The bank of Canada gave Canadians in debt a “gift” this past week. They gave Canadians the luxury of time.
But just how much time do we have?
It is no secret that the Canadian economy has been propped up for many years by extremely low interest rates. Canadian consumers have been buying new homes, vacation property, vehicles, and borrowing against their homes at ultra low interest rates and many are now trapped in a cycle of debt. This is all well and good when interest rates are low, but how long will that last? More importantly, will wages increase to keep pace with rising interest rates? What if there is another downturn in the Canadian economy and we see more layoffs? The golden window for paying down some of that low-interest debt is now… Literally, Now!
Cash is king! Individuals and investors who are holding cash right now can strategically deploy that cash in a lower market cycle OR focus on paying off debt. Are you locked into a fixed mortgage right now? Take advantage of those good terms and start focusing on paying off your credit card debt, lines of credit, and any debt that has a revolving interest rate. Don’t have the extra cash at your disposal to pay off those credit cards? Start cutting monthly expenses where you can. This could mean eating out less, watching your grocery spending, cutting your cell phone or internet plans – there are several ways you can free up some extra cash each month to pay off that debt.
When you reach “milestones” in your debt repayment goals, call your credit card company or bank and ask them to reduce your borrowing limit. If the money isn’t available, you simply aren’t going to spend it! This does not affect your credit rating in a negative way at all, just do it!
Think about paying your high cost debt first. Typically, this would mean paying your credit cards off prior to lines of credit. The average credit card in Canada carries an interest rate between 19.9-29% annually – ouch! While your borrowing costs on your line of credit may increase over the coming months, your credit card is not doing you any favors carrying a balance. Eliminate that balance first or consider consolidating that credit card debt to a lower cost line of credit and eliminating the credit card or lowering the available credit to a minimum amount. Have a home? Consider replacing your unsecured line of credit with a secured line of credit. A secured line of credit is basically a second mortgage on your home but will typically offer you a lower interest rate as the bank uses your home for security on the loan. Don’t let the bank talk you into a line of credit that is more than you need, either. Only borrow as much as you need to consolidate the higher interest debt and reduce the limits as you pay down the debt.
The key to financial success is not completely changing your entire lifestyle overnight. Financial success comes from making small, meaningful choices each day that have a noticeable and positive impact on your overall financial situation. Using cash instead of credit, being patient and not buying something unless you absolutely need to, paying off those high interest loans, putting some money aside for an emergency, creating a cash flow plan to help you manage your family’s finances. Consider working with an advisor to help you create a cash flow plan, and help you integrate it into a long-term financial plan.
The window of time is slowly closing!