Guest post from Tricia French, MSc, PHEc
Managing debt can be tricky. When thinking about debt in retirement, the best plan is to be debt-free. What would it take for you to dramatically reduce your debt? This means committing to taking advantage of the extra income you have today and using it to extinguish your debts.
Is debt starting to control you?
Certain financial behaviours can indicate if your debt is starting to control you. Ask yourself:
- Is your debt stressing you out?
- Are you only able to make the minimum payments on your loans?
- Has your debt been increasing?
- Have you missed payments or had to take advantage of the “miss-a-payment” feature on your loans?
- Have you used a cash withdrawal from one credit card or line of credit to pay another?
- Are you at or near the limit on most of your credit cards?
- Have you obtained new credit because your current credit cards or lines of credit are at the limit?
- Have you borrowed additional money since consolidating your loans?
- Have you received a call from a lender looking for missed payments?
- Have you borrowed money from friends or family to make ends meet?
- Are you unable to set aside even a small amount of savings for a rainy day or emergency?
- Do you feel as though you are living from paycheque to paycheque?
If you answered “yes” to more than a couple of questions, it’s time to look at solutions and perhaps get some professional advice. Do not underestimate the value of working with a professional, such as a Financial Counsellor, to find solutions to debt problems and save time, stress, and money.
There are many solutions for eliminating your debt. The solution best for you depends on:
- Amount of debt – Larger amounts of debt often require more aggressive solutions.
- Number of debts – Solutions that reduce the number of debts by consolidation may be beneficial.
- Strength of credit – With more established credit, solutions available through a lender, such as consolidation, may be options.
- Amount of Money available to pay debt – Finding money in the budget can make paying off loans faster and easier.
Five Key strategies
- Increase Income and/or Decrease Expenses are appropriate solutions when the debt level is lower or when more money can be made available to pay debts. For example, you could rent a spare bedroom to a student. The extra income could accelerate the pay down of the household debt. Alternatively, you may watch your spending and find expenses you can reduce to free up the money to add to your repayment.
- Refinancing refers to lengthening the duration of a loan in order to reduce the monthly payment. Good credit is essential for this to work, but extending the loan can help the payment “fit” better in your budget.
- Consolidation is often the preferred solution for reducing the total number of payments and reducing the overall interest. Good credit is vital and collateral (assets) or a cosigner is often required. This solution is especially effective if you have a number of loans or several credit cards with higher interest rates. One loan could pay them off entirely, simplifying several monthly payments into one loan payment at a better interest rate. Consolidation can be done with a loan or personal line of credit. For home owners, consolidation could happen by way of a home equity line of credit, a second mortgage, or by rewriting the primary mortgage. Rewriting your primary mortgage can result in paying the consolidated debts over the lifetime of your mortgage, costing you a great deal of interest, so proceed cautiously. This solution should be reserved for situations where your budget is so tight, you cannot afford to make all of your payments.
- Negotiating with Creditors is helpful if you are experiencing a temporary financial setback. You can arrange with creditors to make reduced payments for a short period of time. This option may affect your credit, so attempt the previous options first.
- Formal and Legislated Insolvency Programs are solutions of last resort. They include Debt Repayment Programs, the Orderly Payment of Debts Program, Consumer Proposal, and Bankruptcy. Debt can reach an unmanageable level and result in stress that is hard on families. This can happen from taking on too many loans or from a change in circumstances, such as a job-loss or retirement. If your credit has been affected by an inconsistent payment history, you will be unable to take advantage of bank solutions. Legislated programs are available to assist consumers to recover from extreme financial problems and get back on track. Contact Money Mentors (www.moneymentors.ca ) or an agency under Credit Counselling Canada (www.creditcounsellingcanada.ca) for unbiased information about formal and legislated programs.
Patricia French is a Financial Counsellor and Professional Human Ecologist specializing in planning with clients under the age of 50. She is an experienced facilitator, pre-retirement educator, and University instructor with the Department of Human Ecology at the University of Alberta teaching in the area of family finance. She is driven to provide clients, participants, and students with key knowledge, skills, and strategies to navigate the often potholed financial road ahead.