Financial Mistakes That Exacerbate Debt
With Canadians now owing $1.72 in credit market debt for every dollar of disposable income, many people are struggling to restrict their spending.
It’s easy to get carried away when spending your hard-earned money. And there are common mistakes that can exacerbate debt and move financial freedom further out of reach. Let’s examine some ways you can avoid adding to an already difficult financial situation.
Living Beyond Your Means
Whether it’s a brand-new car with top-of-the-line features or a house with every amenity you’ve dreamed about, it’s easy to fall into the trap of saying yes to things we cannot actually afford. Ask yourself this question: Do you pay for the life you dream about or the life that is within your means?
Although it can be hard to accept that we can’t have it all, living beyond our means can lead to consumer proposals or personal bankruptcy when debt becomes unmanageable. When making a big purchase such as a car or a house, determine a budget that will allow you to have a buffer. Far too often, people borrow more than they can afford, especially when additional costs like maintenance and repairs arise.
Relying on Credit
Credit card debt is one of the worst culprits for contributing to a stressful financial situation. One of the biggest mistakes we see as a Licensed Insolvency Trustee is the tendency to use credit for purchases in place of cash. Along with the outstanding debt balance, the high interest charges and annual fees can make it increasingly hard to pay off a credit card.
If you are spending more than you earn, you risk incurring debt that will be unmanageable in the future. We recommend that you review your spending habits for the last three months to determine how much you rely on credit for purchases. Make note of any impulse purchases you’ve made and plan for how you can make more mindful purchases going forward.
With interest rates of nearly 20%, credit cards leave many people in overwhelming financial situations. Credit cards are a type of revolving debt, where you carry a balance from month to month. The higher the balance, the more likely it is to negatively impact your credit score.
A frequent mistake is not being methodical about paying down high-interest credit debt. If you have multiple credit cards, we recommend prioritizing the one with the highest interest rate by paying more than the minimum payment if you can. As you bring the debt balance down, you’ll see the monthly interest payments decrease, which will allow you to put more down on the outstanding balance. Known as debt stacking, this method is a popular repayment method because it helps people regain control over their expenses.
No Savings Account
When struggling just to make the minimum payments on credit cards and loans, it comes as no surprise that there is little left to go towards savings. Many Canadians find it hard to set aside savings for an emergency fund, let alone save for retirement.
It’s a common problem that can leave people in a precarious financial situation without a buffer for unexpected circumstances. If possible, financial experts recommend you set aside at least 15 percent of your income for retirement. As rates of return fall, a higher percentage is needed to account for the difference.
If you are struggling to resolve your financial troubles, our Licensed Insolvency Trustee can help you alleviate the burden of debt. Contact us to learn more about debt relief solutions that suit your needs.