Taming Personal Debt by Paul Sampson
I recently picked up Taming Personal Debt
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debt management
Sometimes it may be hard to know if you are in over your head, but if you can relate to some or all of the statements below, it is likely that you have taken on too much debt.
1. You have no savings at all.
2. You only make the minimum payments on your credit cards.
3. Your bank account is always overdrawn and you often have nonsufficient fund (NSF) fees charged to your account.
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Although it may not seem like much, making extra payments towards your mortgage and loans can save you a significant amount of money in the long run. Even just a few extra dollars here and there is worth the effort to put towards your principal.
For example, if you take out a loan for $5000 at an interest of 6%, it would take you 5 years to pay it off if your monthly payment is $96.66. However, by adding an extra $50 to your monthly payments, you could pay off the loan in full within 3 years 2 months. If you added $100 extra to every monthly payment, you would pay off the loan in 2 years 4 months.
To make this more meaningful to you, check out this loan calculator and punch in your own loan or mortgage information to see the impact of increasing your regular payments or by adding a one-time lump sum.
My husband and I found that by putting extra money down on our mortgage, it has saved us hundreds of dollars on interest charges. Our goal is to aggressively pay down our mortgage while at the same time not neglecting to save for our future retirement and other goals.
It feels good to pay down debt as it lifts a burden from your shoulders. If you have difficulty using your money wisely, help yourself by putting any extra money away towards the principal of your loans so that you won’t be able to spend it on things you don’t need.
Just think, the sooner you are debt free, the sooner you will be able to use that excess cash flow for the things you really want to do but without the guilt or burden of knowing you will eventually have to find a way to pay for it.
Are you finding yourself overwhelmed by your debt load? If you are, you are not alone. In fact, according to a recent report by Certified General Accountants Association of Canada, Canadian household debt has more than doubled since 1989.
There is a short video clip on globeinvestor.com that will give you some advice on how to beat your problems with debt. Laurie Campbell, from a non-profit organization called Credit Canada, speaks with Rob Carrick about how to tackle your debt issues.
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Recovering from a snowball of debt can seem nearly impossible, especially for those with only one income or even a part time income. Although there are many options – debt consolidation, financial advising, an experienced debt assistant, etc.; however it is always wise to consider all options.
1) Obtain a Second Income
One of the easiest ways to destroy debt fast is to acquire a second job, either full time or part time. Since you are already living on one income, the entire second income can be put towards your debt. Almost every debt assistant and financial advisor will suggest that you pay off the debts that charge the highest interest first, in an effort to save you from paying solely interest.
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This is an age-old question and after doing some research on the subject, I have discovered that there are a lot of differing opinions out there. Some say you should pay off all your debt before contributing to an RRSP, while others suggest making RRSP contributions when you are young and then focusing on paying down your mortgage when you are older.
The answer to this question, however, really depends on you and your own personal comfort with debt. There are a lot of people out there who absolutely despise being in debt and will do everything in their power to get out of debt, while others are okay with being in debt, at least to a certain extent.
When considering what to do, it’s a good idea to talk to a tax specialist and/or a financial planner. Sometimes people end up doing ridiculous things in order to avoid paying tax, so it’s important to consider all aspects rather than simply focusing on reducing the amount of tax you pay.
Some specific things to consider when choosing between saving for retirement and paying off your mortgage include your age, current tax bracket, investment returns, mortgage interest rate, and whether or not you have a pension plan.
After skimming through several articles on this subject, I noticed that most people suggest doing both. That way you will feel as if you are getting somewhere, since simply paying down debt is supposedly not as psychologically satisfying. Another opinion I stumbled upon was that it’s better to pay off your mortgage first if your mortgage interest rate is equal to or higher than your RRSP’s rate of return.
It really all boils down to what you deem is most important for your own personal situation. If you want to read chartered accountant David Trahair’s opinion on why you should pay off your mortgage before contributing to an RRSP, check out this link.
If you have come across some extra money due to an inheritance, etc., I would encourage you to do your own research prior to making a decision. There are pros and cons to both sides and it may be wise to do both simultaneously. As the saying goes, it’s not a good idea to put all your eggs in one basket. On the other hand, sometimes it makes the most financial sense to choose one over the other.
While flipping through David Bach’s book Fight For Your Money
First of all, if you take out a payday loan, you will be charged outrageous loan payment fees. In the instance referred to in the book, a woman borrowed $400 and was charged a $60 fee.
Then, because she couldn’t afford to pay the full $400 at the due date, she was forced to take out another payday loan to pay off the first loan. This caused her to pay yet another ridiculous loan fee. Payday loan companies do not accept installment payments, so if you don’t have the means to pay off your initial loan, they have got you exactly where they want you – you will end up in a vicious cycle by taking out one loan after another in order to pay off the previous loan.
By the time the woman had enough to finally pay off her debt with this particular loan company, she had paid $1,780 to borrow the $400! That means she paid 445% in interest charges! Unfortunately, some payday loan customers get stuck paying as much as 1000% in fees and interest charges as it takes them longer to get out of the trap.
Payday loan companies may seem attractive, as they are willing to lend to anyone with a job, even if they have bad credit. Before resorting to such an option, do your research and make sure you understand the full implications of taking out a payday loan. Learn from other people’s mistakes and avoid falling in the payday loan trap.
