Planning your finances can be tough no matter what you do. There’s no handbook for dealing with a financial emergency, and sometimes, a paycheque just can’t stretch far enough.
While life can be unpredictable, there are tips and strategies that you can use to make sound financial choices and plan for a brighter financial future. No matter what your circumstances, these plans can help you climb out of debt and start saving again.
#1 Put 20% of Your Income Toward Financial Goals
Financial advisors have a simple rule of thumb that everyone should follow to the best of their ability: the 50/30/20 rule.
This is where you spend 50% of your after-tax income on essentials (rent/mortgage, car payments, groceries, utilities), 30% on wants, and 20% on either savings or debt repayments. It’s a simple financial rule that will help you control costs and save.
If you’re deeply in debt, you may need to trim that 30% on wants so that you contribute more to debt repayments, but spending 20% of your take-home income on savings is a very healthy contribution.
#2 Choose a Debt Payment Strategy
There are two primary methods for maximizing your money and paying off debt: the snowball method and the avalanche method.
The snowball method starts small and grows as you make progress. The snowball method is where you continue to make minimum payments on all of your debts, but you focus any extra funds you have on paying off your smallest debt completely before moving on to the next one. It’s a great method if you’ve been feeling depressed or anxious because your debt is out of control. It will re-establish a sense of progress and give you the motivation to keep saving.
The avalanche method is the smartest financial move. It’s where you focus on the highest-interest debt first, regardless of the amount owed. By paying off the most expensive debt you have, you free up more income in the long run.
#3 Consider a Consumer Proposal for Extreme Debt
There are times when the strictest budget in the world can’t help you out of debt. When debt repayments become impossible, you may need to use a tool like a consumer proposal to get out.
A consumer proposal is a formal, legally binding process that can reduce your unsecured debt and give you a longer timeline (usually up to five years) to repay your creditors. It can have an impact on your credit history, and it should be reserved for when you really need it.
#4 Don’t Let Your Debt-to-Income Ratio Exceed 36%
Another financial rule of thumb that can help you in the future is making sure that you keep your debt-to-income ratio below 36%. If you’re spending more than that on debt payments, you may be about to cross a dangerous threshold that can require bankruptcy or a consumer proposal in the future.
#5 Keep Saving After Debt
Getting out of debt can require a lot of financial discipline. Once you’ve paid off all of your debt, keep up the good habits you’ve developed. Now, you can put that money toward savings, making sure you have money to rely on in retirement or for a future emergency.
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