12-Minute Financial Makeover Step 6 - Ease Your Mind with Debt Freedom Plan

This is the 6^th installment of our Financial Makeover Series featuring carefully selected personal finance subjects. We hope talking about these basic principles can allow you to figure out what can help the most in your own unique situation.

We talked about avoiding fees in Part 1 and how using a no-fee online checking account could help you so.

Part 2 featured spending more on things you truly love using a fun budget approach.

We continued in Part 3 with the amazing freedom of budget choices that can allow you to realize more of your projects and dreams.

Part 4 talked about emergency savings and having a personalized contingency plan.

Part 5 suggested to hammer down boring big recurring expenses.

After these, we now feel ready to abort an even more challenging subject. So, let’s put on our armor, sharpen our sword and face on the dreaded debt beast.

 

The Right Mindset

Having too much debt is probably today’s biggest financial problem of too many families. We did not start our Financial Makeover Series here because we believe it’s better to have developed some tools before tackling on dreaded debt.

 

With some confidence in your abilities, getting out of debt can be quite straightforward. You just have to allocate money in the right way to achieve it.

 

We know getting out of debt may seen difficult or even impossible for some. Many are even addicted to debt. They know extensive use of it is bad for them yet became comfortable bathing in it. Sadly, they are so afraid about getting into that battle.

 

But after you get over that steep psychological hurdle, getting rid of debt becomes basic math. You have to believe and decide you can get out of debt. No one can do it for you. You have to commit and do it for yourself and your family. The good news is that you have that power in you.

12-Minute Financial Tips to Immediately Improve Your Situation

One of the main concepts at the basis of the 12-Minute Approach is improvement. In most cases and in most domains, it’s easy to get to ball rolling with only 12-Minute a day or 12-Minute here and there. It’s no different for your finances. Your family’s financial situation can be greatly improved by investing just a little time, 12 minutes, on it. The idea is to start with 12-Minute and build up from there.

Consequently, today we will try to present a bunch of ideas on how to quickly improve your dealings with money. Note that our intention is not to present an exhaustive list. If you have a minute or even better, a dozen, pick one of these and try to implement it. 

Pay Off Your Credit Card Balance Every Month

NEVER Carry a Credit Card Balance

Even though some people think it could help your credit rating, according to my view, carrying a credit card balance is NEVER a good idea.

In fact, if you use a credit card, you should adopt this three-part Basic Personal Finance Rule:

Lower Your Credit Card Limit if you’re Not Disciplined Enough

Opt for a Lower Limit

If you’re undisciplined, in addition to eliminating the majority of your credit cards; lower the limit of your remaining credit cards as much as possible.

You will thus avoid temptation more easily.

For Emergencies Only

At worse, only one card with a 500$ limit should be sufficient. 

Eliminate Most Credit Cards If You’re Not Disciplined Enough

Eliminate Your Credit Cards

If you’re undisciplined, simply avoid credit cards. Destroy them to avoid temptation.

You’re the best person to know your strengths and weaknesses. So be honest to yourself and take all means necessary to improve your bad credit situation.

Only One Card For Emergencies

Don’t just destroy your credit cards by cutting them in small pieces; also take time to call all financial institutions implicated to cancel out your credit cards. Remember that you will still have to pay your balance afterwards.

Almost Always Waive Life and Disability Insurance Clauses on Loans

When you borrow from financial institutions, they systematically offer you life and disability insurance to «protect» your mortgage or loan.

It might be wiser to waive these insurance clauses and thereby avoid paying «small» supplements.

Indeed, most of the time, loan insurance clauses are simply not beneficial to you.

Less Expensive Possibilities

You need to check and compare it with other options available to you. But in most cases, it’s possible to obtain similar protections cheaply.

Thus, Group Insurance available through your job is often interesting and can fully cover your insurance needs at a low price. There’s absolutely no point to have double or triple coverage; you’ll probably only get paid once anyway.

In addition, it is always advisable to combine coverage on a single contract to avoid undue administrative costs.

Avoid Paying Annual Fees on Your Credit Cards

Never Pay Fees

You should never pay fees on your credit cards; whether it is interest charge, late fee or even annual fee.

Just use common sense and a little discipline. Credit Card Fees are Simply Useless.

Switch To a No Annual Fee Card

You rarely can take advantage of additional features provided by credit cards with annual fee. Just ask your financial institution to switch to a no annual fee credit card.

The only reason you should pay annual fee is if you can get an immediate monetary advantage than is greater like a cash reward program. But remember that many no annual fee cards can still offer you competitive cash rewards.

Paying Some Loans Early May Not Always Be A Good Idea

Some Contracts Won’t Allow You to Save Interest

As a basic rule, getting rid of debts is a pretty good thing. But be careful, it’s not always true.

In fact, some type of loans won’t allow you to save on interests even if you pay up early. It’s often the case with car loans or leases. 

For these loans, interest charges are calculated as part of the original contract and cannot be altered.

Verify The Contract

The only way to actually know is to read the fine prints of the contract. So check your contract before getting rid of this type of debts.

Shop Around and Negotiate Your Credit Conditions

Always Worthwhile to Negotiate

It may be interesting for you to shop and negotiate loan or credit line conditions with a few different financial institutions.

On your mortgage, for example, a difference of only 1% will save you tens of thousands of dollars in interest before you finish paying your home.

Consult Several Institutions

Avoid being lazy and get information elsewhere. At worst, negotiate with your regular institution to obtain the best possible terms afterwards.

Use Line of Credit to Avoid Paying High Interest on Debt

A Reasonable Interest Rate

A personal line of credit is an excellent way to avoid paying high interest on certain debts.

Interest payable on credit lines is reasonable. Even if it is higher than on a mortgage, it is much lower than, for example, credit cards.

On an As-Needed Basis

Because interest will only be charged if it is used, you can draw from your line of credit only if required.

This enables you to cope with small contingencies and make sure you pay the full balance of your credit cards each month.

Credit lines can also be used as a short-term loan to maximize your RRSP.

Relatively Easy to Obtain

If your financial institution did not already offer you one, it is relatively easy to apply for a line of credit. Depending on your credit rating, it can be expected to pay a few more percentage points than the prime rate, from 1% to 5% more.

Manage Your Credit Situation With Debt Consolidation

Only One Outstanding Loan

Roughly, debt consolidation consists of regrouping multiple debts and taking out a new loan that will allow you to settle all debts at once.

This will leave you with 1 single loan and 1 single payment to handle. It also can enable you to sometimes get a better rate of interest than some of your previous loans.

Be Sure to Carefully Check the Conditions

However, debt consolidation is not a miracle solution and you should be wary of conditions that are not always beneficial to you.

Some credit companies will offer loans under doubtful conditions that will reduce each payment but will only defer the problem.

Doubtful conditions such as:

Get Out of Debt (Part 4 of 4): Combine Methods Depending on Your Situation

Adapt Each Step to Your Situation to Get Rid of Debt

It’s also possible to combine the highest interest rate method and the lowest balance method (see previous posts) to eliminate your debts.

Depending on your situation, you will decide for each step the liability to be eliminated.  The highest interest rate one or the lowest balance one.

Get Out of Debt (Part 3 of 4): Pay the Lowest Balance First

A More Motivating Method to Eliminate Your Debt

                      

Another alternative similar to the highest interest rate method involves starting with the lowest balance debt.

The fist debt will disappear more quickly and the process is a bit easier to initiate.  This can be a little more motivating for some.

You Pay More Interest

Even though it appears that the lowest balance method gets things done faster, you effectively pay more interest on other debt. In the end, this method is more costly and you will be debt-free later.

Get Out of Debt (Part 2 of 4): Pay the Highest Interest Rate Debt First

The Best Way to Get Rid of Consumer Debt

The best way to get out of debt is to completely pay off your debts in order starting with the highest interest rate item on your list.  This should be done while still doing minimum payments on other loans.

Mathematically, this is the best method to get rid of debt. Paying off the highest interest debt first is also the most financially sound method.

Domino-Effect After the Elimination of The First Debt

The toughest part is to get rid of the first liability. Subsequently, that first debt’s payment will be

Get Out of Debt (Part 1 of 4): Immediately Reduce Interest You’re Paying on Your Debts

Run Away from High Interest Credit Cards

Many opportunities are probably already there for you to reduce interests that you pay on your debts.  Particularly, high interests on your credit cards balance.

Do Some Changes Now

Nobody knows your situation better than yourself.

So use your low interest credit line, a personal loan, savings sleeping in a low interest account (even if institutions call them high interest savings accounts) or at a pinch another credit card with not so greedy interest rate.  Do some little changes today!

Have a Plan to Get Out of Consumer Debt Within 3 Years

Take Action Today

The secret to solve your debt and credit problems is to setup a good plan: simple and effective.  It takes a bit of discipline and common sense. But there’s no point in delayed it; take control and start getting out of debt today.

Your plan should have an immediate impact and help you get out of consumer debt within 3 years.  After that, only your mortgage and maybe a car loan will remain and can be the exception.  It could take more time only if your credit situation is extremely severe.

Use Online Debt Repayment Calculators

To estimate what you should expect to repay each month, use online calculators.

The First Step To Get Out Of Debt : List Your Liabilities

Make a List

The first step to improve a bad debt situation is pretty simple : make a list. 

Your death list...oops...your debt list!
And soon, your back-to-life list!

So, just write down your family’s debt report.  This report simply is a detailed list of your liabilities.  It should help you easily assess your credit situation.  This is the fist step for you to take back control.

This list should contain all your liabilities: credit cards, car loan, credit line balance, student loan, etc.

Do Not Forget

Your mortgage, probably the most important liability for most, should be included in your list.