Minimize your debts and invest in your future
For the third year in a row, Canadians have named paying down debt as their top financial priority for 2013.¹ While this indicates a good level of awareness around debt repayment, it also highlights the importance of taking action on debt by putting a realistic plan in place and following through this year.
If you have debt, how can you start paying it down? A good place to start would be to get some advice and develop a plan that you can put into action to realize your goals.
While about half of all Canadians in a recent CIBC survey² said that they have met with an advisor in the last year, only 6% said they think of debt management as a topic of conversation to have with an advisor.
Most Canadians think of their advisor for investment advice or longer-term goals like saving for retirement - but debt management is an important part of your overall financial plan and an advisor can help you create a comprehensive plan that aligns with your financial goals.
An advisor can also look at your broader financial picture and identify ways to reduce interest costs, which can help you pay down your debt faster or free up some cash flow to go towards other financial priorities - such as an emergency fund or retirement savings.
While paying down debt may be your top financial priority, it's also important to keep some savings activity going so you can build your long-term savings as you take care of the more immediate priority of debt management.
3 steps to debt freedom
"It is possible to make debt repayment a priority while still keeping up regular investments into your savings plan, and that can be made easier by having a clear plan with an advisor that outlines the steps you can take each month to get closer to your goals over time," says Colette Delaney, Executive Vice President, Mortgage, Lending, Insurance and Deposit Products, CIBC.
Step 1: Assess your debt. The first step towards managing debt more effectively is awareness of the impact debt has on your overall financial picture. Make a list of every outstanding balance with the interest rate and monthly payment amount, separating out how much goes towards interest as opposed to principal. Your debts may include:
- A mortgage and/or home equity line of credit
- Unsecured lines of credit
- Personal or car loans
- Student loans
- Credit cards
Now add up the individual debts to find your total balance. How much does it cost you in a month to cover those payments? How much are you paying each month in interest to service those debts? Your CIBC Financial Advisor can discuss possible ways to structure your debt and potentially lower your interest costs.
Step 2: Set priorities. It's essential to make at least the minimum payment due on each debt to avoid penalties and to keep your credit rating intact. Beyond the minimum, however, focus your attention first on the debts that are costing you the most - that is, those with the highest interest rate.
"As you repay debt, you reduce interest costs, which can free up some of your income to be directed towards other goals, such as building up your savings account or having a better monthly cash flow," notes Ms. Delaney.
Step 3: Establish a timeline. Like any goal, it's helpful to have a deadline; it gives you a "finish line" to work towards. Keep it realistic and achievable. This is where it can really help to talk to an advisor.
How consolidation can help
One strategy you may want to consider when reviewing your debt is consolidating. Debt consolidation means using your lower-rate sources of credit (such as a debt consolidation loan or a home equity line of credit) to pay off the amount outstanding on higher-rate debts, like the balance on a department store card.