A repayment strategy is the fastest way to get rid of debt
In July, Zandile Chiwanza blew up a bottle of champagne and called her friends to celebrate a milestone: she had just finished paying off around $ 50,000 in debt.
Chiwanza, a 30-year-old personal finance journalist and financial wellness educator in Toronto, owed about $ 7,000 in payday loans, $ 5,000 in credit card debt, $ 12,500 on a line of credit, 5 $ 500 in personal loans from friends and family and $ 20,000 in remaining tuition that had been sent to a collection agency.
Most of this debt had been accumulated to pay for a Bachelor of Journalism degree from Carleton University in Ottawa, which she obtained in 2016. As an international student, Chiwanza was not eligible for the Ontario Assistance Program. to students and had to use high interest debt to cover his tuition and cost of living.
“Throughout school, I always worked at least two jobs to make ends meet,” Chiwanza said. “After I graduated, in order to speed up my debt repayment, I took one full-time job and two part-time jobs. Last year, I was also self-employed to earn more money… it was exhausting. “
For millennials and Gen Z Canadians with four or five-figure debt, paying it off can be incredibly difficult due to a lack of cash, said Jessica Moorhouse, CEO of MoorMoney Media Inc.
For those graduates fortunate enough to land a decent job out of school, the high monthly payments and current cost of living don’t leave much money to put in for retirement, a down payment for a house, a trip or something.
“You are really limited in this cycle of paying your bills and your debts and not really being able to see a change in terms of your net worth,” Moorhouse said.
“It can be very easy to lose focus and motivation, which is why a lot of people start with college debt and then take on consumer debt,” she added. “It’s kind of like dieting too long. It’s not sustainable, so ultimately you kind of want to break that diet and go wild.”
Emergency expenses and necessities such as furniture and electronics can also lead to additional consumer debt, as many people who pay off student debt do not have the extra cash or emergency funds. . Moorhouse cautions young people to always favor an emergency fund, even if it only covers three months of expenses.
Chiwanza had previously suspended the creation of an emergency fund, but realized during the pandemic that she had to readjust her budget to prioritize savings. “I basically put my debt journey on hold and was just making minimum payments,” she said. “Back when I was [dreading extending my debt repayment plan] but it turned out that I now have an emergency fund and have debt charges and that is way more than I had originally planned to do. “
Chiwanza’s strategy to pay off the debt as quickly as possible was to treat it like a bill. “It wasn’t an afterthought after my fixed expenses, and at one point 40 percent of my income was going into debt,” she said. Any additional income that she has earned through bonuses, tax returns, or gifts, she has invested to get into debt. “Money is the greatest gift of all,” she added.
Chiwanza also made it a priority to pay off her most emotionally trying debt – her tuition fees. The monthly calls from the collection agency were causing anxiety, and Carleton University would not provide her diploma or transcripts without that money being refunded. The inability to access her degree also prevented her from applying for permanent residence at the time.
After paying her school fees, she adopted the debt avalanche strategy. With this method, you target the debt with the highest interest rate first, while making minimum payments on other debts.
Another commonly used strategy is the debt snowball method, where you pay off your smallest debt first and follow the minimum payments on the rest of your debts.
From a financial standpoint, the debt avalanche approach makes the most sense because you pay off your most expensive debts first, Moorhouse said, but many people choose the snowball approach. debt because it helps build motivation and momentum.
One of Chiwanza’s debt repayment tactics was to consolidate her debt and lower the interest rates on her credit card. However, she was unable to reduce her interest rates until she obtained permanent residence.
“I would say if you have a high interest rate debt, contact your lender to negotiate your interest or ask for help. You need to know your options. In my experience, a financial advisor at the bank has me. helped get a lower interest rate. I would never have known if I hadn’t asked. “
Chiwanza’s advice to other young people who are repaying their debts is not to be too hard on yourself.
“I think there were parts of my journey where I punished myself for this debt because I saw a lot of shame on the people in debt within the personal finance community. People were saying if you are in debt. , you can’t eat out or enjoy life, ”she said.
“Be compassionate and make your own plan based on your goals. “
This report by The Canadian Press was first published on August 24, 2021.
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