How to reduce debt and improve your finances

Have you been paying less towards your bills and loans recently? Maybe you’re feeling the pinch of inflation and changing interest rates. Here’s how to help you get control back.

In September 2023, Equifax Canada said credit card balances hit an all-time high of $107.4 billion in the second quarter of 2023, in a sign financial stress continued to build for Canadians in the face of inflation and rising interest rates that year.

It’s ok to pause on your savings if you’re facing an emergency or a difficult situation. But how do you get your finances back on track? To do it, you need to have clear guidelines on how to manage your debt.

To start, let’s look at the different types of debt.

2 basic types of debt

There are usually two types of debt: closed-end debt and open-end debt.

Closed-end debts include debts you need for a certain reason and for a certain period of time. This could be a mortgage, a car loan, student loan or a personal loan.

Open-end debts are sometimes called revolving debts. They’re debts you continue to borrow from until you hit a maximum limit. Examples of revolving debts include lines of credit, credit cards and equity loans.

You may be using these debts to cover essential needs, such as:

• supporting your finances if your income is down,
• managing your daily expenses,
• paying for housing,
• saving for retirement (e.g. RRSP loans),
• caring for your children, or
• caring for your aging parents.

So having some debt is normal. But it’s important to make sure you manage it.

What happens if you have too much debt?

Debt isn’t necessarily a bad thing, unless you have too much of it. Here are some risks that come with borrowing too much:

1. It’s habit-forming to the point where you rely on it too much.
2. It takes away money from other important needs.
3. It can damage your credit rating if you can’t pay the bills.
4. It can lead to high-interest payments that are harder to make.

Basically, having too much debt can leave you with: 

• bigger bills 
• a lower credit score, and 
• the inability to afford new purchases that are important to you because your budget doesn’t allow it.

What can you do to reduce your debt?

1. Make a budget and get budget counseling

If you’re trying to get your finances on track, it’s important to make a budget or review your current budget.

Looking at your budget provides a great opportunity for you to:

• review what you're spending your money on,
• separate your needs and wants, and
• set your spending priorities.

While reviewing your budget, you may find that you have some unused subscriptions you can cancel. Basically, the key is to cut back on non-essential spending. You can then place some or all of that money into something that has more priority for you.

Need help making or keeping up with your budget? Talk to a Prospr advisor for budget counselling. An advisor can help you build a roadmap that meets your financial needs and goals.

2. Consolidate your debts

Let’s say you have debts on three different credit cards. Each one has a 20% interest rate. You can call your bank and ask to consolidate all these debts into one account at a lower interest rate. This way, you’ll only have to make one monthly payment at a much lower interest rate. This can help you pay off your debt faster.

3. Talk to your bank or creditors

Shop around for the lowest interest rate. Call up your bank or creditors and ask what options they have available.

Let them know that you’re trying to reduce your debts and ask them what resources they have available to help you improve your finances. 

4. Consider a consumer proposal

Another option is a consumer proposal. Basically, this is an arrangement you make with your creditors to repay only part of your debts. You can also agree to spread the repayment over a maximum of 5 years. Or you can do both. Is this option right for you? We recommend that you talk to a specialist. They’ll be able to advise you according to your situation.

5. Get professional help from an advisor

It can be challenging to get your finances back on track, especially if you’re recovering from a difficult situation or setback. But you don’t have to do it alone. An advisor can help. They can address any financial concerns or questions you may have. They can also help you:

• find ways to reduce your debt and save more money,
• review your current financial situation,
• make well-informed financial decisions,
• create a financial roadmap  that meets your short- and long-term goals,
• revise your roadmap as your needs change,

With this support, working with an advisor can help you feel assured in times of uncertainty and avoid making emotionally driven decisions about your finances.

To get started, contact us today to book an appointment with a Prospr advisor.

This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.