Break free of the stress of debt

Four steps to help reduce debt and its effects.

DEBT IS A SMALL WORD WITH BIG IMPACTS. In a recent national survey,[1] three in 10 couples acknowledged debt causes tensions in their relationship. Four in 10 Canadians said debt negatively affects their mental health. More than half admitted it’s stopping them from saving as much as they’d like towards their retirement. Three-quarters confessed they would find it difficult to deal with unexpected financial changes.

Many feel stuck in their money and debt predicament. Another recent survey[2] found that 40 per cent of Canadians with debt believe they’ll never be debt-free, and that number jumps to 70 per cent among those with a lot of debt. Meanwhile, nearly four in 10 Canadians with debt are always stressed, anxious or worried about it. 

You’re the boss of your debt – not the other way around 

If you’re like the one in three Canadians who say their debt is keeping them up at night,[3] these four steps can help you take back control and reduce the negative effects of debt.

1. Create a budget and stick to it

This is probably the step that’s least fun and most important. A budget tells you where you’re spending your money and, critically, whether you’re spending more than you’re earning. Armed with a budget that lists both essential and discretionary costs, you can identify places to trim expenses. Keep in mind that small savings add up, so it’s worth trying to cut a few dollars here and there, especially with recurring daily, weekly and monthly expenses. Any money you save through budgeting can go towards paying down your debt.

2. Start an emergency fund

One reason people often feel unprepared to manage unexpected expenses – a stolen bike, a lost smartphone, a broken appliance – is that they don’t have money set aside for “unplanned” costs. Gradually building up an emergency fund in a separate bank account makes it less likely you’ll have to add to debt to deal with a financial crisis. Experts often suggest aiming for an emergency fund that covers three to six months of the expenses in your budget.[4] One strategy to get there is to deposit all your loose change at the end of every week.

3. Plan to pay off debt efficiently

For some, clearing smaller debts first can provide the encouragement needed to tackle larger debt. But if you can, target debt with the highest interest rate first – it’s costing you the most and reducing it will immediately reduce your expenses. You may also be able to consolidate all your debt into a lower-interest line of credit or all-in-one banking and mortgage account – with debt in one place, you can manage it more easily. Stay motivated by reminding yourself that every dollar you pay off saves you interest and moves you closer to debt freedom.

4. Find ways to boost your income

You may be able to move your budget further into the black by increasing your income. Perhaps you can make a compelling case for a pay increase at work. Other solutions might be a part-time job or a low-cost small business in the evenings and on weekends. Or possibly you have items of value you can sell. Consider all your assets and skills, and look for opportunities that pay you for them.

Make a plan, stick to it and celebrate your successes

Some things are out of our control. Most of us don’t get to choose the price of groceries, tilt the housing market up or down, or decide whether interest rates will rise. Your debt, however, is something you can actively manage and reduce. Being debt-free won’t happen overnight but committing to a plan of manageable steps can get you there.

With guidance from your advisor, you can get started today. Reward yourself for each milestone you reach – ideally with a prize that doesn’t cost money, such as a family night of board games or a long walk through a local park. And remind yourself often that lower amounts of debt can reduce stress in your relationships and give your mental health a boost – as well as freeing up money you were spending on interest for the things you really want in life.

When pillow talk stops

Canadians aren’t always up front about money with their partners.

2 in 10

According to one survey, two in 10 married or common-law Canadians take an “out of sight, out of mind” approach, doing their best to ignore money issues altogether. A similar number say their partner doesn’t know how much debt they have.

1 in 10

Then there are the secret purchases. One in 10 Canadians with debt have completely hidden the cost of a large purchase from their partner, and another one in 10 have lied about the cost. What were they buying? Among men, 42 per cent of those who hid or lied about purchases had bought electronics. Among women, 40 per cent had bought clothing.

Source: Manulife Bank of Canada Debt Survey, July 2018.

© 2019 Manulife. The persons and situations depicted are fictional and their resemblance to anyone living or dead is purely coincidental. This media is for information purposes only and is not intended to provide specific financial, tax, legal, accounting or other advice and should not be relied upon in that regard. Many of the issues discussed will vary by province. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. E & O E. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.