Do you find yourself frequently paying bills after their due dates? Do your cheques often bounce? Do you receive calls from collection agencies? These can all be warning signs that your debt is becoming unmanageable.
The good news is that there are steps you can take to get your finances back on track. This guide can help you create a plan to take control of and manage your debt.
On this page
- Step 1: Make a budget
- Step 2: Check your credit health
- Step 3: Create a plan
- Step 4: Take control and take action
- Step 5: Stretch your dollar
- Step 6: Planning ahead
- Moving forward
Step 1: Make a budget
Making a budget is the most important step in taking control of your finances. A budget is like a roadmap for your finances: it tells you how much money you have, where it comes from and where it needs to go. Use this comprehensive budget planner, complete with tips, guidelines and live charts to show you where your money goes.
To get started, take these simple steps:
- Know where your money is going: Tracking your money will help you figure out what comes in and what goes out of your pocket. Every dollar you spend affects your overall budget.
- Evaluate your needs and wants: knowing the difference between your "needs" (something that is necessary, required or essential) and your "wants" (something that you'd like, but don't necessarily need) is key to making a smart budget.
- Think about your financial goals: identify your short-term and long-term goals and make saving for those goals part of your budget.
Take budgeting one step further by exploring Statistics Canada’s Personal inflation calculator. Calculate your personal inflation rate based on the good and services you consumer and learn how you spending habits compare to those of other Canadians near you.
Step 2: Check your credit health
Your credit report and credit score are two of the main tools that lenders use to determine whether or not you are a good candidate for credit products. Lenders want to know if you will be able to pay your bills on time.
Your credit score goes up and down based on the information in your report. For example: making regular payments, on time, will gradually make your score rise, but missing payments will make it drop. In Canada, credit scores range from 300 to 900. Scores of 600 and over are considered to be good. Scores of 750 and over are generally considered excellent.
Why is a credit score important?
If you have a good credit score, you may be able to borrow money at a lower interest rate and pay less interest over the long term. Having a poor credit score can make it difficult to qualify for loans, credit cards, leases or mortgages and sometimes results in higher interest rates. Your credit history can also affect your eligibility for some debt repayment options.
Take time to check your credit health every so often. Check your credit report and make sure that there are no errors in the report. Checking your personal credit report will have no effect on your credit score. You have the right to know what information is on your report and can get a copy of your credit report free of charge.
Improving your credit score takes time but there are many things you can do, such as using a secured credit card and making sure you meet all your minimum monthly payments. The Financial Consumer Agency of Canada has more advice on what you can do to improve your credit.
- Additional resources to help you understand credit reports and scores.
Step 3: Create a plan
Not sure where to focus your efforts to start taking control of your debt? There are many strategies you can use to manage debt and start paying it off.
One option is to start by paying down the debt with the highest interest rate first. This means you'll pay less interest over time and will reduce your overall debt sooner. Another strategy is to prioritize paying down the debt with the lowest balance while still making sure you're making the minimum payments on all other debt. Knocking off a few debts quickly can help build momentum and motivate you to continue.
When to get help
If you don't know where to start, consider getting help from a budget or credit counsellor. They can help you identify debt management opportunities and build a debt reduction strategy. For example:
- Are there opportunities to consolidate loans (also known as debt pooling)?
- Are you able to negotiate your debt with your lenders and/or creditors?
- Are you working closely with your mortgage lender to find the best solutions for your budget?
- What kind of approach should you take with credit cards?
Remember, seeking help is not something that you should be afraid or ashamed of. A counsellor will work with you to get you back on track and in control of your finances and find solutions. The Financial Consumer Agency of Canada has more advice on getting help from a credit counsellor.
Do your research! There are some less-than-reputable companies in the marketplace who may try to attract your attention with promises to help erase your debt and solve financial problems. Find out if there have been any serious or unresolved complaints about the agency. This could include late payments to creditors or false advertising. Know your rights and check with your provincial regulator for more information on different debt management solutions.
Here are some resources on finding a reputable budget counsellor and how to tackle debt consolidation:
- Credit Counselling Canada
- Canadian Association of Credit Counselling Services
- Coalition des associations de consommateurs du Québec (French only)
- Associations coopératives d'économie familiale (ACEFs) (French only).
- Using a debt settlement company
Step 4: Take control and take action
Once you've taken the time to create a budget and develop a plan, it's time to put it into action.
Whether you have chosen to make your own plan or are working with a credit counsellor, stick to your plan and be consistent. Try to make the minimum payments on all your debts by their due dates. When you do, any extra money you have from your budget can be put towards paying your target debt.
However, be realistic. If you cannot meet the payments you have set out in your plan, you may want to investigate alternatives. If you haven't already done so, this would be a good time to involve a professional.
Remember, sticking to your plan may not always be possible depending on your situation. Getting out of debt is a long process. The trick is to try and take control of your debt before it becomes overwhelming.
Here are some additional resources and tools on debt repayment:
- Getting out of debt – Financial Consumer Agency of Canada
- Credit Card Payment Calculator – Financial Consumer Agency of Canada
- Debt collection agencies
Step 5: Stretch your dollar
Following a tight debt management plan can leave you trying to find ways to stretch every dollar. It is important to take a good look at your expenses to see exactly where you can save money.
First, look at your budget. Are there small things you can do to save and bring down recurring expenses? Solutions can be as simple as planning your meals for the week to save on food, planning your commute to save time and money on gas, or adjusting your thermostat to save on your energy bill. Try the My Expenses Calculator to learn how small purchases can add up over time.
Next, take a look at your fixed costs. If you're having trouble affording your fixed costs, talk with your provider or look into switching providers to get a better rate. Reducing those monthly costs could save you money over the course of a year.
For example, many Canadians find themselves paying too much for living expenses, such as their mortgage, insurance, utilities and more. The result is not having enough money to meet other financial needs.If you're having trouble with your mortgage, talk with your mortgage lender and work together to try and find a solution. Likewise, you may be able to get a better rate for services such as home or auto insurance, telephone, television or Internet.
Step 6: Planning ahead
Once you're on track with your budget and have a debt management strategy, you need to keep an eye on the future.
While your budget will likely include amounts for savings and emergencies, you should always prepare for larger purchases, such as buying a car, household appliances, or even a new home. Plan and research these purchases before you make a financial commitment and make sure that you know what you can truly afford. For example: there may be additional costs beyond a vehicle's finance payments, or beyond your home's mortgage payments that need to be considered. These can add up and put a strain on your budget.
Setting up an Emergency Fund
An emergency fund is money you set aside to pay for unexpected expenses. You'll most likely have to deal with an emergency resulting from an unexpected situation or a drop in income at some point in your lifetime. In general, it's recommended that you save the equivalent of three to six months of your regular expenses. You can also aim to save three to six months of income. Both methods are effective, so choose whichever one works for you.
These amounts can sometimes seem out of reach. That is why you should save gradually. Saving a small amount on a regular basis can make a big difference in the long term.
Here are some additional resources that can help you to start spending smarter:
- Buying a Home
- Homebuying Calculators from the Canadian Mortgage and Housing Corporation
- Buying or leasing a vehicle
- Driving Costs Calculator from the Canadian Automobile Association
- Setting up an emergency fund
Now that you have a budget, have assessed and organized your financial situation and put a plan in place, be sure to continue looking for ways to save money and spend smarter.
This six-step process provides you with a basic path to improved financial security, but should you need more information, your provincial or territorial government provides resources to help you stay on track!
Provincial and Territorial Consumer Affairs Offices
- Alberta: Service Alberta
- British Columbia: Consumer Protection BC
- Manitoba: Tourism, Culture, Heritage, Sport and Consumer Protection
- New Brunswick: Financial and Consumer Services Commission
- Newfoundland and Labrador: Service NL
- Northwest Territories: Department of Municipal and Community Affairs
- Nova Scotia: Service Nova Scotia and Municipal Relations
- Nunavut: Department of Community and Government Services
- Ontario: Ministry of Government and Consumer Services
- Prince Edward Island: Consumer Services
- Quebec: Office de la protection du consommateur
- Saskatchewan: Financial and Consumer Affairs Authority of Saskatchewan
- Yukon: Department of Community Services