Unfortunately, household debt in Toronto and across Canada is very high. In many regions, debt is at record levels. Having a high level of debt can leave you in trouble, especially if you suffer a job loss or emergency that requires you to spend a great deal of money. Other factors that can put people into positions where they cannot meet their debt obligations include illnesses, home repairs and accidents as well as marital problems like divorce and separation.
It can sometimes seem as though living debt free in Toronto is impossible. However, that doesn’t have to be the case.
So how can you become debt free?
Getting Debt Free
The first step to getting debt free is to do a detailed examination of your household budget. You’ll need to make sure that you know exactly how much you earn after tax in order to start the process. Then you should list the amount you spend on all of your expenses.
In general, people have two different type of expenses:
- fixed expenses and
- discretionary expenses.
Fixed expenses are the ones you can’t change and therefore must pay (rent or mortgage payments, car loans, credit card payments, etc.)
Make sure you list exactly what you owe on each loan and take note of the different interest rates on each loan as well as well as the monthly payments you make. This analysis will allow you to determine whether you have any reasonable chance of significantly reducing your loans.
You’ll then need to look at your discretionary spending. This includes groceries, eating out, clothing, vacations, entertainment and any other expenses. Take some time and figure out if you can reduce any of these expenses. If you can, see if you can reduce your spending enough that you can end up on a path towards being debt free.
However, if after you reduce your discretionary spending to the minimum, you still find that you can’t significantly reduce you non-mortgage debt, then you will need to look at other options.
Some common options for becoming debt free include: debt consolidation, credit counseling, debt settlement, consumer proposal and bankruptcy. These options all have their own advantages and disadvantages. You can read more about pros and cons of consumer proposal.
Staying Debt Free
Once you’ve managed to become debt free by following any of the methods listed above, your next goal is to stay debt free. Toronto can be an expensive city to live in, but you don’t have to go into debt to live in this city. However, you do need to do some planning.
Your plan should start with looking back to the household budget you made earlier. Take a look at your after-tax income, minus your fixed expenses and then see how much you have left over. The key to staying debt free is to only spend as much as you make (or less!) If you can, you’ll want to put some extra money away just in case. These savings can help you a great deal if you lose a job or run into any other trouble in the future.