How to pay off your debts?

In summary:

• Take inventory of your debts and choose a suitable repayment method (snowball or avalanche) while reducing your expenses and increasing your payments.
• Consolidate your debts to simplify repayments and look for additional income sources to pay off your debts faster.
• When your efforts are not enough, professional options exist to help you resolve your debts with solutions tailored to your situation.

Our practical tips for paying off your debts

Paying off debt can seem overwhelming, but with the five effective strategies explained below, it is possible to speed up the process and improve your financial management. Here are our five tips to help you pay off your debts faster:

1. Take inventory of all your debts and choose a repayment method

The 1^st tip to settle your debts more quickly is to gain a clear understanding of your situation by preparing a table listing all your debts, including the remaining balance, interest rate, and minimum monthly payment required for each. This will allow you to choose the repayment method best suited to your profile and motivation level:

a) Avalanche method: Identify the debts with the highest interest rates, typically credit cards, then focus your extra payments on those first while continuing to make minimum payments on the others. This approach reduces the total interest paid over the long term.

b) Snowball method: Start by paying off the debts with the smallest balances to achieve quick wins that boost your motivation. Eliminating a debt quickly creates a sense of accomplishment that encourages you to continue your efforts and maintain financial discipline.

2. Make larger payments

The 2^nd strategy is simple but powerful: pay more than the minimum amount required, since minimum payments extend the repayment period and increase total interest costs. To do this, you can use your tax refunds, bonuses, overtime pay, or any unexpected money and apply it directly to your debt. Any extra amount will reduce interest charges and create a snowball effect.

For example, if your minimum payment is $75, try paying $100 or $125 instead. The additional amount could save you hundreds, or even thousands, of dollars in interest and shorten your repayment period by months or even years.

3. Reduce your expenses

Cutting certain non-essential expenses frees up extra cash to accelerate your repayments. Start by reviewing your bank statements from the last three months to identify areas where you can cut back. It’s also the perfect time to adjust your budget to better reflect reality.

For example, canceling a little-used $15 monthly subscription, reducing takeout from four times to once per week (saving about $200 per month), or negotiating your cell phone plan to save $20 monthly could easily free up $200, $300 per month, or more, to apply directly to your debts.

4. Take out a loan to pay off your debts

Another strategy is to combine your debts into a single loan, known as debt consolidation. The idea is to take out a loan at a lower interest rate (than your credit cards) to pay off those cards and other high-interest debts. This approach offers several advantages: one monthly payment that is easier to manage; a lower interest rate, meaning less interest paid and more going toward the principal; and a fixed, more predictable payment, making budgeting easier.

For example, if you have $15,000 spread across several cards at 19%, a consolidation loan at 12% could significantly reduce the interest paid. However, it is essential not to reuse the credit cards once consolidated to avoid increasing your total debt again.

5. Find additional sources of income

Increasing your income is often underestimated, yet even a few hundred extra dollars per month can significantly accelerate debt repayment. You could freelance in writing, graphic design, or tutoring; offer services such as cleaning, babysitting, or snow removal; sell unused items at home; or work a few extra hours at your job.

For example, if you generate an additional $300 per month and apply the entire amount to your debt, that represents $3,600 repaid in one year. However, this extra income should not fund new expenses, and you must also be mindful of burnout. This solution should be temporary to address a debt problem.

Additional tips to help you pay off your debts

While eliminating one debt after another, make sure to:

• Stay up to date on all your debt payments to avoid damaging your credit rating.
• Avoid increasing the balance of your other debts: paying off one debt only makes sense if you do not increase others in the meantime.
• Avoid using your credit cards or “freeze” them: place your credit card(s) in a glass of water and put it in the freezer. If you suddenly feel the urge to use them, you’ll have a good 24 hours to think twice.

When paying off your debts is no longer enough, other solutions exist

Applying the snowball or avalanche methods requires some flexibility in your budget. But what should you do if, after cutting all possible expenses, your calculations still don’t balance? If you feel like you’re emptying the ocean with a teaspoon, it may be time to move to the next step. Solutions exist to lighten your financial burden if you are caught in a debt spiral. One of our Licensed Insolvency Trustees can offer you a free informational consultation to propose effective solutions tailored to help you get out of debt.

By Pierre Fortin
Jean Fortin & Associés
Personal Finance Advisor
Licensed Insolvency Trustee