How to Manage Debt When Living Paycheque to Paycheque

There’s no denying that the cost of living in Canada has risen dramatically in recent years.?Inflation has soared, driving up the cost of food, fuel, rent, and other necessities. Supply chain disruptions brought on by the pandemic have created shortages, further driving up prices. And interest rates are at levels not seen in decades, leaving borrowers struggling with steep debt payments.??

As a result, more and more Canadians are finding it more?challenging to stay afloat financially. As living costs rise and squeeze budgets, households must increasingly rely on high-interest debt to make ends meet. These include credit cards, lines of credit, and payday loans. And while these loans provide immediate financial relief, they can also contribute to greater debt problems down the road.?

Economic conditions will gradually improve over time. But it’s impossible to predict when. For this reason, being proactive and doing what you can to weather the storm is wise.??

In this article, we’ll outline some strategies you can employ to effectively manage your debt when living paycheque to paycheque.?

The four areas you need to optimize to avoid a dangerous debt cycle?

To effectively deal with debt on a stretched budget, you must make strategic adjustments in these four areas:?

1. Cash flow management. Time your expenditures with your income to avoid running out of money.?
2. Debt management. Employ a sound method to handle your existing debt and work to pay it down over time.?
3. Expense management. Readjust your lifestyle and spending habits to free up more money.?
4. Income management. Find ways to earn more money and ensure you always have at least one income source.?

Let’s explore each in detail.?

Cash flow management: timing your bill payments strategically?

Many people habitually pay all of their bills once a month. This isn’t surprising, as spreading payments over multiple dates is cumbersome. And most people aren’t enthusiastic about parting with their money early!?

However, the main issue with this method is you risk having insufficient funds in your bank account to cover all your financial obligations. Suppose you overspent during the first half of the month. In that case, you may find yourself in a situation where you must decide between paying your utility bill and line of credit by the end of the month.?

There’s a better way to handle your bills than paying them once a month: pay them when you get paid. In other words, match your cash inflows with your cash outflows. This approach to money management is called the?budget-by-paycheque method?and it has several benefits:?

• You don’t need to monitor your spending as closely?
• You won’t pay late, which can hurt your credit score?
• You reduce the risk of your bank account going into overdraft, resulting in additional fees and interest charges?
• You won’t have to resort to costly payday loans to cover periodic cash shortfalls?

For example, you pay $350 per month for utilities. Your employer pays you bi-weekly. The old-fashioned way would be to pay the entire $350 at once.?

However, your bank account could be empty when the due date arrives. And you’ll be desperately scrambling for cash to ensure you pay on time.?

A better option is to split the bill in half: pay $175 near the middle of the month and the remaining $175 at the end. Since you receive a paycheque every two weeks, there’s less chance you’ll be short on the money needed to cover the expense.?

In addition to bills, you can apply this strategy to your debt payments and savings. Instead of paying your credit card monthly, pay weekly or every two weeks. If you have a savings account, make weekly or bi-weekly deposits.?

Debt management: using proven strategies to consistently reduce your debt?

These three tips will help you properly manage your debts on a tight budget:?

1. Avoid taking on more debt?

As long as the annual inflation rate is higher than your yearly wage increase (assuming you get one in the first place), your living costs will remain elevated. As a result, the temptation to cover any shortfalls by taking on additional debt will always linger in the back of your mind.?

However, turning to high-interest debt like credit cards and payday loans will exacerbate the problem.??

Given the danger of relying heavily on debt to cover living costs, you should opt for cash as your preferred payment method. Avoid adding further high-interest debt to your balance sheet – focus on paying down your current debt.?

Credit cards charge interest daily and typically at double-digit rates. Interest charges will accumulate rapidly if you routinely carry a balance on your account. As time passes, you’ll have to dedicate more and more money to your credit card, leading you further down a debt cycle that will become increasingly difficult to escape.?

In addition, carrying an excessively high credit card and line of credit balance will impair your credit score. Credit utilization measures the revolving debt you owe relative to your credit limit. The higher the ratio, the lower your credit score.?

2. Follow a sound debt reduction plan??

Besides avoiding going deeper into debt, working to shrink it is equally important. But you will only make meaningful progress if you implement and commit to a sound plan.?

So, how do you go about chipping away at your debt obligations??

One tried and true method is the debt avalanche, which prioritizes the payment of loans with the highest interest rates.?

The logic behind the debt avalanche is simple: high-interest debt grows the fastest, making it challenging to pay down. Therefore, the quicker you repay the balance, the less interest you’ll pay overtime, and the smaller your payments will be overall.?

Here’s how it works in practice:?

1. List the types of debt you owe, the current balance, interest rates, and minimum monthly payments.?
2. Sort your list from the highest interest rates to the lowest interest rates.?
3. Determine how much extra income you can allocate each month to pay off your debts after covering each minimum payment (we’ll explain later why paying the minimum is crucial).?
4. Apply the extra income toward your highest-interest rate debt each payment period.?
5. Once you have repaid the highest-interest rate debt, focus on your next-highest interest-rate debt.?

Another debt reduction strategy is the debt snowball. In contrast to the debt avalanche, the debt snowball focuses on debts with the lowest balance first, working your way up to the one with the largest balance.?

The debt snowball is ideal if you’re intimidated by how much you owe. By tackling the smallest loan first, you can gradually overcome your anxiety as you make quick wins. With each balance you pay off, you’ll gain greater confidence in reducing your debt burden.?

3. Always pay the minimum amount required?

Some types of debt require a?minimum monthly payment. You must pay this amount each month for your account to remain in good standing with your lender. It applies to revolving debts like credit cards and lines of credit.?

Lenders calculate the minimum payment as a small percentage of your total balance, typically around 2% – 3%. They may also set a fixed-dollar amount.?

Whatever method your lender uses, ensure you pay the minimum amount by your due date without fail. If you do, your lender will deem your payment to have been paid on time. But if not, they will record it as being late.?

Each instance of a late payment will appear on your credit report, harming your credit score and making it harder for you to qualify for future loans. And since your payment history constitutes 35% of your credit score, the damage can be significant if you continually miss minimum payments.?

Expense management: cutting costs and making wise spending choices?

When rising inflation and interest rates push the cost of living higher, you must be?conscious of your spending patterns. You’ll need to look for creative ways to slash costs and revamp your lifestyle to cover your debt obligations.?

Here are some tips to keep for keeping your day-to-day costs low when living paycheque to paycheque:?

1. Cut back on discretionary spending?

Reducing the money you spend on your wants rather than needs isn’t always easy – or fun. But it’s essential if you’re serious about managing your debts and non-negotiable living costs, like groceries and rent.?

You’ll have to find cheaper alternatives for specific items and services in your current budget. In some cases, you may have to discard them altogether. And while making such decisions can be disheartening, sometimes, you may discover that you’re just as content and happy without them.??

Are you currently paying for a streaming service you barely use? If so, login into your account and cancel it. If there’s a show you want to binge-watch, consider visiting a friend’s house and watching it there instead.??

When shopping for clothes, skip the retail outlets and go to a second-hand or discount store. Sometimes, you can find the same items but at deeply discounted prices. Also, make it a habit to shop only during massive sales.?

When you visit the grocery store, fill your cart bag with the essentials: eggs, bread, butter, meat, fruits, and vegetables. Avoid all or most junk food to save money. And buy in bulk when you can.?

2. Negotiate your bills?

Not all prices are set in stone. If you can, seek out ways to find better deals on some of your recurring costs. You may be drastically overpaying and not know it.?

Examples of services where you can negotiate a lower rate include your cell phone, cable, and internet plans. You can also secure lower premiums on your car insurance and home insurance policies.?

Here are some quick tips for landing better deals:?

• Research what your current provider’s competitors offer – ask if they’d be willing to match or beat their rates.?
• Leverage the loyal customer angle if you’ve been with your service provider for three or four years – your service provider will be more willing to offer you a lower rate than let you go.?
• One of the best times to negotiate a new rate is when your promotional offers end (typically after one or two years after you signed up for the service).?
• Be on the lookout for special deals during Boxing Day.?

3. Stay in rather than go out?

When looking for ways to trim your budget, one lifestyle shift you can employ is to be more of a homebody. Typically, people spend more money when they go out than stay at home. As a result, you can save considerable money on food, entertainment, and transportation.?

Here are some ways you can stretch your budget further by staying in:?

• Rent a movie on a streaming service instead of visiting the cinema?
• Prepare a meal at home instead of ordering takeout or dining at a restaurant.?
• Brew your coffee each morning rather than heading to a coffee shop to get one.?
• Have a party at your home – invite people over and ask everyone to pitch in by bringing drinks and snacks?

Another activity you may consider doing from home is your job. Obviously, only some have the luxury of setting up a home office, and your line of work may preclude you from this work arrangement in the first place. But working from home is a great way to save money on gas, lunchtime meals, dry cleaning for your clothes, and other costs.?

4. Go digital with your banking needs?

Online banks have been growing in popularity in Canada in recent years. And while not as established and reputable as the Big Five and offering fewer services, these digital banks have at least one advantage: lower or non-existent banking fees.?

It’s not uncommon for some traditional banks to charge packages to charge as much as $17 per month for a chequing account. You can easily save this money if you digitize your banking needs.?

Consider transferring your money to one of the following online banks to get a low or zero-fee chequing/savings account:?

• Tangerine?
• Simplii Financial?
• EQ Bank ?

In addition, you should explore getting a high-interest prepaid debit card. Not only do these accounts charge little or no fees, but you’ll have the ability to earn interest on your balance. Some also allow you to collect rewards points like you would with a credit card. Here are two great options to explore:?

• Koho?
• Neo Financial?

5. Build an emergency fund?

A nightmare scenario for someone living paycheque to paycheque is a significant, unforeseen expense, such as a car repair bill.??

The solution: begin setting aside a portion of your income, even a tiny amount, toward an emergency savings account. You’ll only use this money to cover unexpected expenses – never everyday costs like groceries and electricity bills.??

With a healthy cash reserve available when needed, you won’t need to resort to credit cards, payday loans, and other high-interest debt to cover emergency bills.?

Income management: earning extra money and protecting yourself against a job loss?

If you were to lose your job while barely scraping by, the financial consequences could be severe. You’ll instantly fall behind on your debt payments and bills. And the more payment deadlines you miss, the more interest will amass, and your credit score will erode. Eventually, you may default on your debts.?

The solution: look to boost your income with a side hustle. While this solution is only feasible for some, it’s become the norm across Canada. More and more people earn extra from a side gig to ensure they generate enough money to cover their living expenses.?

Do you have any skills or hobbies that people may find valuable??If so, seeing if you can use them to earn a second income is worthwhile. This can be anything from delivering meals through Uber Eats, walking dogs in your local neighbourhood, or doing freelance graphic design work through platforms like Fiverr.?

A part-time job is a similar option, and for some, much more reliable and hassle-free – you don’t need to look for customers constantly.??

However, it’s worth noting that a home-based freelance gig allows you greater flexibility and more income potential. Plus, you can?deduct a portion of your household’s bills?on your tax return.?

How to deal with debt that becomes too much to handle?

If you cannot deal with your debt obligations after following the above tips and strategies, there’s no shame in reaching out for help. Covering day-to-day expenses when you’re living paycheque to paycheque is stressful enough. It’s even more so when you add debt into the mix.??

The sooner you tackle your debts, the easier it will be to rebuild your financial house. It’s for this reason you should arrange for a free consultation with a?Licensed Insolvency Trustee?(LIT) to find a workable solution that aligns with your goals and needs.?

One debt relief solution you may qualify for is a?consumer proposal. This federally administered program allows you to discharge a considerable chunk of your unsecured debts (credit cards, payday loans, etc) and combine what’s left into a single loan. You’ll then make one monthly payment for up to five years to settle your remaining balance – and you won’t have to pay a dollar in interest.?

A consumer proposal is tailored to fit your budget and doesn’t require you to give up your assets. And it’s a legally binding agreement between you and your creditors, which means they can never freeze your bank account, bombard you with collections calls, or?garnish your wages.?

Other solutions you can explore with your LIT include?debt consolidation?and?bankruptcy.??

When you’re ready to start your journey toward financial freedom,?contact us, and we’ll help you kickstart the process. We’ll be with you every step of the way as you work to regain control of your money – and your life.??