Tackling your debt can include two major strategies; they are, earning more money and reducing expenses. For now, we'll explore how to reduce your expenses, and in Step 6 we will explore how you can earn more money. You can choose one or the other, but it's best (and most aggressive) to utilize a combination of the two.
To get started, you'll need to take a serious look at your current expenses and see where changes can be made. The information below will guide you through reducing your overhead by eliminating or cutting your existing expenses.
First: Document all of your Current Expenses
Write down all recurring expenses that you currently have - these will include bills and general expenses like groceries, gas, etc.. If needed, use your bank statements as a reminder. Detail what the expense is (the category, i.e., groceries) and the amount you currently pay or spend. Include expenses that are less frequent than once a month too. Also, think of subscriptions that renew annually - these can be easy to forget. I've listed some expenses to get you started, but you need to write these, plus those I might've missed.
- Property taxes
- Strata / HOA fees
- Cell Phone
- Lan line / Phone
- Any subscriptions
- Gym membership
- Activity fees
- Insurance (home / car)
- Car Payments
- Bank Fees
- Credit Card Interest / Loan Interest / and any minimum required payments
- Medical Prescriptions or Medical Plan Fees
- Taxes (personal or corporate income tax)
Second: Scrutinize Expenses
Look through each expense individually and ask yourself if it can be lessened in some way. Reducing the expense might include changing service providers, reducing your use, etc. To get more aggressive with expense reduction you might consider cutting certain expenses entirely. Remind yourself that these can be temporary measures and can be reintroduced at a later date. Example - cutting cable/the internet could seem scary, but if it's only for a short duration - it might seem less so. Also, using a bus service to eliminate car insurance could be helpful too. Below are some in-depth expenses to consider and how you might lessen them.
Third: An In-Depth Look
The easiest starting place is cable!! While it might seem scary at first cutting/reducing cable services is a great way to save. Cable is astronomically expensive with streaming services becoming more and more prevalent and carrying better content. CUT the cable. Assuming you're on a month to month plan - just cut the cord. Leverage your internet during the months you're putting funds towards your debt. A full cable/internet package can cost upwards of $180 / month!! THIS IS HUGE. Also, if you own the PVR equipment, you could sell it. If you rent it, you'll cut your expenses by canceling the rental and returning the equipment.
Your fitness and pocket book will thank you for this one. Keep in mind that these decisions can be temporary. They are meant to start throwing heavy-handed darts at potential debt or towards more important things!! When you get on your feet again, you can opt to reintroduce cable. Be cautious and avoid black and white thinking - these decisions can be temporary to get you where you need to be.
Next, scrutinize your cell bill. Do you need a data package??!! Data can be another additional cost which isn't necessary, and if you deem it necessary, at the very least reduce your data package. Wi-fi is accessible almost anywhere now. Review your bill and look for lines items like picture messaging, extended voicemail, and cut these, if possible. Our cell phone packages are often way bigger than our needs. Eliminate all the extras to provide PHONE service only. Smartphones are a money pit. Another suggestion is to call your cell provider, let them know you want a better rate, or you'll cancel. Let them work harder to keep your business. Last time, I did this, I told them I wanted everything I currently had but wanted to pay less. They moved my plan from personal to business and reduced my monthly bill from $170 to $110 monthly - a $60 monthly savings. Canada's cell providers are far too expensive.
Electricity is a little easier - turn lights off when you leave a room, turn the heat down a bit. For British Columbia Residents, BCHydro offers 21 no-cost tips to reducing this bill. Use drapery to cut any air conditioning costs, etc., etc..
Lan line - ok, seriously, if you have a landline, I am judging you. Ditch it!! Likely you have a cell phone anyway. Your lan line is a false sense of security. You don't need it. Cancel it!!
Subscriptions - do you have any auto-renewal services you can cancel? Spotify? Apple music? Netflix? Magazines? Do you need these?
Bank Fees - If you have any fees associated with your banking - monthly chequing account fees, annual credit cards fees, ask for a FREE (no-fee) product by the same institution, or switch institutions for one that offers free services.
I was paying $14.95 a month and didn't even know why. When I finally inquired, I learned that it provided me with two bank drafts per month! FOR WHAT!!?? I decided to shift the majority of banking to Tangerine (ING Direct) no-fee banking. Strange to say, but there's something about Tangerine's marketing and straightforward upfront information that made (and makes) me feel like they care about me, and my ability to get ahead. A few keys Tangerine highlights:
- Not only is the offered chequing account FREE, but they provide interest too. Even though the percentage is small - I was totally excited to see a deposit into my account at the end of every month, instead of the bank making deductions instead.
- The savings account they offer offers a higher than usual interest rate and they frequently offer bonus interest rates for limited durations too.
Interest Fees & Payments - do you have loan interest or credit card interest mounting? Call your lenders and ask for a reduced interest rate. Be careful of switching products, though. As an example, a 19.99% interest credit card lender might suggest switching you to another lower interest card - while this seems like a no-brainer, there could be fees to switch, or a limited reduced interest rate with a higher rate kicking in after a probationary period. Do not do this unless you are certain you understand all the fine print details.
Review any loans - check your statements. Aside from loan interest, are there any other fees appearing alongside the interest payment? Occasionally these loans will have disability and loan protector insurance which is adding to the amount you need to repay. I've specifically asked to have these eliminated with new loans, and inevitably they end up tacked on anyway - it always takes an extra phone call to have them removed. The banks need to make their quotas - they are not going to look out for you - this is your job. I don't think loan protector insurance is worthwhile for most people - it's just making it more challenging to repay the debt.
Consider making an appointment to consolidate debts into one loan, with one payment, and with an overall lower interest rate. (this needs careful consideration, though - see Step 7 for more info).
Review the interest and fees associated with your credit card. There are too many no-fee cards to warrant paying an annual fee.
Groceries / Eating Out - this is my personal weakness. I love meeting friends out - it's a big part of my social life. Do you and your family eat out? How often? If you're not willing to give this up completely - limit the amount you go out or change the venue to a less expensive one. Most people tell me they know how much they spend in these areas. I suggest, reviewing your credit card/debit statement and adding up the prior month - include coffee, booze, snacks, and groceries. I bet it's much much more than you thought. My total for a month can be upwards of $800. Do you want that kind of money being wasted? Since food is something you can't keep for the future - do you want your hard earned cash to literally go in one end and out the other? Or, if it's that important to you, can you dial it back to get your debt repaid? Make it your priority to find some way to reduce food costs.
Taxes - a good accountant is well worth the money. Sometimes too much attention is placed on cutting out daily coffees, walking more than driving, cutting coupons, etc. but paying more tax than you truly owe can be a much more significant expense. Consider the service you receive from your accountant - is it time to find someone else who will look for ways to save you money?
Have a Mortgage? For your next renewal, dig into the interest you pay and how it's compounded. All your scrimping and saving in other areas can be essentially null and void if you're paying through-the-nose to finance your home. The interest rate can be all many people focus on - there are many other considerations to review over the life of the loan. Dig deeper for your next renewal.
Fourth: Plan and Restructure
I'll cover this more in Step 5, but for now, look one month, and one year ahead of yourself. Why do annual expenses frequently result in chaos? Take Christmas as an example. On December 26th of each year, we have 365 days to get prepped for the following year. Instead, most of us wait until December 1st, then start to panic when we realize that everything Christmas-related will have to go on a credit card, and the viscous cycle starts again.
Can you think of annual expenses that are going to inevitably creep up and wreak havoc on your finances? Can you start to put some money aside, at the very least, reducing the impact? A good way to do this is to set up another bank account so you physically separate money needed for these more unexpected expenses.
I know what you're thinking....how the h$ll am I supposed to do that when I'm buried in debt. Great question! This will be answered when we dig into budgeting in Step 4. For now, the simplest explanation is that you won't put every extra cent towards your debt because doing so can keep you in the debt cycle you're in now.
An example of an Ineffective Debt Repayment Strategy: You have $3,000 in your bank account, you have $3,000 on your credit card, so you do the responsible thing and put the $3,000 sitting in your bank account on your credit card. The bank account is now $0, and your credit card is also $0 - things are looking up. Guess what? Now you need to eat - so you do the only thing you can do, you put the meal on your credit card, then the gas, then the phone bill, and on and on and on. See why this doesn't work! It doesn't work now, and it won't work next time - there is a different way to manage money.
Fifth: Record what you cut and by how much.
Once you make your way through your expenses, write down which ones you cut and approximately how much you saved. Once you get rolling, you'll likely find additional creative ways to cut back. If you come up with something other than those listed here, will you share it?
Once completed, move to Step 4.