Current State of Debt in Canada
Inflation is booming, and the number of Canadians with debt is rising. According to Advisorsavvy, about two-thirds of Canadian families have debt, a significant figure considering the country’s population. The average Canadian carries approximately $21,000 in debt, and this amount is currently increasing year over year.
It feels like a never-ending cycle. You pay your dues, but new bills always seem to appear. It can leave you wondering, “Will there ever be an end to this?” This is why choosing a strategy to pay off your debt is crucial. It can save you money in the long run by helping you prioritize which debts to tackle first, considering factors like interest rates, balance size, and repayment terms.
There are two best ways to pay off debt in Canada. The reason why these two are more popular is their simplicity and effectiveness, and these are the Debt Snowball Method and the Debt Avalanche Method.
The Debt Snowball Method
In the battle against debt, conventional wisdom often screams at you to prioritize high-interest debts first. But the Debt Snowball method takes a different, surprisingly effective approach: crushing the smallest balances first, regardless of their interest rates. Why? It’s all about the power of momentum and motivation.
The debt snowball method is popular for paying off debt in Canada. It involves paying off your debts starting from the smallest amounts, regardless of their interest rates. This is an effective strategy because it helps you build momentum and motivation as you see the results of your efforts in decreasing debt balances. As you pay off the smaller debts, you gain a sense of accomplishment and motivation to keep going until all your debts are paid off. This approach is more straightforward and prioritizes the more manageable tasks first.
To use this method for repaying your debt, you need to organize your outstanding debts from the smallest to the most significant amount. To begin with, focus on paying off the debt with the smallest balance first. then move on to larger debts. This strategy makes the process more manageable and helps build momentum, making your journey towards a debt-free life more effective and satisfying.
How to do it
To illustrate the Debt Snowball Method, imagine you have three debts: a $500 credit card balance, a $1,200 personal loan, and an $800 medical bill.
Start by making the minimum payments on all debts, such as $25 for the credit card, $50 for the personal loan, and $40 for the medical bill.
Now, if you have an extra $100 each month, apply that extra amount to the smallest debt – in this case, the $500 credit card balance. Your new total payment for the credit card becomes $125 monthly.
As you successfully pay off the smallest debt, you can redirect the $125 to the next smallest debt, say the $1,200 personal loan, making the total payment $175 monthly. Repeat this process, rolling over the funds from paid-off debts to the next one, until you achieve the goal of becoming debt-free.
Pros of the Debt Snowball Method
The Debt Snowball Method offers two key advantages: simplicity and motivation. Its straightforward approach involves listing debts from smallest to largest, making it easy to implement.
It simplifies debt repayment and boosts motivation by providing tangible victories with each debt paid off, triggering a dopamine rush that fuels the desire to keep going. The emotional payoff of paying off debt is also significant, increasing confidence and giving a sense of control over one’s financial future.
This beginner-friendly method prioritizes psychological impact and is ideal for those lacking motivation or dealing with high-interest debts.
Cons of the Debt Snowball Method
While the Debt Snowball Method has its benefits, it comes with drawbacks. The Snowball method focuses on small debts first which may lead larger high-interest debts to be ignored. This can lead to paying more in total interest than other strategies like the Debt Avalanche.
The method might only sometimes be the fastest path to debt freedom, especially for larger debts. While seeing quick wins fuels motivation, the slow and steady approach of the snowball method can be outpaced by the avalanche’s laser focus on high-interest targets. Conquering small debts can create a false sense of achievement and lead to complacency.
Additionally, this method might result in a longer repayment time compared to strategies like the Debt Avalanche, which prioritizes higher-interest debts. It’s important for you to consider these factors when choosing a debt repayment strategy.
The Debt Avalanche Method
Another popular method is the Debt Avalanche Method, which focuses more on your debts that have high-interest rates. The Debt Avalanche Method is a simple debt repayment strategy where you prioritize paying off debts with the highest interest rates first. Instead of focusing on the size of the debt, you tackle the ones that are costing you the most in interest.
It is effective because it helps you prioritize which debt you should pay first in order to save money on interest. By doing so, you minimize the overall interest you’ll pay, saving money in the long term.
By doing this, you can potentially save more money in the long run.
How to do it
Imagine you have three debts: a $2,000 credit card balance with an 17% interest rate, a $3,500 personal loan at 12%, and a $5,000 student loan at 8%.
Using the Debt Avalanche Method, you start by organizing these debts based on their interest rates, from highest to lowest.
The focus is on paying off the credit card first, as it has the highest interest rate. Allocate any extra funds you have towards the credit card while making minimum payments on the personal loan and student loan. Once the credit card is cleared, you redirect the funds to the next highest-interest debt, the personal loan, and then to the student loan. This approach systematically targets the most expensive debts in terms of interest rates, helping you minimize overall interest costs and accelerate your journey to becoming debt-free.
Pros of the Debt Avalanche Method
The Debt Avalanche Method is another way to pay off debt in Canada. It offers distinct advantages that can benefit your debt repayment strategy. First, it provides substantial cost savings. By prioritizing the repayment of high-interest debts, you have the potential to save significantly on interest charges over time. This strategic approach aims to tackle the most expensive debts first, minimizing the overall cost of borrowing.
Additionally, the Debt Avalanche Method enables a faster payoff compared to alternative methods such as the Snowball Method. By strategically focusing on high-interest debts, you can expedite the repayment process, potentially clearing all your debts in a more efficient manner. Overall, the Debt Avalanche Method is a powerful tool for those looking to minimize interest costs.
Cons of the Debt Avalanche Method
The Debt Avalanche Method, while effective, has a couple of drawbacks to consider. First, it may be less motivating compared to other methods like the Debt Snowball. Since the focus is on high-interest debts, which might be larger, visible progress and small wins might occur less frequently, potentially impacting motivation.
Second, the Debt Avalanche Method requires a high level of discipline. Sticking to the plan and avoiding the accrual of new debt is crucial for success. This approach demands consistent adherence to the strategy, which could be challenging for individuals who may find it difficult to maintain strict financial discipline over an extended period.
Choosing the Right Method for You
Choosing the best debt repayment method depends on several factors tailored to your unique situation. Consider the following factors:
How Much You Owe:
- If you have small debts, it might be good to focus on paying off the smallest ones first for a quick sense of accomplishment.
- If you have big debts, it could be better to focus on the ones with the highest interest rates to save more money in the long run.
Interest Rates:
- If some of your debts have really high-interest rates, it might make sense to tackle those first.
How You Feel and What Keeps You Going:
- If you like seeing results quickly, start with the smaller debts. It can be motivating.
- If you’re good at sticking to plans and want to save more money over time, focus on the high-interest debts.
Your Money Goals:
- If you want to get rid of debt quickly, start with the smaller ones.
- If you want to save money in the long term, focus on the high-interest debts.
Additional Tips for Debt Management
Creating and sticking to a budget means making a plan for your money. It helps you see how much you earn and spend, allowing you to set aside money to pay off debts. This plan also prevents you from taking on new debt by keeping your spending in check.
Think of it as a roadmap for your money, guiding you to financial goals like getting rid of debt. Here are additional tips for managing debt:
Create a Budget:
- Make a plan for your money – figure out your income and expenses. This helps you set aside money to pay off debt and avoid getting into more debt.
Increase Income:
- Find ways to make more money, like getting a part-time job or asking for a raise at your current job. This extra cash can help you pay off your debts faster.
Seek Professional Help:
- If you’re struggling with your debts, asking for help is okay. Talk to a professional to get advice on managing your debts better. They can help you come up with a plan.
Conclusion
Remember that the Debt Avalanche Method focuses on paying off high-interest debts first, saving money in the long run. On the other hand, the Debt Snowball Method starts with smaller debts for quick wins and motivation. The key is to choose the method that suits your goals and personality.
For further assistance and tools, here are some helpful resources:
Regardless of your chosen method, taking that first step to tackle your debts is crucial. Start today and stay committed to your plan.
Citations
- Amos, S.: What is the average debt in Canada?, https://advisorsavvy.com/average-debt-canada/
