Posted on Thursday November 23, 2023

How to pay your debts in 3 key steps

The rising cost of living can easily interfere with your financial plans, whether you’re carrying debts or not. But regardless of where you’re at in life, owing money can add a layer of stress in times of high inflation. What will I do in an emergency? Can I still save? These are questions that you may have asked yourself.

 But debt management can be easier than you think with the right tools.

Good debt versus bad debt

First, there are two kinds of debt: the good kind and the bad kind. Borrowing to acquire an asset that will increase in value or that carries less risk is “good” debt. The typical example is buying a home. Conversely, borrowing for purchases that won’t grow in value, such as a car, is “bad” debt. Of course, the most common example of bad debt is an outstanding credit card balance.

Here’s a fictitious example:

 Mario, age 40, has a mortgage on his house and makes his payments on a regular basis. He has the impression that everything is fine, and that he can maintain his lifestyle without any worries. When inflation rears its head and interest rates start rising, he ends up paying some of his bills with his credit card, telling himself it’s just a “small amount.” Before long, his debt starts adding up he finds himself struggling to pay the balance every month.

What advice would we give Mario? Read on to find out. Here are three essential steps to paying off your debts.

 Step 1: Make a detailed budget

A budget is a must. To take control of your finances, you first need to know in detail what you’re earning and what you’re spending. This will allow you to make more informed decisions.

 Gather your latest account statements and receipts and use our calculator to assess your situation. Do this regularly and it will become second nature.

 Did you know that 48% of households with debt say their debt increased in 2023? This statistic shows the importance of knowing where every dollar is going.

 Step 2: Prioritize which debts to tackle first and create an action plan

 Start by paying down debt with the highest interest rates . If you’re faced with a dilemma, remember that higher interest debt will cost you more in the long run. The interest that accumulates each month is added to the balance the following month. That’s why you may feel like you’re paying without getting anywhere.

 With a detailed budget, you will know exactly where every dollar is going. Make a plan by prioritizing one goal at a time.

 Let’s go back to Mario, our fictitious example, for a moment. If Mario owes $5,000 on a credit card with an interest rate of 19.9%, and he can pay $100 a month, how long will it take him to pay off his debt? With a good plan, he can reach his objective within 2 years.

 If you have several debts that you can’t keep up with, debt consolidation might be the answer. Consolidating your debts means grouping them together into a single loan to facilitate repayment. It may be a way for you to reduce the interest you’re paying.

 Step 3: Reassess your financial situation regularly

So far, we’ve looked at how to manage and repay your debts. But it’s also important to have an emergency fund and to plan for retirement. That said, juggling multiple objectives at the same time can be a real headache if you don’t review your budget regularly. The good news is that you don’t have to do it alone! At UNI, our advisors take your financial health to heart and we are here to guide you towards achieving your goals.

Finances are everyone’s business!