More and more Canadian consumers are getting swallowed up by debt. I’m sure you’ve read and heard many of the statistics and stories in the news about how Canadians are borrowing at a record pace. One of the keys to financial independence is to get rid of your bad debt and acquire good debt. Bad debt is debt that makes you poor, such as credit card debt, car loans, line of credit and even your mortgage – this is consumer debt. Good debt is debt you acquire that actually works for you. The best example of good debt is a mortgage loan on a rental property that throws off positive cash flow every month. Good debt is money that you borrow to purchase assets that puts money in your pocket.
Step 1 – Stop accumulating bad debt. Whatever you purchase via credit cards must be paid off in full at the end of each month. No exceptions.
Step 2 – Make a list of all your consumer (bad) debts. This includes each credit card, car loans, school loans, and any other bad debts you have acquired.
Step 3 – Refinance your mortgage to consolidate your high interest debts. Chances are you’ve built up enough equity in your home to pay off your high interest credit cards and consumer loans. Your mortgage broker can help determine how much equity is available and how much you can save by increasing your mortgage balance to pay off bad debts at lower Canadian interest rates.
Step 4 – Explore the option of using additional equity in your home to increase cash flow. After you consolidate your bad debts you may still have equity left over to invest in a secure cash flow producing asset. For example, the equity could be invested in revenue property, purchasing of a business, toping up your RRSP, contribution to your TFSA, etc…
Step 5 – Pay yourself first. Put aside a set percentage from each paycheck or each payment you receive from other sources. Deposit that money into an investment savings account. Once your money goes into the account, NEVER take it out, until you are ready to invest it. Now – instead of just paying creditors – you’re paying yourself for only one type of purchase: assets that give you positive cash flow each month. By adopting this as a consistent habit you will be out of the Rat Race faster than you ever dreamed!
I encourage you to give us a shout with any concerns or questions. If you are looking to budget and need a few pointers, we can provide you with our budget spreadsheet a a few helpful hints. I’m sure you have heard the saying, having no plan is the same as failing to plan. Start planning today.
