Living with debt can be stressful, especially during high-inflationary periods where it can be more difficult to find extra money to put toward debt repayment. The FP Canada 2023 Financial Stress Index tells us that 40% of Canadians report that money is their greatest source of stress, and 38% of Canadians are tackling that stress by paying down debt.

Debt repayment example

Consider this example of an individual with debt. In this example, let’s assume all their monthly essentials are looked after (rent/mortgage, groceries, utilities, insurance, etc.) and they have $1,200 remaining to allocate to five debts.

After making the minimum payments of $765, how should they allocate the remaining $435?

	Amount Owing	Interest Rate	Minimum Payment
Credit Card 1	$1,500	19.99%	$35
Credit Card 2	$4,000	21.99%	$75
Car Loan	$12,500	4.00%	$280
Lines of Credit ($7500 limit)	$500	6.50%	$10
Personal Loan	$8,000	9.00%	$365
		Total	$765
		Remaining	$435

There are three primary methods to tackling debt:

1. The snowball method: This method focuses on paying off the smallest debt first. The goal is to reduce the number of creditors and to provide the debt payer with a sense of accomplishment that will help keep them motivated. Like a snowball, the effects of each payment are small at first, but as they pay off debt and eliminate creditors, they can then allocate the savings to the next smallest debt, which compounds the impact. Using this method, they would make all minimum payments then pay down the Line of Credit (LoC). After the second month, the LoC would be eliminated, and the minimum payment of $10 could be added to the $435, increasing the remaining amount paid towards debt each month to $445. They would then work on paying down Credit Card 1.
2. The avalanche method: This method aims to reduce the amount of interest paid and therefore increase the amount of debt payment that goes towards principal. With this method, they would make all minimum payments and allocate the remaining $435 towards Credit Card 2, as this debt carries the highest interest rate. Once Credit Card 2 is paid off, they would take the $435 and the $75 saved from the card’s minimum payment and allocate this to Credit Card 1. You can see that this method incorporates the snowball method but differs in which debt to repay first.
3. Debt consolidation: Debt consolidation can be a great tool for individuals with multiple creditors that are serious about repaying debt. With the above example, there is $7,000 available on the LoC, at a rate lower than both credit cards and the Personal Loan. Under the debt consolidation strategy, they would borrow $5,500 from the LoC to pay off both credit cards. They could take this one step further and make a one-time pre-payment to the personal loan of $1,500, thus maxing out the LoC, and increasing the minimum payment from $10 to $75. The savings from the credit card minimum payments ($35 + $75 = $110) would more than cover the increased LoC payment and the difference can be used to continue paying down the Personal Loan. Once the Personal Loan is paid off, they would start paying off the LoC (next-highest interest rate).

Speak to your Advisor

Everyone’s tolerance and capacity to hold debt is different. With the right advice and support, you can eliminate your debt and the stress that comes along with it.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor, Nicolle Lalonde.