Five steps to get out of Debt


On average, Canadians are indebted at 170 per cent of their disposable income—meaning that for every dollar a household earns after taxes, they owe $1.70. The situation for some Canadians is even bleaker: approximately one in 10 Canadian households has debt levels of 350 per cent. So, if you are struggling with debt, you’re not alone and while it can seem overwhelming, I promise that there is a way out. It will take discipline, time and sacrifice -- but if you follow the five steps below, you’ll get out from under it.

  1. Make debt repayment a priority in your monthly budget. This will come right after your necessary monthly expenses and it should be as much as you can manage. If you don’t have a budget, here is how you can get started. The trick is to look for every spare dollar you can find in your budget to pay off the debt. That means shaving off the nice-to-haves and taking a hard look at the sacrifices you’ll need to make. Things like eating out, date nights and a daily Starbucks fall under the nice-to-have category. There are also lots of ways to shave money off the necessities. For example, look for ways to shave money off your grocery bill. Apps like Flipp will help you find the best prices. Look for daily specials and buy cheaper cuts of meat. You’ll be surprised how much money you can actually save. It can be really tough, but the stress relief you’ll get from reducing your debt will be worth it – I promise.

  2. Pay down your debt one loan at a time: There are a number of ways to pay down your debt but two of the most popular are called the snowball method and the avalanche method.

    In the snowball method, which was made famous by Dave Ramsey, you pay off the debt with the lowest balance first regardless of the interest rate. That means you put everything you can towards your smallest debt and pay it off as quickly as possible. At the same time you continue to pay the minimum amount on all your other debts. Once the smallest debt is paid off, you take all the money you were paying against that debt and add it to the new smallest debt and so on. While this is not the fastest way to pay off debt, there is a big psychological upside to doing it this way because you will see tangible results sooner, which will motivate you to keep going. In fact, a recent study by Harvard Business Review found that people using this method paid off debt more often than those using other strategies.

    The avalanche method is similar but here, you pay off the debt with highest interest rate first, moving down to the lowest interest rate. This method will get out of debt faster because you’ll pay less interest and more principle. The downside is that because the debt with the highest interest rate is often one of the largest, it will take longer to see tangible results. For some, it’s hard to stay motivated when you don’t see quick results.

What are my thoughts? The financial advisor in me wants you to do the avalanche method – it’s the most efficient way of paying down debt. But knowing that psychology plays a huge part in financial decisions and success, you need to know yourself and what you are motivated by. At the end of the day any action you take is beneficial.

  1. Don’t create more debt. This is a big one. If you continue to add new debt while you’re paying off existing debt you won’t make any headway. Here is where the discipline and sacrifice really come in. It’s not worth embarking on this journey if you continue with the spending habits that got you to this point. It won’t be easy because nobody likes to feel deprived. But I’ve worked with a number of clients who have gone through this process and once they got over the initial hump, they realized that what they thought was important to them, really was not.

  2. Cut up your credit cards. Studies have shown that people tend to spend at least 15% more on everything when they use credit. Impulse spending is a lot easier if you can worry about it later, and it’s the reason why so many people get into debt in the first place. So leave the cards at home until your finances are back on track.

  3. Talk to a credit counsellor. If you’ve spoken to a financial advisor and don’t see another solution, you may need to talk to a credit counsellor about a consumer proposal. This is a legal process that can be used to avoid bankruptcy and deal with debts when you don't qualify for a debt consolidation loan or a debt management program. In this situation, a licensed insolvency trustee will send out a proposal to your creditors asking that they accept payment of less than the full amount of your debt. Creditors who hold at least half of your debts must agree to the proposal, but the stats show that 98% of consumer proposals are successful because creditors receive more of what they are owed when compared to personal bankruptcy. Before going this route however, you must show that you have already tried credit counselling, debt consolidation, or other debt solutions without success. You should be aware that once you start the consumer protection process, you can’t walk away and your credit rating will be negatively impacted while you are on the program and then for another three years. As with any other strategy, one of the most important factors in determining long-term success comes down to education and support.

If you are dealing with personal debt, it will take time, perseverance and even sacrifice but I can promise you that once you acknowledge where you are at, and take steps to move forward, you can get out from under it. If you want more information on the topic, listen to my podcast, or reach out to me via my website.

Mark Shimkovitz is a financial advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. member of Canadian Investor Protection Fund.