We’re in Week 2 of Financial Literacy Month in Canada, it’s this week’s theme is “Plan.”
Specifically, how are you planning to pay down your debt?
It’s a big and overwhelming question to ask and there is no ‘one way’ to pay down debt.
However, there are a few tips I have for finding the cash flow for making larger debt repayments and managing your spending.
Identify Which Habits Are Eating Your Cash Flow
At the end of the day, how much money goes out of your account—aside from your basic necessities—comes down to habits.
Are you getting delivery instead of picking it up?
Are you replacing a lot of the same thing instead of buying something once at a more expensive price?
Are you shopping at a more expensive store when you could get things for cheaper at another for the same quality?
Are you going to every Calgary Flames game instead of one every once in a while? (Guilty as charged…)
Changing our spending habits is the hardest thing to do, especially when we’re all busy with work, family, friends, and fun.
However, I recommend starting with one habit before tackling any others.
James Clear, the author of Atomic Habits, wrote an entire book for building a system that helps you get better by 1% each day.
Let’s say you get delivery twice a week. This costs approximately $25 in delivery fees. That’s $100/month. Yes, crazy when it adds up!
If you drop down to getting delivery only once a week, that’s now $12.50/week or $50/month. Now you have an extra $50 that can go towards paying down debt or savings.
You could still be ordering food twice a week, but one of those times you go pick it up.
Small habits = big results!
You can start to compound these results by shopping at discount stores, using coupons, using reward dollars, etc.
Review Your Statements Closely
When you get your annual mortgage and insurance statements in the mail, how closely are you looking at them?
I was talking to someone recently and they didn’t realize they were paying double their property tax payment until after reviewing their mortgage statement. For a whole year, they were paying nearly $400/month towards property taxes instead of $200!
I’ve also seen the flip side where folks are paying too little and have to make up the difference come tax time.
So, set a time to pull out your statements and ask yourself these questions:
Mortgage Statement
Are your property tax payments covering your annual payment?
Are you paying additional insurance coverage that you might not need?
How many years do you have left in your term?
Could you lock in a lower interest rate with an early renewal?
What are your pre-payment privileges?
Insurance Statements
How much do you have remaining on your Health and Wellness benefits?
Do you need more or less coverage?
Can you combine coverages for a lower rate?
Investment Statements
What has been your return on investment(s)?
Is it worthwhile reducing or stopping contributions to help pay down your debt?
Rethink the 50/30/20 Rule
Popularized by United States Senator, Elizabeth Warren, the 50/20/30 rule suggests how to split your after-tax income.
50% goes towards basic needs (housing, food)
30% goes towards wants (the fun things!)
20% goes towards savings.
With today’s rising interest rates and costs for basic needs, we might need to rethink this rule.
Depending on your situation, perhaps it’s 80/10/10. Maybe it’s 70/20/10. It all depends on what you’re comfortable paying each month to these three categories.
If you’re struggling to dedicate enough to your basic needs category, what habits can you change in the other two categories?
Are You Checking Your Credit Report?
Recently, I was trying to purchase a car seat at Canadian Tire. I went to swipe my Canadian Tire Credit Card but the card was denied. Weird.
I’m standing in line on the phone with their customer support, trying to figure out why the card was denied. Talk about stressful.
What I found out was that there was a small balance—less than $100—on the card from a few months prior.
Because the balance hadn’t been paid, they put a hold on the card. For someone who is pretty on it when it comes to making on-time payments, I was a little shocked.
We eventually got it figured out and purchased the car seat. However, a lesson learned for me!
Not only was I not paying attention to the statements that were coming in, but I hadn’t checked my credit report in some time.
If I had checked one or both of these things, I would have seen that there was a balance on the card that needed to be paid.
Now, I’m lucky in this scenario. I’ve seen people get denied mortgage applications because of a situation like this. The applicant forgets about the store credit card they used to buy a mattress four years ago. It has a small balance on it, but it shows as unpaid. And that history stays with you for up to seven years…not the picture we want to paint for a lender.
Make sure you’re checking your credit report every six months to make sure you’re not carrying balances where you’re not supposed to.
Maximizing Rewards
Speaking of store credit cards, are you maximizing your rewards with every purchase you make?
Scene+, AirMiles, PetroPoints, PC Points, 7Eleven Points, Triangle Rewards, Co-op Rewards…the list goes on.
There are some neat ways to capitalize on rewards AND manage your spending each month.
Let’s say your current bank card gives you two travel points for every dollar you spend. Next, you buy gift cards at 7Eleven for regular monthly purchasing (Visa Gift Cards, Amazon etc.).
Now you get the points on your bank card plus the 7Eleven points. If you purchase at 7Eleven/Petro Canada store, you can double dip and get Petro Points too! All leads up to a free tank of gas and coffee at the end of the month, plus banking some reward dollars for travel later on.
I’ve seen a lot of different ways to maximize reward points to save money and get a good kickback.
But I caution you about getting every store Visa card out there just for the sake of maximizing rewards. If you’re only buying one thing from Canadian Tire every three months, it’s likely not worth having the Triangle Card. *cough*
Can You Simplify Things Into One Payment?
It can be tricky to determine your monthly cash flow when you have multiple expenses coming out of multiple accounts.
I’m a big fan of making things simple.
Can you streamline your expenses into just one or two accounts? If you can get everything into one account, you can treat expenses as one whole payment versus individual payments.
It’s also a good way to find hidden expenses and interest charges that might be eating away at your cash flow.
Bonus Tip: Can you make annual payments instead of monthly payments? You can save anywhere between 10% - 20% by paying annually instead of monthly. If you save $30/month by paying annually on your car insurance, you can now allocate $30 to debt repayments.
Making Annual Prepayments to Manage Interest Costs
If you could pay less interest over the term of your mortgage, would you do it?
In a previous post, I went over a few examples of how making additional payments or one annual prepayment on your mortgage could help save you thousands of dollars in interest and reduce your amortization period.
Most lenders will allow you to prepay up to a 20% lump sum of the original mortgage amount or a 20% payment increase.
However, even $50/month (remember, we’re saving that already by not getting delivery twice a week) can help you save on your overall interest costs.
Squeaky Wheel Gets the Grease
Most times, people don’t question the products they get from their bank or credit union. But, I’ve seen people be able to drop interest rates on their credit cards, just by asking.
Even if they say no the first time, try again.
Call back in a couple of weeks. You’re likely going to get a different person who might say yes or who might know about a product the other person didn’t!
And this is the same for all of the services you use: insurance, electricity, TV/phone. There are likely a few deals you aren’t aware of that could save you a few bucks each month.
Learn the Value of a Dollar
We all know of that one thing in our parent's or grandparent’s house that’s older than old, but is indestructible and works better than a lot of the new versions on the market.
In our world, it’s become really easy to buy the “cheap” option with platforms like Amazon.
However, you’ll likely be replacing that cheap option a lot sooner which is costing you more in the long run. It’s a phenomenon called obsolescence.
As a simple example, I love fishing. I’ll spend a bit of money on a really nice fishing lure because I know it’s going to last a long time.
We also tend to treat our more expensive items with the most care so we ensure they last longer.
Stop Trying to Impress People
Finally, the best money management tip is to stop trying to impress people.
You’re not spending their money, you’re spending your money.
I’m not saying become a hermit and don’t spend money on yourself at all (see the point above). But, identify what you’re comfortable spending and spend it wisely. If you’re pulling yourself deeper into debt because you need to keep you with the Jones, it’s time to reevaluate your habits.
I hope there were a few points in here that helped you not only figure out a plan to pay down debt but to manage your finances overall!