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how to manage your debt

For some, debt is the most feared four-letter word in the English language. And most of us dream of a debt-free life. Truth be told, few people have the luxury of living without taking on some debt, whether it be a mortgage, car loan or a line of credit. The trick is choosing your debt wisely, and making sure it's not essential to your survival.

One misconception is that all debt is "bad". If fact, there is such a thing as "good" debt, usually defined as money used to buy things that are likely to go up in value or appreciate. Examples include taking out a mortgage to buy a home or borrowing to start your own business. Each of these results in potential returns, whether in a higher resale value or a successful business.

That said, there are ways to optimize your "good" debt, minimize your "bad" debt — money used for things that depreciate — and focus on lowering your overall debt load:

Budget, budget, budget. Understanding your monthly financial commitments is the important first step in debt management. A budget can help you monitor — and lower — your regular expenses.
Reduce the amount you owe. For example, instead of buying yourself a "treat" with your tax refund, use the money to pay down your existing debt. By reducing — or, better yet, eliminating — the principal you owe on your credit cards or line of credit, you'll also decrease your monthly payments.
Consolidate your existing debt. If you're carrying a lot of debt, chances are you owe a number of different financial institutions or people. And you're probably paying a relatively high interest rate on at least some of that debt, leaving you less money to pay off the principal. Consider consolidating your debt. This means you only have to make one payment every month, making what you owe seem more manageable and reducing the paperwork involved. Plus, you should be able to reduce the carrying costs associated with multiple loans.
Lower your monthly payments. Before you consolidate your debt, search for the lowest interest rates you can find. Consider applying for a secured loan or line of credit as these tend to offer lower interest rates. Paying a lower interest rate means you free up additional funds you can use to further reduce your debt.

Finally, make sure you're not going further and further into debt. Try to only buy things you can pay cash for. Carry a debit card instead of a credit card. And convince yourself that you'll feel better about a lower balance on your next statement than you will about a new pair of shoes.

helpful tools and information

Office of the Superintendent of Bankruptcy Canada