As we wrap up the 2021 holiday season, many individuals are experiencing the holiday spending hangover. On Black Friday, one in four Canadians overshot their budgets according to Global News.
The Covid-19 pandemic hasn’t made things easier for Canadians. During 2021, at least 26% of Canadian households added at least one new type of debt. Furthermore, 70% of these households claim their acquired debt has made their quality of life worse.
With the increase in debt over the last year and the recent increase in spending over the holiday season, many people may need to get their finances back on track.
If you find yourself financially struggling after the holiday season, here are some incredibly useful tips to get yourself back on track financially for the new year.
Remember, it’s better to get ahead of the game when it comes to your finances!
1. Acknowledge and assess the damage
Acknowledging and taking inventory of your debt is the first step in getting ahead. This tip is probably the most painful but most important tip in this article. Many individuals will ignore their debt, believing that not knowing how much they truly owe is saving them from the stress associated in dealing with it.
To complete this step take a look at all your sources of debt and write them down or type them into an excel spreadsheet. This includes your credit cards, car loan, line of credit, or any source of debt that you need to pay back. Write the remaining balance of each source and the interest rate for each.
Now that you have an understanding of how much you owe, you’re ready to start taking charge!
2. Create a budget
I bet you’re tired of hearing this tip but creating a budget is the best way to get your finances in order.
You need to understand how much you are spending each month before you can make a plan to pay off your debt. Budgeting also helps you live within your means, helping you stay on top of your finances.
You can create your monthly budget using an excel spreadsheet or a budgeting calculator online. Scotiabank provides a free and useful online calculator here to help you calculate the amount you have left after your expenses to put towards paying off your debt. Once you have that number, you can create a payment plan for your debt.
3. The debt avalanche and debt snowball method
These are two popular and useful methods used to pay off debt. When you’re ready to begin creating a payment plan for your debt, these two methods can help you.
The debt avalanche method focuses on paying off your debt with the highest interest rate first. This method is highly efficient and ultimately saves you on interest payments in the long run.
The debt snowball method involves paying off the smallest amount of debt first, then gradually moving on to the next highest amount until you have the largest amount of debt remaining. Individuals generally find this method easier to stick with as it creates a sense of accomplishment as you pay off sources of debt quickly.
Whichever method you choose depends on your individual motivational factors. Read more about these two methods here.
4. The 50/30/20 rule
A good place to start when defining your monthly budget is to use the 50/30/30 rule. This rule determines how much of your paycheck goes towards your monthly expenses and debt repayment.
This rule states that 50% of your earnings should go towards must-haves (i.e., rent, food, and utilities), 30% towards wants (i.e., dinner or a movie), and 20% to paying down debt.
Remember that this rule can vary depending on your financial situation but is generally a good practice to follow when paying down debt. After you’re debt free, you can put this budget towards your savings.
5. Increase your monthly earnings
Now that you have a budget and debt pay-off plan ready, you can help pay-off your debt faster by increasing your monthly earning potential.
If you have extra time in the evenings or on the weekends, why not take on a part-time job or side hustle to increase your debt payments. Increasing your monthly earnings can increase the amount you can put towards your debt per month, shortening the amount of time it takes you to pay off your debt. This can help you stay motivated and become debt-free more quickly.
There are many resources available to find part-time and single day opportunities. SPOT is a mobile app that allows you to find these opportunities and earn extra cash on your own schedule. All you have to do is create a profile and start working. You can conveniently receive your pay weekly by direct deposit into your bank account.
Earning extra money on top of your current monthly income is an extremely efficient way to pay off your debt faster!