Over the past three decades, as interest rates have fallen and household income has grown, Canadians have taken on more and more debt. Household debt has more than doubled over that time, and the average household now owes more than 1.7 times what it earns.1 Moreover, higher interest rates will likely mean higher debt servicing costs for investors.
Start with a plan
Getting into debt is easy but getting out of debt requires a plan. If you are concerned about your debt–whether it’s a mortgage, student loans, line of credit or credit cards—understanding your personal cash flow is the first step. Understanding your cash flow will provide the building blocks for a financial plan and help to ensure you’re living within your means as you repay what you owe.
Get to know your net cash flow
First off, determining your net cash flow is simply a matter of subtracting your income minus your expenses. In other words, if your income exceeds what you spend, you have a positive net cash flow and are living within your means. But if you need to borrow money every month to meet your needs, you have a negative net cash flow.
Your debt-reduction plan in five simple steps
Knowing your cash flow will help you decide if you can afford to put money toward paying off your debts—and if so, how much. To help you assess your cash flow and pay off your debt, here are five steps to put you on track.
Step 1: Analyze your monthly cash flow
- Start by calculating your income after taxes, your deductions, and your fixed and regular expenses.
- Separate your basic living expenditures (e.g., housing, food, transportation and clothing) from discretionary expenses (e.g., entertainment, vacations).
- If there is not much excess income left, think about reducing the discretionary expenses.
Tip: MD’s Cash Flow Calculator allows you to estimate your cash flow and work with your MD Advisor to determine how best to achieve your financial goals.
Step 2: Treat debt payments like bill payments
- Decide how much of your excess income you can put toward debt.
- Consider setting up automatic monthly payments to debt.
- Remember, despite current low interest rates, interest charges can add up quickly, which is why it may be helpful to consider setting up automatic debt payments.
Step 3: Set your debt-reduction targets
- Setting attainable targets can drive you and your plan forward—“I want to pay off my credit card debt by next year,” for example.
- It helps to set goals that are time-based (e.g., within a year) and realistic (e.g., pay off my credit card debt).
Step 4: Create a plan for achieving those goals
- Once you set your goals, you need a strategy for attaining them.
- Credit is typically the biggest contributor to debt, so consciously using money that you do have may keep you from living outside your means.
- For example, you can vow that: “I will use cash or debit for all non-essential purchases rather than add to my current credit card debt.”
Step 5: Monitor the plan to ensure you are on track
- Make a point of checking your transaction history and account statements on a regular basis, to see how you’re doing.
- If you feel that you’re not on the right track, revisit or recalibrate your cash flow plan as necessary.
Learn more about MD's financial planning services or contact your MD Advisor to find out how we can help.