sometimes become a source of concern. It's possible to reduce your financial stress by adopting smart habits to manage and pay off your debts. Here's how!
Opt for a simple debt optimization strategy
Follow these steps to get a complete overview of your financial commitments so you can prioritize them and set up a repayment plan that works best for you.
- Make a list of all your debts: mortgages, car loans, lines of credit used to finance renovations, equal installments to pay for furniture or appliances, outstanding credit card balances, etc. Don't leave anything out!
- For each debt, include the amount due, the interest rate, the minimum monthly payment, the payment date, the authorized credit limit and all other associated expenses (for example, late fees). You can use the Manage debt tool on AccèsD. If you have financial commitments with Desjardins, you'll see that some fields have already been completed (for example, interest rates).
- Make or update your budget including an assessment of how much of your income goes toward paying off your debt.
- Avalanche method for debt repayment: If you can't consolidate your debt, prioritize paying off your debts with the highest interest rates. This could save you more in credit charges and help you pay off your other debts faster.
- Snowball method for debt repayment: Start by paying off your smallest debts, then move on to the larger ones. This helps you feel a sense of accomplishment and stay motivated as you continue to chip away at the total number of creditors you owe.
Discover the Manage debt tool
By answering a series of questions via the Manage debt tool on AccèsD, you can get information on your debt level and personalized financial advice to help you effectively manage and repay your loans. If you're a member, the tool will list all the debts you have with Desjardins (see points 1 and 2 above).
Consolidate debt to simplify repayment
In some cases, you can choose debt consolidation, which combines your financial obligations so you just have one periodic payment to make. This approach helps by either reducing the amount of your payments or by enabling you to pay off your debt faster.
Use credit responsibly to keep your debt in check
Credit can be a handy way to meet certain needs—as long as you use it wisely. It can simplify how you manage your expenses, but make sure you choose the right kind of financing for your specific purpose. For example, you could use a single credit card to make most of your purchases and ideally pay off the entire balance by the due date. Depending on your situation, you might also be able to use a home equity line of credit to pay for home renovations.
"Good" debt versus "bad" debt
Some kinds of loans can actually help you achieve your goals and build your wealth. These are considered "good debt." For example, you could use a mortgage to purchase a second home. You'll not only enjoy your new property, but also benefit from its increasing value as time goes by. On the other hand, borrowing money to go on a trip or purchase an item that loses value with time would fall into the category of "bad debt."
Keep in mind
Both borrowers are responsible for 100% of the debt if their contract stipulates that the debt is joint and several. In other words, each borrower commits to individually paying off the entire balance, not just "their half." The same principle applies to any co-signer who commits severally, or solidarily, to paying the entire debt if the borrower fails to do so. Even if they don't benefit from the loan, it still appears on their credit report and is taken into account when calculating their debt level. You should keep this in mind before you become a coborrower or a guarantor for a loved one like your child. This situation could affect your own financial situation and any risk assessments performed for future credit applications.
Rethink certain expenses to account for inflation
The rising cost of living is affecting transportation, groceries, materials, real estate and many other goods and services. That's why taking some time to adjust your budget can make all the difference. Start by looking over your discretionary spending. These are expenses that can easily be reduced or eliminated all together. You should also think about your short-term expenses and how they relate to your financial goals. For example, do you really need to renovate that second bathroom or replace your car this year?
Avoid withdrawing money from your RRSP to pay off your debt!
Only in special circumstances (such as going back to school or opening a Home Buyers' Plan) should you consider withdrawing money from your registered retirement savings plan (RRSP). Otherwise, RRSP withdrawals are added to your taxable income for the year and you'll lose the contribution room. Using your RRSP to pay off debt is generally not a good idea.
Plan your savings
As soon as you have room in your budget, you should set aside some money in savings. Here's a tip! Once you've repaid your debt, you can take the money you were paying towards your debt and roll it into a savings plan. Planning for your goals will also allow you to limit new debt, which in turn reduces your financial stress.
In an ideal world, you would also have an emergency fund—the equivalent of 3 to 6 months of living expenses—to avoid having to use credit for unexpected expenses.
For personalized support in managing your debts, contact your Desjardins advisor. They'll help you set up a repayment and savings strategy that works best for you.