Life happens, you want to reach your goals and personal debt can add up. While debt can seem daunting, making a solid repayment plan can help relieve any stress and get you back on track to meet your financial goals. 

Whatever the debt and whatever the reason, you can feel confident knowing that there are strategies for repaying it (and there’s a light at the end of the tunnel).

Here are some steps to help you get started and tackle your debt. And remember, you’re not doing this alone. We’re here to walk you through the process and create customized strategies for your life.

Step 1: Understand your current debt situation (completely)

To create a plan for debt repayment, you need to thoroughly understand your debt situation. 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 overwhelming, but be completely honest—it’s important to get the full picture of exactly how much you owe. You can’t make a successful plan for debt reduction without knowing all the details. 

Step 2: Understand your cash flow and expenses each month

As you look at the money you spend each month, you’ll see two types of expenses: variable and fixed. 

A fixed expense is the same each month, like your mortgage or rent payment. A variable expense changes from month to month, like how much you spend on entertainment, food, clothing or travel. If you’re looking for a way to organize your expenses, take a look at this budget worksheet.

Once you know your monthly expenses and where your money is going (your cash flow), you can start to manage your spending. The goal is to have more money going towards debt repayment each month. This could look like cancelling an unused subscription, or eating out once or twice a week instead of every day.

The goal of prioritizing your spending isn’t depriving yourself, but learning to spend in moderation. This frees up funds every month that you can put towards your debt. Plus, with a defined budget, you’ll know exactly how much you can contribute each month to your debt repayment plan.

When it gets hard to stick to your budget, remember: the money you’re using to tackle debt now will be money in your pocket in the future once the debts are paid off.

Step 3: Develop your debt repayment plan

Let’s take a look at some of the 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 still be making minimum payments on your other debts along the way.

Here’s an example of what this could look like: 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 percent interest rate, you’d pay back the car loan more aggressively while you make minimum payments on the credit card debt.

The snowball method is popular because you’ll see results right away—and who isn’t motivated by progress? This positive affirmation helps set behaviour changes when it comes to paying off debt (and staying out of debt).

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 minimum payments on your other debts. You’ll pay less interest with this method and ultimately save money over time, but it might take you longer to start clearing those debts off completely.

Let’s look at the same example as above but apply the avalanche method. 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’d 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 pay less interest with this method and ultimately save money over time. However it will most likely take longer to pay off those debts completely—not seeing immediate results can be discouraging.

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. 

While it may seem like an easier option, debt consolidation often doesn’t encourage a change in spending and budgeting behaviours—which can end up with negative effects in the long run. If you want to explore debt consolidation, it’s important to understand your overall debt situation and monthly cash flow for repayment so you can grow your financial health and confidence.

Debt consolidation also can come with higher interest, restrictions and certain criteria must be met, making it not a viable option for everyone. We recommend that you drop by your branch and talk with a banking expert to see if this is an option for you.

If you’ve read through this list and you’re not sure what’s the best option for you, reach out to your local ATB branch for help. Once you find a method that’ll work best for you, the key to successfully paying off your debt is to stay the course. Remember, even if the progress feels slow, you’re still moving forward.

Step 4: Set yourself up for success

The most important part of choosing a debt repayment strategy is that it works best for you. You should feel in control of your strategy—this is what makes you successful in the long run. Once you’ve set your plan, keep going! It really is possible to be completely debt-free and reach your financial goals.

Have you reaped the rewards of changing your spending and saving behaviours? Stick to it! Tracking your expenses and cash flow isn’t just for paying back your debt—it’s a life-long part of your financial health.

Still have questions? Need help creating a strategy? Drop by your local ATB branch or reach out. We’ll work together to create a debt repayment strategy that works for you and your life.