Debt Management And Going Beyond Breaking Even To Protect Your Finances

With the uncertain state of the economy and Canada"s average debt-to-income ratio at 152 per cent

, it is easy to get complacent with your finances as long as you are managing to stay afloat. However, is just staying afloat really the hallmark of a healthy financial outlook? In truth, staying afloat and breaking even mean you are one emergency away from financial hardship. Even a small change in your income or one unexpected expense can cause serious problems for your finances and start you on a path to serious financial difficulty.

When it comes to maintaining a truly healthy financial outlook, you have to go beyond just breaking even to protect your finances against future uncertainty. You can create a financial safety net for yourself, so if any difficulty arises you can handle it quickly and efficiently without a major disruption to your regular budget. With this in mind, it"s important to take steps to improve your finances as much as possible so you can weather any financial storm that may be just over the horizon.

Assessing your debt is a good place to start. First, determine your personal debt-to-income ratio. Divide your total monthly debt payments by your monthly income. Ideally you want your ratio to be less than 36 per cent. This amount of debt can typically be maintained easily, as well as allow you to implement a saving strategy to create your financial safety net.

If your ratio is between 37 per cent and 49 per cent, you are most likely just breaking even every month and have little money left over for savings. If so, try implementing a debt reduction strategy. This allows you to strategically reduce unsecured credit card debt by focusing on paying off one debt at a time. You streamline your budget to free up as much money as possible and put this extra cash to paying off your debts. You can start with your highest interest debts first since they build interest faster or you can focus on your smallest debts first to help build momentum.

With each debt you eliminate, you free up that money in your monthly budget. While you are reducing your debt, this money is used to pay off each debt as quickly as possible. However, once you eliminate your unsecured debts and establish a good debt-to-income ratio, this money can then be used for savings. Experts agree given the current state of the economy, consumers should have about eight (8) to twelve (12) months of expenses set aside in case they are laid off or unable to work. This money is in addition to the long-term savings you have for things like retirement or post-secondary education for your kids.

If your debt-to-income ratio is over 50 per cent or you cannot find enough money in your budget to pay off debt efficiently when you try to reduce your debt-to-income ratio, you need to seek help. Contact a trained credit counsellor to review your budget and learn about debt solutions that will work for you. In many cases they may recommend using a debt consolidation option, such as a debt management program, to combine your debts into a single monthly payment that may reduce the monthly obligation on your debts as much as 50 per cent.

by: Claudia Humphrey

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