Dealing with Debt
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  1. Dealing With Debt
  2. Trapped By Your Finances? How to Get Out of Debt in 3 Steps

3 Steps to Get Out of Debt when You Feel Trapped

How to get out of debt in Canada.Bad money habits can cause our finances to spin out of control, and when this happens, it may seem impossible to get out of debt. If you’re living on credit and you can’t see a way out, rest assured that there is a way turn your situation around.

Becoming debt free is a possibility for everyone; all it takes is some time and dedication to implement new financial habits. If you’ve ever wondered how to get out of debt, here are three steps you can take now that will help you get rid of debt in the future.

1) Learn How to Budget

Before you can start paying off debt you need to know why you’re in debt in the first place, and the best way to do this is to develop a budget to see where all your money is going. Are you in debt because you’re spending too much? Is it because you’re not earning enough money? Or is it a combination of both? The only way to find out is to create a budget.

A budget shows you how much money you earn and how much money you need to cover day-to-day expenses. Once you know what you have to work with, you’ll be in a better position to start making smart financial decisions.

So, start by gathering all your credit card and bank statements for the last month, so you can see what your living expenses are. Then take a blank sheet of paper (or a blank Excel spreadsheet on your computer) and write down these headings: Housing Expenses, Living Expenses, Work Expenses, Personal Expenses, and Payments. Under each of these categories, write down the amounts that you see recorded on your statements.

The next step is to add up all of your expenses from the different categories, and compare that amount to your monthly income. To find out what your monthly income is, you can use your bank statement to add up all the deposits in your bank account.

Now, when you subtract your monthly expenses from your monthly income, what number do you see? If it’s a positive amount, you’re doing a good job of living within your means, but there are probably some areas you can cut back on so you can pay off your debt more aggressively. If you see a negative amount, chances are you’re living on credit, and if this lifestyle continues, getting out of debt becomes even more challenging.

If you’re ready to start budgeting, this handy budget calculator spreadsheet can help you put together your budget.

2) Identify Your Needs and Wants

If you’re relying on credit and spending more money than you earn, it’s imperative that you learn how to separate your needs and wants. Differentiating between a “need” and a “want” is an essential money management skill, and not being able to distinguish what we “need” from what we “want” can cause some financial problems in the long run.

As its name implies, a “need” is something you need in order to go through your day-to-day living; think everyday essentials such as food, clothing and a roof over your head. On the other hand, a “want” is something you’d like to have, but isn’t necessary for you to survive; items such as designer clothing and flashy electronics fall into this category.

Although it sounds simple enough to distinguish between needs and wants, there can be some cause for confusion. For example, that daily breakfast sandwich at the drive-thru on the way to work falls into the food category, and since food is a “need,” many consumers classify this purchase as something needed, rather than wanted. This is where financial problems start to creep up, because you’re spending money you may not necessarily have on things you don’t necessarily need.

The key to separating your needs from wants is to ask yourself “Do I need this exact item in order to survive?” Do you need the breakfast sandwich to get through the day, or will a bagel and cream cheese from home do the trick? Chances are you’d get along just fine – and save a handful of money, too – if you opted for the bagel.

So, carefully go through your expenses and determine which items are truly needs, and which are wants. You’ll be surprised by how many things you buy simply because you want them, not because you need them. And once you come to this realization, you’ll be in a better position to cut back on your spending so you can pay off debt.

3) Live Below Your Means

Develop a Budget So You Can Live Below Your MeansContrary to popular belief, living below your means isn’t about pinching pennies and depriving yourself of things that bring you joy. Instead, it’s about creating a comfortable lifestyle you can afford, with money left over for you to save, invest, or put towards getting out of debt.

What’s the easiest way to live below your means? Either decrease your expenses or increase your income. Or better still, do a combination of both! If you can cut back on your expenses and increase your income simultaneously, you can make some serious progress in reversing your situation.

Once you’ve separated your needs from your wants, go through your budget and make some cuts, starting with your wants. Early morning coffee runs on the way to work? Cut. Eating out for lunch three times a week? Cut. Going to the movies every weekend? Cut. If you cut back a small amount in a few areas, you’ll be surprised by how much money you can free up, which you can put towards your debt.

When you’re making these cutbacks, you can replace them with more frugal alternatives. For example, you can brew your own coffee at home and take it with you in a thermos, cook larger portions at dinner and pack up leftovers for your lunch the next day, and organize a games night with friends. Here are more frugal living ideas that will help you slash your spending and save more money.

If you’ve trimmed the fat from your budget and you notice that you’re not saving as much money as you’d hope, you can start to look at ways to increase your income. You could look for a new job or ask your current employer for a raise, or you could even take on a second job if you can spare some time over the evenings and weekends. If you have an extra room in your home you can rent it out, and if you’re crafty you can sell your handmade items on Etsy or at craft fairs.

However you choose to free up existing income or generate more income, it’s important that you refrain from using your extra income to improve your lifestyle until you’ve put together a get out of debt plan and successfully paid off your debts. Living below your means and paying off your debt isn’t going to be quick and easy. It took a while to get into debt, and it’ll take just as long – if not longer – to get back out.

Take Action to Get Out of Debt

As the old saying goes, if you do what you’ve always done, you’ll get what you’ve always had. And when it comes to finances, nothing could be further from the truth.  If you spend like you always have, you won’t see an improvement in your financial situation and more often than not, it’ll be much more difficult to get out of debt because of the accruing interest charges.

If you’re starting to feel trapped by your finances, it’s time to take action. The three steps we’ve outlined above are a good starting off point, but if you need further guidance on how to pay off debt, getting debt help from an accredited, non-profit credit counsellor is the best thing you can do for yourself, and for your finances. In a credit counselling session, our counsellors will go through your finances with you, help you build a budget, and they’ll also present you with your available options so you can become debt-free.


How to Get Out of Debt in Canada

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Worried about debt?

Get help to overcome it.

The sooner you start dealing with your debt, the sooner you see an improvement in your credit report If you need some help getting started with a plan, or if you’re not sure if your budget is realistic, contact a non-profit credit counsellor for free, confidential help. Typically, the earlier you contact us, the more options you’ll have.

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