Saving or investing is the polar opposite of debts. Therefore, if you find yourself in this tricky situation, you may seek professional advice to get rid of the financial dilemma. Here is how we suggest you can walk the fine line between debt and savings.
Eliminate The Toxic Debts
After successfully saving for your necessities, it is time to allocate spending on debts. These include credit card purchases, mortgages, and other loans that carry an excessive interest rate. Focusing on these repayments with high interest will swallow your budget if prolonged. As a result, you will spiral into debt which we do not wish upon you.
There are two methods to approach debt repayment efficiently—the snowball and the avalanche technique.
The Snowball Technique
Begin by creating a list of your debts from the total amount paid against the remaining amount. The top of the list must mention your most expensive loan. Seeing the amount paid against the small portion remaining will bring psychological pressure and reduce the ever-present burden.
The Avalanche Method
The avalanche method requires you to list the loans according to the interest rates. You must prioritize repaying loans with the high-interest rates first while still making the remaining minimum payments on other loans. This method is helpful for students with college loans, credit card repayments, and other loans with double-digit interest rates. You can also contact with fee based financial planner for your help.
Transitioning To Savings From Debt
Regardless of whichever method you pick, attempt timely payments. Furthermore, spend less on groceries and curb entertainment expenses to balance the budget with loan repayments.
The issue most Canadians encounter is the association of debt with their income. Due to loans, the debt can take years to go away. Therefore, to overcome the challenge, individuals highly depend on making repayments without thinking of saving. This is not an ideal solution, especially for families with mortgages. Their expenses vary from college, bills, and child taking responsibilities which cannot be delayed. Furthermore, these expenses require extensive savings too.
Therefore, the trick is finding the balance that assists in savings while in debt. Consult with your family or a consultant and stick with the plan. You can prioritize making loan repayments while contributing minimally to savings. Once the debt is repaid, shift gears to intense savings to cover past expenses.
Save For Emergencies
Unfortunately, the debt is here to stay and will not disappear anytime soon. And since life is unpredictable, you want to build emergency savings when unforeseen expenses arise. This figure does not need to be huge but sufficient to reflect your living standard and expenses pattern.
Imagine taking a loved one to the ER without enough funds to save their lives. At this time, you will use high-interest credit cards, which will increase your debt and subsequent debt repayment. Without the presence of savings, you can be in deep trouble.
It is wise to save three to six months of expenses in advance if you wish to be realistic. You can aim to save for three months if you struggle to find the debt to savings ratio. Once the savings reach a particular ceiling, you can convert the account into a high-interest savings amount. Give it a thought! Consider it a supplementary income that can be put back into the account to earn more. It will significantly aid in preventing late student fees, bill payments, and mortgages without hurting your credit score.
About Us
Merrick Financial Inc. is a fee only financial planner Toronto to help you save while repaying debts. Furthermore, we also offer investment advice if you are looking to branch your investment portfolio. Visit our website to schedule a meeting online and take advantage of our investment-related services.