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How to Balance Debt Repayment with Your Financial Goals

Personal financial advice typically dictates that you don’t want to let debt linger. However, paying down debt doesn’t have to – in fact, really shouldn’t – come at the expense of pursuing other important financial goals, whether that means saving for retirement or funding a future family vacation.

Debt isn’t always the demon it’s made out to be, and some so-called ‘good debts’ can even be leveraged into long-term financial gain, as we explained in a previous blog.

Still, some debt is truly bad. Credit card debt often comes with very high interest rates, meaning even a small balance can grow quickly. However, many other debts have interest rates lower than average annual market index returns. Either way, all debt requires attention and management, including a reasonable plan for repayment, and should never be ignored.

If you’ve got car loans, credit card debt, or any other kind of debt that’s clouding your financial future, here’s some advice on how to handle paying it off while keeping your other goals in mind.

Start with an assessment of debts and goals

One of the main keys to managing your money is understanding where it’s all going. Make a list of debts from biggest to smallest and include how much interest you’re paying on each balance, as well as the minimum monthly payment.

Next, take the time to figure out what you want your money to do for you. Are you saving to buy property, or put money away for your post-work years? Is there a dream trip you’ve been dying to take? Be honest with your goals: work towards whatever you truly want but be reasonable about the scope of what you can achieve – not everyone ends up a multi-millionaire, meaning mansions and mega yachts are out of the question for most.

Work out a debt repayment plan

Step two is setting up a plan for paying back your debts. In a previous blog, we wrote about three main methods for managing debts, including the Avalanche Method, where you tackle the debt with the highest interest rate first before moving on to the next-highest. Perhaps the most financially savvy method is consolidation, where multiple debts are grouped together with one interest rate and a single monthly payment. Consult a financial professional for advice about which strategy is right for you, and how aggressive a repayment schedule your budget can handle.

Avoid creating new debt

Ideally, you’ll start your debt repayment journey with enough spare cash to handle any incidental costs that interrupt your usual monthly spending and savings habits, such as home or auto repairs.

Once your credit card debt is wiped out, focus on finding some more financial wiggle-room by building an emergency fund. The goal is to stash away enough cash to cover three to six months of expenses. That way, if the worst happens, you won’t have to pile immediate debt on top of whatever other problem you’re facing.

Finally, resist the urge to let your spending run wild and plunge you back into debt. Identify your spending weakness, if you’ve got one, and do what you can to keep it under control. That could mean avoiding online offers from your favourite retailers or making meals at home instead of dining out. Focus on your long-term goals and use them as motivation to avoid unnecessary spending.

Work on setting yourself up for retirement

Before turning to your individual financial goals, it’s wise to ensure you’re doing enough to prepare for a stable, secure retirement. If you’re fortunate enough to have an employer who matches contributions to a pension plan, make sure you’re taking advantage of their generosity. As a rule of thumb, you want to put at least 15 per cent of your annual gross income towards retirement savings. Include any employer matching in that amount.

Figure out how much you can contribute to personal goals

After you’ve set up a debt repayment plan and made sure you’re doing enough to retire comfortably, it’s time to go through your budget and see how much money can be put towards your personal goals. If you haven’t already done so, this might be the time to consult a financial expert for advice on how to make your money work harder for you by maximizing your return on any investments.

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