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Financial Planning  -> Free In 30! -> Get out of debt

Get Out of Debt Now!

This is the Most Important Issue Facing Canada and Canadians Right Now.

Most developed countries in the world are increasing their spending and debt.  Most governments will not stop their excessive spending until they are forced to do so.  This happens because they cannot sell their debt (e.g., Canada Savings Bonds, Government of Canada bonds, provincial government bonds, crown corporation bonds, t-bills) without paying substantially higher interest rates .  Once they are required to pay higher interest rates they can no longer afford the interest on the debt.  Therefore, they will have to slash spending, raise taxes, or both.

Western Europe, Japan, United States and Canada are in imminent danger of having to pay higher interest rates on their debt.  This will start a downward spiral of their economies, which will lead to a recession.  Some people think parts of these economies have been in a recession since 2008.  A recession is falling Gross Domestic Product (GDP) and higher unemployment.  Governments usually try to counteract this by increasing spending and lowering short term interest rates.  Unfortunately (or fortunately), the governments will not be able to increase spending because of the debt, and interest rates can't really go much lower.  Canada and the rest of the developed countries are going down the same road as Greece, Ireland, and Portugal.  See our article on Debt in Selected Countries.

Recessions are a normal part of the business cycle, but if we go into a recession now because of sovereign debt, it may be long and nasty.  You can't really tell when a recession begins or ends until probably five years after it's over.  We entered a recession in 2008, but at this point we can't really tell if the recession ended in 2010, or if it is a double-dip recession that we are still in.

What can be done?

The most important thing you can do is reduce your debt, especially debt on which the interest is not tax-deductible.  You can also lobby your governments (federal, provincial and local) to eliminate the deficit, reduce debt, and become better managers of your money.  You can do this by contacting your Member of Parliament (MP), provincial and local government representatives.

For investors, we've added a recommended lower risk portfolio for more conservative investors.

Get out of debt and stay out of debt (this is the most important advice we can give!)

At whatever age you retire, you must own a home and be free of non- tax-deductible debt.  Otherwise, your income will be reduced, and there would be very little money left after rent and/or loan payments.  If you retire at 65 and will be relying on CPP, OAS and GIS, the maximum you will receive is about $1,550 per month for a single person, or $2,710 for a couple. This is not the time to find out that you don't have enough money to retire comfortably.  See our Seniors page to find out how much your pension will be when you retire.  If you want to retire early, or have more money when you retire at 65, you will need either savings or a pension from your employer.

If you have or plan to have children, you should try to ensure that the mortgage on your home will be paid off before your children enter university.  This will free up funds for their education.It is very important to stay out of debt until you buy a home.  Debt is the reason many people are not financially successful.  Being in debt can be very stressful, and can reduce your quality of life.

The information below will help you on the road to financial freedom.

Start saving money as young as possible.

If you are still living at home and you don't have a budget, now would be a good time to start.  You shouldn't have accumulated any debt yet, and it is easier to stay out of debt than to get out of debt.  The earlier you start saving, the easier it will be, because it will become a habit.   If you can take advantage of your parents' generosity by living cheaply at home, you can get a good head start on your financial freedom.  This will mean making an effort to live harmoniously with your parents, which should not be a problem if you look at the long term benefits.  Besides, just because your parents don't want you out drinking all night or robbing gas stations doesn't mean they are trying to spoil your fun.

Tax Tip:  Start saving early.

If you already have non-tax-deductible debt:

bullet Use your pay yourself first money to pay off non-tax-deductible debt more quickly.  Include this as part of your personal budget.
bullet Pay off your highest interest rate debt first, which would probably be your credit cards/bookie/loan shark.  All of these have very high interest rates.
bullet If you cannot pay the entire balance of your credit card at the end of the month, stop using your card and cancel it.
bullet You should only have one credit card.  If you have more than one, it is more likely that you will run up your credit card debt.  There are more bills to pay, and it is more complicated.  Figure out which card is best for you, and cancel the rest.
bullet If you have more than one credit card with a balance on it, concentrate on paying one off completely first.  Then pay off the next, and so on, until you are down to one credit card.  Don't use this card unless you are able to pay off the balance at the end of every month.
bullet Pay off any other loans that you have, paying off the higher interest rate loans first.
bullet After all your non-tax-deductible debt is paid, start saving for large purchases such as appliances, vehicle, etc., so you can pay cash for them.
bullet See our Save and Invest page once you have paid off all your non-tax-deductible debt.

If you think you are insolvent (your liabilities are greater than your assets, and you cannot meet your financial obligations as they become due), then a good resource is the Office of the Superintendent of Bankruptcy Canada.  They provide alternatives to bankruptcy, and many other resources.  One of their resources is a directory of all trustees licensed by the Office of the Superintendent of Bankruptcy.  Please note that if you are seeing ads on our site for firms which help you resolve debt problems, this does not mean that we recommend or endorse them.

Tip:  Get out of non-tax-deductible debt as quickly as possible.  See Save and Invest page and our RRSP vs Mortgage Calculator.

Be better organized / make life simpler

bullet If your pay yourself first money is going into RRSPs, have the contributions set up as automatic deductions from your payroll to be transferred directly into your RRSP.  This way you will get your tax savings immediately.
bullet If your pay yourself first money is going to pay down debt, set up automatic transfers from your chequing account.
bullet Use only one financial institution.
bullet Use only one credit card, and have your regular bill payments (electricity, gas, cable, telephone, etc.) charged to your credit card.  You will have fewer monthly payments to make.
bullet Check your credit card transactions frequently.  This can usually be done online.
bullet Do as much as possible online, reducing trips in your vehicle.
bullet Buy term life insurance instead of whole life.
bullet Don't buy RESPs.  Pay down your mortgage or build up your RRSPs instead.

Tax Tip:  Pay yourself first by payroll deduction or automatic bank transfers.

Tax Tip:  Nobody plans to fail - they just fail to plan!

Your financial plan should include the following steps:

  1. Pay yourself first!
  2. Set aside emergency funds
  3. Define your goals
  4. Personal budget
  5. Buy a home
  6. Get out of debt
  7. Save and invest

Revised: October 26, 2023


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