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Steps and strategies for personal debt repayment

By ATB Financial 27 August 2020 5 min read

We can get into personal debt for many reasons, and it can be especially challenging if you’re trying to make it through tough times. Whatever the reason for your debt, know that there are strategies for repaying it and a light at the end of the tunnel.

Making a solid plan to get out of debt can help relieve your stress and get you back on track to meeting your financial goals. Here are some steps to help you tackle your debt.


Step 1: Understand your current debt situation, completely.

To create a plan for debt repayment, you need to understand your debt situation thoroughly. You can start by making a list of all your debts. This list could include your credit cards, loans, lines of credit, mortgage and any other money you owe.

This might feel daunting, but be completely honest, because it’s important to see the full picture of exactly how much you owe. You cannot make a successful plan for debt reduction without all the details. At first, your total debt may seem overwhelming, but don’t get discouraged. We’re here to help you and walk you through strategies for your situation.


Step 2: Understand your cash flow and expenses each month

You will have two types of expenses: variable and fixed. A fixed expense is your mortgage payment and other bills that are always the same or near the same each month. A variable expense would be how much you spend on entertainment, food, cash, travel and other things that can change month to month. You might find this budget worksheet helpful to organize your expenses.

Once you determine your expenses and your cash flow, you can start to prioritize your spending to help maximize cash flow for debt repayment each month. For example, you might have a subscription service you’re not using and can cancel. If you eat out for lunch every day, you might choose to eat out once or twice a week instead.

The key to prioritizing your spending is not to cut yourself off from or sacrifice the things you enjoy, but to try to spend in moderation. This will free up funds each month to put directly towards your debt. And, with a defined budget, you’ll know exactly how much you can contribute each month to your debt repayment plan.

Remember, the money you’re using to pay off debt now will be money in your pocket in the future once the debts are paid!


Step 3: Develop your debt repayment plan

There are a few different strategies for repaying debt. If, after reading this, you’re not sure which is the best solution for your situation, reach out to your local ATB branch for help. Once you find a method that’ll work best for you, the key is to stay the course. Even if the progress feels slow, you’re still moving forward. Here are some common debt repayment strategies:


The snowball method

Start by paying off your least intimidating debts first. Once the smallest debt is paid off, you move onto the next lowest, and then the next. Keep in mind that you’ll always be making minimum payments on your other debts while you do this.

For example, if you have a $4,000 car loan with a six per cent interest rate and a $9,500 credit card debt with a 19 per cent interest rate, you would choose to pay back the car loan more aggressively while making minimum payments on the credit card debt.

The snowball method is popular because you’ll see results right away. It’s just like going to the gym—once you see the results, you’re motivated to keep going. This positive affirmation helps set behaviour changes when it comes to paying off debt and staying out of debt too.

The downside of the snowball method is that the smallest debt might not be the highest interest debt. In some cases, you could end up paying more interest on that high-interest debt in the long run.


The avalanche method

Start by paying off your highest interest debts first, while still making the minimum payments required on your other debts. You will pay less interest with this method, but it might take you longer to start clearing those debts off completely. Do not feel discouraged while applying this strategy, and remember you can save more in the long run.

Using the same example as above, if you have a $4,000 car loan with a six per cent interest rate and a $9,500 credit card debt with a 19 per cent interest rate, using the avalanche method, you would choose to pay down the credit card more aggressively first because it has a much higher interest rate.

The main advantage of this strategy is that you’ll save money on interest over the long term. The downside is that it will take you longer to get the debt repaid and not seeing immediate results can be discouraging for some.


Debt consolidation

Debt consolidation is when you borrow a sum of money to pay off multiple debts. This method sets you up with one payment instead of trying to manage several. Debt consolidation is not a viable option for everyone. It can come with higher interest, has some restrictions and certain criteria must be met. A check-in with your branch can confirm if this is an option for you.

While it may seem like an easy strategy, debt consolidation often doesn’t encourage a change in spending and budgeting behaviours. For many people, this strategy might not be the best solution for the long term. If debt consolidation is a strategy you want to explore, it’s important to still keep in mind steps one and two from this list and understand your overall debt situation and monthly cash flow for repayment.


Step 4: Set yourself up for success

The most important factor when choosing a debt repayment strategy is that it works best for you. You should feel in control of your strategy, which will bring you success in the long term. Once you’ve set your plan, keep going! It is possible to be completely debt-free and reach your financial goals.

If you’ve found success changing your spending and saving behaviours, stick to those behaviours and your financial plan. Remember that keeping track of your expenses and cash flow is something you should do in the future, even after you pay your debt.


If you’re not sure which debt repayment strategy is best for you, or where to start, drop by your local ATB branch or contact us. We’ll work with you to find a debt repayment strategy for you and your situation.

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