How to pay down debt

Debt is a common factor when it comes to the finances of many Canadians¹. When managed properly, borrowing can be a useful tool to help us fund major purchases, such as a home, vehicle, or post-secondary education. However, holding debt can also feel overwhelming, stressful, and like a burden on our financial well-being. One way to manage that stress is to have a strategy for repaying debt and a plan to execute on that strategy. In this article, we discuss some tools and ideas that have helped others in their debt-repayment journey and may be of assistance to you.

1. The avalanche method

If you have multiple sources of debt from credit cards and loans or other sources, the avalanche method might be beneficial for you. This method requires you to list and then sort all your debts by their interest rates, starting from highest to lowest. You then continue to make the minimum payments on all your debts, while prioritizing paying more than the minimum payment for the debt with the highest interest rate. This is a very important factor of the avalanche method. Then, once the debt with the highest rate is paid off, you can move on to the next highest, and so forth. This approach aims to help lower the amount of overall interest you may be paying by putting more money towards paying down the principal of your debt with the highest rate.

2. The snowball method

The snowball method focuses on building momentum by paying off your smaller amounts of debt first. Assuming again that you have multiple sources of debt, you list and sort to find the smallest amount of debt you currently hold, regardless of the interest rate. While still making minimum payments on your other debts, if you can, you allocate additional funds towards the smallest of your debts until it’s paid off, and then move to the next smallest amount. As you pay off these amounts, the amounts that you were paying towards them can be reallocated to pay down your larger debts. This approach can also have the bonus effect of giving you an emotional boost as you watch pieces of your debt load disappear.

3. Debt consolidation

If you’re looking for a more streamlined approach, debt consolidation might be an option for you. When you consolidate your debts, you are combining multiple debts into a single loan. This can make it easier to handle the repayment of all your existing debts and may often involve a single interest rate that is lower than the highest interest rate you may be paying. Options like personal loans or home equity loans could be useful tools to help consolidate your debts. This approach may help you save money and make it easier to manage your payments. Click here to check out the TD Debt Consolidation Tool.

4. Pay yourself first

Should your income increase, consider prioritizing a portion of your additional income towards increased debt payment, which could help you pay down your debt faster.

5. Find additional funds in your budget

Many people are able to find some additional money to allocate towards debt repayment by taking a second look at their budget and seeing areas where they may be able to reduce spending, typically in the discretionary expense categories. You can then use the extra money towards repaying more of some of your debt. Prioritizing a specific amount in your budget towards debt repayment can help you stick to your financial plan and avoid going off track. Check out the TD Personal Cash Flow Calculator to help you finding discretionary expenses with your budget.

A TD advisor can help you plan to reduce your debt. They can review your financial situation and offer personalized advice towards managing your debt. To discuss debt management further, book an appointment with a TD advisor.

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