What’s the best strategy for reducing your debt

Explore two different options that could work for you.

Many people carry some kind of debt, so if that’s you, this article might give you some insightful ideas for how to tackle it.

As always, we recommend reaching out to credible financial planning resources, like licensed professionals or non-profit credit counselors, for a full scope of professional support – but this is a good place to start.

Ways you can pay down debt

It’s normal to feel overwhelmed when the topic of paying down debt comes up. Focusing on some basic, simplified strategies is a good way to go about it. We’ll focus on two:

Option 1: Debt avalanche

Go after any high rate debt you may have first. This strategy allows you to save more money in the long run and makes good mathematical sense.

You’ll still aim to make all your minimum payments on all your accounts in order to avoid any credit hits or accumulated debt.

Option 2: Debt snowball

Go after low balance debt first. This strategy could be more advantageous psychologically, as it gives you “quick wins” by paying off smaller, easier-to-manage debts.

It works well to reduce your debt load in the shorter term, and the “snowball” effect is all about the momentum that comes from that. You’ll have to keep making all of your minimum payments with this method as well.

Comparison

Let’s break down the two approaches with an example below:

In this scenario, you would pay off about $11,650 in interest over the next 5 years. So by paying an extra $100/month towards debt, the result for each method would be:

• Avalanche: You would pay about $7,470 in interest 

• Snowball: You would pay about $8,430 in interest

With the debt avalanche method, you would put any extra money towards the second credit card payment because it has the highest interest rate. Once your second credit card is paid off, you would focus on paying anything extra towards the first credit card, then the bank loan, and lastly the student loan as it has the lowest rate. The results are clear – you’re saving more money with this approach. 

With the debt snowball method, you would put any extra money towards your first credit card payment because it has the lowest balance. Once this is paid off, you would focus on paying anything extra towards your bank loan, then your second credit card, and finally your student loan as it has the highest balance. While this method doesn’t save you as much money as the avalanche approach, it can help keep you motivated by tackling smaller debts faster. 

Consolidating your debt

If you have more than one debt, you may want to consider combining them. This could be done through a consolidation loan from your bank, which would allow you to put all your debts together and would reduce the amount of interest you’re paying each month.

If you’re a home owner, you can also consider using the equity in your home to consolidate your debt. “Equity” is the difference between what the house is worth and what you owe on it. Doing this can give you an even lower interest rate than a bank loan. This approach is most often done through a Home Equity Line of Credit (HELOC), a second mortgage or even remortgaging your current home. 

More resources to consider

You can also reach out to a nonprofit credit counselling agency to explore a debt consolidation program. This program helps you arrange one monthly payment, which is then distributed to your creditors. Typically, the creditors will stop or reduce your interest, and take a set monthly payment.

Alternatively, you may need to consider an insolvency option, like a Consumer Proposal or Bankruptcy, if you can no longer manage all of your debts. The Consumer Proposal route is a legal agreement to consolidate your debt, as it can reduce the total amount you pay back to your creditors. On the flipside, Bankruptcy is a legal agreement to eliminate your debts. 

Each option will have various positive and negative elements that are unique to your situation. That’s why it’s important to seek out the advice of a licensed financial professional to help guide you.

Key takeaways: how to use new strategies to reduce your debt 

• Use a similar chart to the example shown in this article to help organize and see your debt status in visual form.

• Explore your own personal debt reduction plan. Consider if the avalanche or snowball approach could work for you. Hint: you can use an AI chatbot or free online interest calculator to help!

Words of encouragement: debt itself isn’t a “good or bad” thing

People aren’t better or worse because they have or don’t have debt. It’s something that happens because of life circumstances and isn’t a reflection of your value as a human being. Never let debt take down your self esteem. Instead, focus on what you can do to fix the situation over time.