✔ January usually brings a financial headache for many Canadians, but there are steps you can take to avoid that next year
✔ You want to make sure you have a budget and use that to make a debt repayment plan for this year and build a holiday piggy bank for next year
✔ To give you more money for these 2 goals, you can try to increase income, cut expenses, try for lower interest rates, tackle highest-interest rate debt first, or consider a savings loan
A new year means a new start and trying to make good on those resolutions you made. But, if you’re like many Canadians, you turn to credit cards to help tide you through the yuletide season and January comes with an unpleasant holiday bill hangover.
According to credit bureau TransUnion, the average Canadian carried $29,376 in non-mortgage debt in the third quarter of 2020 – that’s a lot, although the good news is, with the pandemic limiting spending opportunities and Canadians saving more, that has gone down from the previous year. Canadian households owed an average of $1.71 for every dollar of disposable income.
If your debt is keeping you up at night, why not start now to make 2021 the year to stop worrying about that annual financial headache? Here’s some help to get you started.
Cure the holiday bill hangover with a budget
The first thing you need to do is make a budget that takes into account your extra holiday debts that need to be repaid and how much money you can put toward repaying that debt – without going into further debt! You can start with a budget calculator. Use your budget to achieve two main goals: make a debt repayment plan for this year’s financial hangover and build a holiday savings plan to avoid a financial hangover next year.
Goal #1: Make a debt repayment plan
Once you know how much you can afford to put toward your debt, you can use a credit card debt calculator to see how your payments will affect your balance. A debt calculator can be very motivating because it can show you the huge difference small extra payments or higher-than-the-minimum payments can make – letting you pay down your debt faster and saving you money on interest rates.
For example, if you have a $1,000 credit card balance at 18% interest and you just pay the minimum $10 every month (or 3%, whichever is greater), it would take you 10 years to pay off and you’d pay $798.89 in interest. If you were able to pay $100 a month, it would take just 11 months to pay off and you’d pay just $91.62 in interest!
Goal #2: Build a holiday piggy bank
It may seem counterintuitive that saving money is a step toward curing a holiday spending hangover, but one of the reasons people get into debt is they don’t have enough savings to cover costs for emergencies and annual events such as holidays. If you can build a holiday savings plan, you won’t need to turn to credit cards for your holiday purchases.
For instance, if you start with $10 and put $10 every week (about as much as a few cups of takeout coffee) into a savings account (at 2% interest), you’ll have saved more than $535 in just one year.
How to get there
There are many options for reaching your goals of paying down holiday debt and building a holiday piggy bank. You can try to make more money or cut back on other expenses. Here are few more smart strategies:
- Lower your interest rate.
Your interest rate affects how quickly you can pay off your debt. If your interest rate is high, more of your debt payments are going toward interest and less toward paying down the principal, as you saw from our example above. You can get your rate lowered by asking your lender for a lower rate, switch to a lower rate card or consider debt consolidation.
- Pay off debts with the highest interest first.
Targeting one credit card at a time can help you focus and show better results than trying to pay off all debts at the same time. It makes sense that if you tackle your highest-interest debt first, you’ll pay less in interest and that saves you money.
- Consider a savings loan.
It can be difficult not just to build savings, but to avoid tapping into it out of temptation. If that sounds like you, one option is a savings loan that can help you grow savings (while also building your credit score). You don’t have to provide money up front, but funds are placed into a secured account that you can access later. Your payments on the loan help build the savings. You can find out more here.
If you’ve overindulged over the holidays, or have resolved to make 2021 your year for financial wellness, you can get back on track and we can help.