As mentioned in another posting, with all signs pointing to interest rates going up by mid-May, this is yet another strong reason for paying down even more of your debt this year. Setting a budget and making debt-repayment a priority this year will help you gain a better foundation for managing your finances with higher rates on the horizon. Overall, this can help you make the most of this new year and remain financially-focused in 2015.
The first step towards planning to pay down your debt is to gain a better perspective on what you should be spending your money on this year – and on the other hand, what perhaps where and when you shouldn’t be spending. While this can be easier said than done, there are some debt-planning stages that could help you understand which expenses should be made a priority.
Tracking your Costs – Your Foundation of your Budget
You can start by tracking all of your current expenses. While some will be more of a priority than others, mortgage, insurance, utilities, credit card payments, car payments, for example, others can be considered ‘variable expenses, such as travel, entertainment, restaurant meals, etc.
Designing your Budget
This is where you will look back at the previous year’s expenses, and try to cut out some of these to reduce your unnecessary costs. Being realistic is key to this approach, as there will be some bills you simply can’t avoid paying, however others you will need to sacrifice in order to improve your cash flow and pay off more debt.
Choosing a Payoff Strategy
If we are focusing again here on paying down your credit card debt, which may be the loans with the highest interest rates then you will choose a strategy that will enable you to pay off your debt with a higher degree of efficiency. Two of the more common credit card payment-payoff methods, include focusing on the higher interest rates first versus choosing to pay off more of the smaller debts/lower interest rated loans first. The benefit to this second strategy is that it can give you the momentum to continue paying down your debt with more consistency and faster, yet smaller results.
With that being said, the first approach is probably the more effective option in many cases, since you can unload the higher debt with the highest interest rates first, so that you can get out from under the worst of the debt first. The longer your higher debts stay active, this means that they will grow, and the culprit here is in the form of the ongoing interest charges.
Tracking your Progress
Lastly, you should track your progress, aka keep an eye on your spending. You can use calendar reminders to help you track your finances. Keeping on top of your spending can start with the beginning of the month, noting how much of a balance you start with and checking in every few days to see where your balance is and what you have been spending your money on, etc. If you notice you have gone off track at some point, the early you notice this the better. Then before things get too bad, you can regain your composure and try to improve your spending choices, as you go.
Bringing it back to the 2015 interest rate hike – here are some suggestions as to when and where you should be spending your money and other expenditures you may want to avoid at this time.
1) Paying Down Your Debt
As previously mentioned, paying down your debts should be a financial priority. While you may be tempted to make more purchases before the rates go up, instead try using your funds to unload your debts instead. While the rates are lower, it may be a lot wiser to pursue your debt payments more aggressively. For example, you could use your money to make a lump sum payment off of your mortgage or credit card or line of credit. This payment will then go right off your principal balance, and in turn lower your interest charges. This can be a great way to save yourself some interest in the future, because when your interest rate goes up, your balance will be lower and more manageable.
2) Avoid Rushing to Buy a Home
While, technically this is considered a ‘don’t’ when it comes to how you should spend your money this year – it still is an important part of your financial decisions this year. Again, some people may feel that they should rush into buying a home before interest rates goes up, however many experts actually argue against this. Instead, it is necessary to look at the values of homes over time. Many signs point the high interest rates, also correcting the value of homes. If Canadians want to enter the house market too soon to beat the interest hike, they may notice down the line that the value of their home may have dropped significantly. If they have not taken their time to make sure it is the best options for them at that time they may not find themselves in a financially sound situation.
3) Watching for Sales and Discounts
While these last points are always an important part of any basic spending plan, they can help you still maintain your lifestyle, while also being able to pay down your debts. There are always going to be items you require and some that are considered more of a ‘want’. It doesn’t have to be one or the other. You can watch for sales and discounts for items that fall into both categories. Coupons and generic brands can help with your food and household shopping costs and for other purchases, sales and discounts can help you save money. As a part of this strategy you can also make smarter purchases.
4) Research and Think Through Your Purchases
Making a grocery list can prevent you from buying unnecessary items and this can apply for other areas of shopping too. Being prepared can also stop you from making impulse purchases, where fancy marketing tools and flashy advertisements are meant to entice you. Researching items and products, such as larger purchases can also help you to make wiser spending decisions. Research can also help deter you from making purchases, if you learn more about a product and find out it is not the right product to buy at this time – or at all.
While these last two points can apply to a variety of spending categories, they can help you decide what specific items you should and can spend your money on. Since purchases are unique to individuals, then implementing these strategies into your own personal spending behaviours can help you manage your debt and prioritize which of the ‘variable expenses’ are more important than others. Better yet, if you rely on discounts and sales, you can still include some of these in your life from time to time, yet not fall further into debt. Ultimately, paying off your bills should be your main focus. With 2015 only just begun, you can start off on the right foot and improve your financial situation throughout the entire year.
