It's important to have a balanced budget. But what happens when your monthly expenses are more than your income? In all likelihood, you could use your credit card, or worse - a payday loan - to make ends meet. The problem is this can create a cycle of debt that leads to high debt balances that take years to repay and can harm your credit. Here are some things you can do if your credit card balances seem to be increasing out of control.
Understand The Warning Signs
The first step in getting your debt under control is understanding the warning signs that you may be over using credit as a way to balance your budgetary needs. Here are six early signs that you are relying too heavily on credit:
- You put necessities like groceries, gas and personal items on credit because you can't afford to pay for them in cash.
- You are only making minimum payments towards your debt because that's all you can come up with.
- You repeatedly reach, or exceed your credit card limits.
- You've applied for additional credit cards, or asked for a credit limit increase, to continue to be able to pay for everyday living costs.
- You've used more than one payday loan in the last year to pay for rent, an emergency or similar expense.
- You worry every day about how you are going to make your next credit card or bill payment.
These are all signs of financial stress. If you are also receiving phone calls from creditors and collection agencies then you've progressed beyond the early signs and are now facing a financial crisis.
Re-Balance Your Budget
Next you need to stop using debt as a way to balance your budget. Even if you don't want to go through the complicated process of creating a monthly budget and tracking your spending, there are actionable steps you can take to stop relying on credit to make ends meet:
Cut up your credit cards. Or at the very least, leave them at home. If you don't take them with you, you can't use them.
Cut back on any expense item that isn't strictly a necessity, at least initially. Once you start having extra money left over at the end of your pay period, you can slowly add back in little extras.
Look for ways to reduce your cost of living. If you eat out a lot, start cooking at home, or brown bagging your lunch. Cancel unnecessary programs, (yes, including Netflix), if that's what it takes. When it comes to larger bills like insurance renewal time, get a comparison quote to reduce these larger fixed payments. If necessary, consider moving to reduce your housing costs.
Set it in stone and make it a lifestyle. More often than not, people don't even know how they ended up spending more than they make. Lifestyle creep can happen. It's not always frivolous spending, the vacation, or a newer car that gets people into debt. There are ways our spending grows, little by little.
Find ways to increase your income. This one isn't always possible, but if you can explore ways to earn extra money including taking on a second part-time job, then do it. Consider selling items you no longer want or use. Remember that's only a temporary income boost, and not something that can be used to consistently balance your budget.
Re-balancing your personal budget is a start. Now that your debt levels aren't growing, you can come up with a plan to deal with your debt. You can overcome your debt by making a choice to live frugally until you're in the black each month. That doesn't mean you can't do anything, it just means make sure each and every dollar fits in with your long-term financial goals. Right now, your goal should be to increase the amount you can put towards debt repayment.
Paying Off Your Debt
Your debts accumulated over a period of months, if not years. Every month your cash flow fell short of your spending, and you added a little to your pile of debt. Yes, you made minimum payments on each and every credit card, but those payments only paid the interest. If you added even one more charge each month you're coming up short, your debt pile grew yet again.
Paying down those debts is just as simple as increasing them. You just need to reverse the process. You need to make payments that are greater than the interest on our debts, plus any new charges.
Make all the necessary minimum payments. Paying the minimum won't reduce your balances, but it will preserve your credit rating. Make a list of every outstanding debt and set up a process to keep up with at least the necessary minimum payments.
Begin by putting as much money as you can towards your high interest debts first. The good news is that paying down balances will in fact free up some cash flow to reduce your debt even faster. Once your debts start falling, so too does the interest you're paying each month. You might be surprised to know just how much of your paycheque goes towards interest costs if you actually sat down and figured that out (and we recommend that you do).
Double down on your payments. Once you pay off one credit card balance, apply that payment amount to your next debt. By doubling up on your payments, your second debt will be reduced quicker than your first.
Put any extra cash towards debt. While it might be tempting to spend your Christmas bonus, or money that was gifted to you, your best approach is to put this extra resource towards debt repayment. You'll benefit in the long run because you will reduce your interest costs.
Should you cash in your RRSP or similar savings? Most people facing debt problems have little in the way of cash and investments to put towards debt repayment. However, some may have RRSP or RESP savings, either from their own doing, or from their employer. Cashing those into repay your debts can have unexpected financial costs. We recommend speaking with a Licensed Insolvency Trustee before you take this step.
When Should You Speak With A Licensed Insolvency Trustee
As we mentioned, your debt balances grew over time and it will take time to repay them as well. But how long is too long? When should you consider something like personal bankruptcy or a consumer proposal as a way out of debt?
The truth is that it's different for everyone. Generally, you should consider speaking with a Licensed Insolvency Trustee if:
- You owe more than $10,000 in unsecured debts like credit card debt, bank loans, tax debt, or payday loans.
- You can't create enough excess cash no matter how hard you cut back to reduce your balances - the interest cost is just too high.
- Even with the most drastic lifestyle changes, you are looking at a repayment period of five years or more (aside from your mortgage or car loan).
If any of the above are true for you, you may want to consider other debt relief options. If so, contact a Licensed Insolvency Trustee for a free no-obligation debt consultation.