By MELISSA CASSAR
Although New Year’s resolutions can be a great way to make a fresh start, I’ve learned the hard way that if you set unrealistic goals, they’ll likely fizzle out after a few months. Sometimes small steps are the answer to building momentum as you go.
Not surprisingly, the number one resolution for many people is paying off debt. Unfortunately, without the willpower to stop accruing new debt while paying off the old, this effort can fail. However, if you’re determined to clear up debt and are able to set responsible spending habits, these approaches might just work for you:
Make a budget and stick to it. This is the best thing you can do to control your finances, but it’s hard to do alone. Personal finance experts like Krystal Yee (www.givemebackmyfivebucks.com/2011/03/14/why-budgeting-is-important-to-me) offer tips on how to create your own budget and stick to it. Practical Money Skills Canada, (www.practicalmoneyskills.ca) a free personal financial management site sponsored by Visa Canada, features a guide to handling your debt and tips on creating a budget you can live with, along with interactive budgeting tools.
Targeted payoffs. If you owe money on several accounts, list all outstanding balances and their corresponding interest rates. Each month, pay the minimum amount due on each account except for the one with the highest rate. Pay as much as you possibly can on this account until it’s paid off, then move on to the next-highest-interest loan, and so on. This is the only time you should ever pay the minimum due, which can normally add years to payoff times. But your sense of accomplishment at paying off accounts one by one may inspire you to kick it up a notch. Just be sure to retire those higher-rate cards and only use them for true emergencies; otherwise, you’ll be back where you started.
Consolidate debt. Sometimes it makes sense to open a new credit card with a very low interest rate to pay off other cards. Carefully examine all the terms, however, because low rates sometimes skyrocket after an introductory period and additional fees can drive up overall costs.
Tap savings. Most experts recommend keeping three-to-six months’ pay in easily accessible savings accounts for emergencies. But, if you’ve saved more than that, you could be losing money in the long run. Say you have $10,000 in savings earning 3 per cent interest, but have $5,000 in credit card debt at 18 per cent. You’re paying six times as much in interest as you’re earning. Caution: Only try this if you absolutely won’t use it as an excuse to rack up new debt – you worked hard to save that money!
Pay down debt or invest? When you have some extra cash on hand, it may be worth investing some of those funds, especially if your after-tax return on investments is more than your after-tax cost of debt. Just remember to consider the nature of risk behind the investment you choose (i.e., you may lose the money you invest, but you may still have financial obligations to pay back the liability). To help you make an informed decision, Visa Canada has a pay down debt or invest calculator to help analyze your current situation.
Remember, resolutions are never easy – if they were, we’d already be doing them. But in the long run, paying off debts and getting a fresh start is well worth the effort.
Melissa Cassar is Head of Corporate and Public Affairs for Visa Canada.