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Five Best Practices for Escaping Debt and Maintaining Financial Freedom in Canada

Senga Bailey
June 12, 2023

Introduction

Debt can feel like a mountain that’s difficult to climb. But with the right plan and a little discipline, it’s possible to conquer your debts and enjoy the view from the top: a life of financial freedom. Here are five best practices for Canadians looking to escape the cycle of debt and maintain financial stability.

1. Make a Comprehensive Budget and Stick to It

The first step to getting out of debt is to take control of your spending. Creating a comprehensive budget allows you to see where your money is going and identifies areas where you can cut back.

For example, you might find that you’re spending a substantial portion of your income on dining out. By reducing these expenses and allocating more towards your debts, you can make significant progress towards your goal.

Implementation Tip: Use a budgeting app or software that syncs with your bank accounts. This will allow you to automatically track your spending and ensure you’re sticking to your budget.

2. Prioritize Your Debts

Not all debts are created equal. High-interest debt, such as credit card debt, grows quickly and can quickly become unmanageable. Prioritizing these debts can help you save money in the long run.

For instance, if you have a credit card with a 19% interest rate and a student loan at 6%, focus on paying off the credit card first while making minimum payments on the student loan.

Implementation Tip: Consider the “debt avalanche” method where you pay off debts with the highest interest rates first. It can save you money over time and accelerate your path to being debt-free.

3. Establish an Emergency Fund

Life is unpredictable, and unexpected expenses can derail your debt repayment plan. To protect yourself from these unforeseen costs, it’s essential to establish an emergency fund.

For example, if you suddenly need to repair your car, having an emergency fund can cover the cost without adding to your debt.

Implementation Tip: Start small. Aim to save $1,000, then work your way up to three to six months’ worth of living expenses. Automate a small portion of your income to go directly into your emergency fund each month.

4. Utilize Debt Consolidation

Debt consolidation can simplify your debts and potentially lower your interest rate, helping you pay off your debt faster. It involves combining all your smaller debts into one larger debt, typically with a lower interest rate.

For example, if you’re juggling multiple credit card debts, a debt consolidation loan could help you manage them more effectively.

Implementation Tip: Speak with a financial advisor or a non-profit credit counselling service to see if debt consolidation is the right strategy for you.

5. Cultivate Healthy Financial Habits

Once you’re out of debt, the goal is to stay out. Cultivating healthy financial habits can help you maintain your financial freedom.

For example, rather than splurging on a new TV with your credit card, save up for it. This practice helps you avoid unnecessary debt and encourages conscious spending.

Implementation Tip: Automate your savings. Decide on a percentage of your income to save each month, and set up automatic transfers to a savings account.

Conclusion

Escaping debt requires discipline, dedication, and patience. However, by implementing these best practices, you can overcome your debt and achieve lasting financial stability. Remember, everyone’s financial situation is unique, so it’s crucial to find strategies that work best for you.