Couple doing finances together
Financial Literacy

Want to get on the right side of debt? These pro tips can help

The current financial climate can make it difficult to stay ahead of your bills. But by following a few simple rules, you can set yourself on much firmer footing

Couple doing finances togetherBefore looking for ways to manage debt, you need to gain a true picture of where you currently stand (Getty Images/Brothers91)

Even at the best of times, keeping on top of personal spending can be a challenge for many people. But in the current climate, which carries a high dose of inflation as well as high interest rates, it’s naturally even harder to stay on the right side of debt.

“Consumers are feeling the pinch,” says CPA Ilan Kibel, partner and senior vice-president at BDO Canada. “Soon we may see a lot of people having to do something to manage their debt, whether it’s filing for bankruptcy or submitting a consumer proposal.”

No matter what the economic future may hold, however, there are ways to keep on top of your debt before it gets out of hand. Here are some of them.


Before looking for ways to manage debt, you need to gain a true picture of where you currently stand, says CPA Richard Fillion, a financial planner and president of Rest Assured Financial Inc. And to do this, it’s helpful to prepare both a cashflow statement and a budget. The cashflow statement tracks what money is coming in and where it is going out, and the budget shows where you want your money to go in the future. “These tools have always been important but are even more so in today’s cashless society,” he says.

Of course, even the best designed budget won’t be of any use if you don’t actually compare it to your actual income and spending. “This is the toughest part,” says Kibel. “I find a lot of people prepare budgets and then throw them in their bottom drawer.”


As Fillion points out, it is important to be able to differentiate needs (food, shelter, clothing, and so on) from wants. “People often say they deserve a new car because they have never had one before, or that a new vehicle is cheaper than repairs on our current one. But no one deserves something just because they have never had it before, and it is usually not true that purchasing is cheaper than fixing. One way to make sure we really value something is to wait a few days to see if we still feel the same way about it when it is not dangled in front of us.”


People buy based on emotion rather than logic, says Kibel. “They think buying is a therapeutic tool when in the long run, it can actually be more harmful than therapeutic. That’s why it’s so important to be conscious of every buying decision you make. Otherwise, things will get even more emotional down the line when you realize that you’ve got to deal with a debt problem and don’t know where to turn. Carrying this financial burden can play havoc with your mental and physical health.”


Balances on credit cards can take 10 years or more to pay off when you make only the minimum payment. For that reason, both Fillion and Kibel say people should consider credit cards not as a replacement for debt, but as a replacement for cash. “If you know you can go home that day and pay off your purchase, then use your credit card. If you couldn’t, then don’t use it,” says Kibel.


When using financing, it’s important to add the interest costs to the cost of the item, says Fillion. “That will allow you to decide whether the purchase makes financial sense and whether you really need it at this additional cost. For example, if you buy a vehicle for $40,000 with financing at eight per cent to be paid in equal monthly payments for five years, the full cost of the vehicle will be closer to $50,000.”


For a home, you can usually pay about three times your family income (four times if you are quite certain your income will soon rise significantly), says Fillion. “This allows for potential increases in interest rates and leaves some breathing room for other needs. You should aim to pay off your house in less than 20 years even if the amortization period is for 25 years.”

For vehicles, Fillion says you should have the money in your budget to pay off any potential purchase within three years, even if it is financed for longer. “Take the cost of the vehicle divided by 36 months to see if it is affordable given your other expenses in life.”


It’s useful to review the subscriptions you pay automatically every month, and potentially get rid of some, says Kibel. “Rather than pay even $20 for something you don’t use, you could set up an automatic payment for that amount into your line of credit or other debt account. Over time, that will reduce the interest you pay.”


Many people miss out on opportunities to negotiate better deals with service providers, says Kibel. “But it doesn’t hurt to ask. For example, I recently upgraded my family cellphone plan because it saved us $100 to $150 a month over the former plan.” He adds that whenever he goes to a store, he asks for a discount. “My kids cringe when I do this, but nine times out of 10, I get the discount.”


If your high-interest debt is adding up to the point where it is getting too difficult to handle, you might want to work with a professional financial adviser to find a solution that works for you. “There are a number of options—from debt consolidation to filing a consumer proposal,” says Kibel.

Of course, if you get a handle on your finances early, you likely will never get to the point where you need to consider a debt repayment plan.

“Managing our finances responsibly can at times force us to make decisions we would rather not make,” says Fillion. “But the payoff—a worry-free financial life—is priceless.”


Listen to the latest season of the Mastering Money podcast, which touches on debt-related topics, including the state of debt in Canada and debt traps to avoid. And find out how to get on the right side of debt before it gets ahead of you.