Using debt wisely

November 28, 2019

By Kelley Keehn, award-winning author, personal finance educator and consumer advocate for the Financial Planning Standards Council

DEBT. It's a four-letter word that we can't avoid in modern society.  For most Canadians, if you'd like to go to university, buy a home, a car or a laptop, borrowing the money will get you there quicker than traditional saving.  That doesn't sound like a bad thing, right?  And it doesn't have to be.  But it depends greatly on what type of debt you have, how you're using it, and how you plan to pay it off.

Many Canadians I speak with have two major emotions when it comes to their debt: fear or apathy.  They're either terrified of owing money, or they'd prefer to ignore their debt, and not really look at the double-digit interest rates on their credit cards.

Albert Einstein was quoted as saying, “compound interest should be the eighth wonder of the world.” Indeed, it is a magical thing.  The problem, though, is that when you borrow money, compound interest is not working in your favour, but rather, that of the bank or credit card company.  

Money is the #1 cause of stress

According to FP Canada, Canadians are losing sleep over money more than ever.  FP Canada’s 2018 survey found that 41% of Canadians say that money is their number-one source of stress, more than health, work and relationships.  

The bad news

Right now, the average Canadian is carrying a credit card balance of $4,000, while 56% do pay off their balances every month.  If you find yourself with that balance on a high interest rate credit card of say 29% and only pay the minimum payment ($120 a month), it will take you a shocking 41 years to pay it off – with more than $15,500 in interest payments.  No wonder most people would just prefer to overlook their situation! 

The great news

Here's where math and compound interest get fun. You don't have to be good at arithmetic.  FCAC's Financial Goal Calculator will do all the number-crunching for you.

What if, in the above example, you found an extra $5 a month to pay down on your credit card balance?  What would such a small amount do?  It would cut the time to pay it off in half, and save you more than $4,000! But it would still take you more than 22 years to pay it off.

Now, what if you could bump your monthly payment up to $200?  That's less than a few extra dollars a day.  That small amount adds up to a whopping saving of $14,000 (over what you would have paid by just paying the minimum) and, the really exciting part?  You'd have that credit paid off in just two years and four months.  That's something to get excited about!

Tip:  Take time to make a list of all of your debts, their payment dates, and interest rates.  You can work with your banker, non-profit credit counsellor or Certified Financial Planner to create a plan to consolidate your debts, negotiate a better interest rate, or simply pay them off sooner by making a budget and repayment plan.

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