Weekly Column: Rolling Down Debt

Rolling down debt

This scenario might sound familiar to some: in the oil boom, most employees in the patch worked on a rotating shift which included plenty of overtime hours. Many received a live-out allowance (LOA) to cover the cost of hotels and meals on the road. There might also be a truck allowance to cover wear and tear and mileage on a personal vehicle. All things considered, times were good and there was always plenty of money to go around.

People that work hard have a right to play hard. Boats, quads, bikes, campers and after market accessories for vehicles were another way of rewarding oneself for time spent away from home and family. The payoff to leaving those you love for weeks at a time was taking them on epic adventures when you got home, right?

And then you lost your job

When layoffs started, many people began preparing for the worst. Cutting unnecessary spending helps but if you have lost your overtime hours your income is also cut significantly. Now you may be caught without the money to pay things off in full as you had expected. Contractors and the self-employed are in an even bigger fix because, for many, the work dried up but the cost of their tools, trucks and equipment did not.

For those outside of the industry, it may be hard to understand how people raking in huge money could so quickly find themselves in a jam. But not many people have a year’s expenses saved for emergencies, and it turned out that was what was needed for countless families and business people. Even the most careful and conservative spenders didn’t foresee such an extended slowdown. Saving for a rainy day and planning for the worst helped, but it’s been a tough couple of years for many in the area. People that normally paid off their credit cards in full might now be using credit to get by, month to month.

The new normal

It’s been awhile now and, though stressful, hopefully you have managed to get some assistance or work and adjust to the new reality you face. Possibly you aren’t yet able to consider paying off your creditors faster. Maybe you are struggling to get on top of your payments but don’t know where to start. Whatever the case, when you’re ready to tackle that stack of bills there’s a strategy to help you make the most impact in the shortest amount of time.

The snowball effect

Essentially, you want to list all of your creditors from highest interest rate to lowest. Most experts recommend paying off the highest interest rate first to save the most on interest over a period of time. For example, pay off your credit cards that charge 19% interest before you worry about the line of credit that charges 7%. Once paid off, put the amount that you are accustomed to paying towards the next debt on your list, then combine those totals and begin paying on the next, and so on. In this way you will create a “snowball” of payments that gets larger and pays creditors off faster, saving thousands in interest.

Pay more than the minimum

Credit card companies lower your minimum monthly payment as the balance gets paid down, basically stretching out the time it takes to pay the bill off in full (and making the company more money in interest). One example on moneymentors.ca shows how paying just $20 above the minimum every month and keeping the payment at that amount for the entirety pays off a debt of $24,105 almost ten years earlier and saving over $1700 in interest.

Can you find an extra $20 every month to get yourself out of credit card debt?

Be strategic

If you’ve only been making minimum monthly payments and plan to increase that amount to save on interest, be sure that you don’t overextend yourself and end up needing to use the credit card for survival again. The idea is to tighten up any discretionary spending and sacrifice a few treats here and there to raise your payment. If you are able to bring in some extra monthly income and can dedicate it exclusively to the highest interest rate you have, you’ll quickly see balances begin to drop.

Use that momentum to wipe creditor after creditor off your list. Once you’ve paid off your credit cards and some loans, use the amount that you used to pay on debt to build up an emergency fund, invest for retirement and save for vacations and recreation.

There are many online and printed explanations of how to snowball your debt repayment. Check out http://financialmentor.com/calculator/debt-snowball-calculator and do an honest calculation of your liabilities. The sooner you begin, the sooner you will unburden yourself from credit card debt.