Reduce debt to gain financial freedom faster. It may seem obvious, but when people budget sometimes they don't account for paying more than the minimum on their credit cards. It’s great to take stock of what you have and where it’s going, but after that it’s time to make more money come in and less money go out. Reducing debts and planning ahead to increase assets are steps three and four in our financial freedom how-to. Part one in our financial freedom series about budgeting was posted on Wednesday.
Step 3: Reduce debt!
The average Canadian owes almost $22,000 in consumer debt. Mortgages and student loans are also major liabilities. While you can’t magically get rid of them, there are tricks for paying them down faster.
- Use the “snowball” method. Pay the minimum on all but the lowest balance, and put as much toward that one as possible. It’ll pay off sooner, and then you can “roll” the payment you were making into the next lowest balance.
- Use the envelope method. Hide your credit card. (Some even suggest freezing it in water. Anything to make it harder to use.) Then, withdraw the cash you’ve allotted for a given week’s expenses and divide it into labeled envelopes (groceries, gas, entertainment, etc.). When the envelope is empty, you can’t spend any more on that thing.
- Consolidate. Look into ways to combine debts into one lower-interest payment. This is especially useful for student loans or credit card debts.
Step 4: Plan Ahead!
Plan for the long term. A holistic approach to your finances means more than just weekly spending. Establishing savings and retirement accounts, investing, and making smart insurance policy decisions can go a long way in saving you money and keeping your finances where you’d like them to be--or better.
- Consider a tax-free savings account. Contributions can be automated. Check with different banks for options on minimum contributions and interest rates.
- If you already have a savings account, consider investing some into a low-risk mutual fund or other portfolio. A Registered Retirement Savings Plan (RRSP) can be strategic in saving for the future, but it could also help you pay for your first home.
- Invest in quality life insurance to guarantee your family assets in case of unexpected loss. 20/20 Mortgage Life Insurance allows pre-existing conditions, without a medical exam.
Step 5: Review!
No battle plan survives contact with the enemy, and no financial freedom strategy survives contact with daily life. After you’ve set up a budget, opened your savings plans, and automated everything, you’re going to feel proud of yourself, and rightly so! Congratulations on taking major steps toward your financial freedom. Now is not the time to sit back and let things go.
It’s a good idea to review your budget on a monthly basis to make sure you’re still hitting your targets or if anything needs updating. Maybe you can increase payments on your credit card, or you need to decrease your savings contributions for a while because your car broke down last month. A budget sounds like a static document, typically a spreadsheet, but the truth is financial planning is a dynamic strategy. Remember in step one we said you needed to cultivate a financially-savvy mindset for the long term? This is what we mean. Otherwise you’ll be back where you started and have to create an entirely new budget from a potentially worse financial position.
We hope you’ve found these tips helpful. If you’re interested in how life insurance can be an important part of your financial freedom, get an instant insurance quote from 20/20 Mortgage Life Insurance.
