Page 41 - A Canuck's Guide to Financial Literacy 2020

41

Dealing with Debt

Many Canadians from coast to coast struggle with paying down debt. Dealing with the high
interest rates while making only the monthly minimum payments can seem overwhelming.
According to Statistics Canada, for every $1 earned, we owe $1.75 in debt. Debt has
always been known as a cash flow killer and can have a negative impact on a person’s well-
being. It can affect your credit score thus preventing you from obtaining a credit card, a car
loan or even obtaining a mortgage. Below, you will find steps you can take to minimize your
debt and increase your cash flow.

List Your Debts

One of the first step of managing debt is being aware of it. It’s important to know which
creditors your indebted to and by how much. Make sure that you find out the due dates and
the interest rate on the outstanding debt. A possible example is shown below.

Debt Amount Interest Due Date
Visa $2,100 19.99% End of Each Month
Student Loan $5,400 5.00% End of Each Month
Car Loan $20,000 1% End of Each Month

If you’re not sure about your debts, you can request a copy of your credit report which
would list past and current credit obligations. The bottom line is that knowing what you owe
and who you owe it to will help you get out of debt quicker.

Pay-Off High Interest Debt

A crucial step to any financial plan is to pay down the high interest debt such as credit card
balances, payday loans, title loans, rent to own payments. Interest rates on these debt
obligations can be as high as 20%. It’s very rare to earn 20% a year on your investment
unless you’re comfortable with speculative risk and the possibility of total loss of your
principal. With this approach, you would make the minimum payments on all of the debts
that you’ve listed and depending on your cash flow, make an extra payment on the debt
with the highest interest rate.

Debt Amount Interest Credit Limit
Visa $4,100 21.99% $10,000
Visa $2,100 19.99% $5,000
Student Loan $5,400 5.00% None
Mortgage $200,000 3% None
Car Loan $20,000 1% None

Over time, using this approach will mathematically lead to the lowest overall total payments.