5 Ways You Can End Up Drowning in Debt – And How to Get Out of It!

Drowning in debt is an increasingly growing problem in Canada – and around the world. Especially this year, with an ongoing pandemic, personal debt is at an all-time high. Living with debt for a prolonged period can stop you from enjoying your life to the fullest. Your main goal should be to gain financial freedom and rid yourself of your debts for good.

• 

To understand this a little better, let’s explore how people wind up in debt in the first place. Believe it or not, it can be prevented sometimes. Of course, life can throw some unexpected curveballs, making it nearly impossible to avoid debt. However, how you manage your debt plays a big role in how quickly you can become debt free. Read on to find out what causes debt, how to get out of it, and what you can do to avoid ever falling into debt again.

How You Can End Up Drowning in Debt

Debt can sometimes be the result of unfortunate life circumstances, like a serious illness, the death of a loved one, or an unexpected job loss. In today’s world – the Covid-era – this is becoming a bigger and bigger problems for millions of Canadians. If you have found yourself in insurmountable debt, know that you are not alone. Here are some circumstances that could lead individuals to end up drowning in debt:

1. You Have No Concrete Budget

If you are managing a household, particularly if you have a family to be responsible for, operating without a solid budget plan is like walking around with a blindfold on. No business operates without a budget. And you shouldn’t either. If you don’t create a plan, you run the risk of overspending, or wasting money unnecessarily. You can easily go over budget if you aren’t keeping track of what is coming versus what is going out.

Without a budget plan, many Canadians wind up in debt. You need a list of expenses and income. By keeping track of your money and calculating what you can afford before you buy it, you can have good control over your finances. If you are shopping without consulting your budget plan first, you are very likely to spend more than you have. Before you know it, you could find yourself owing way more money than you can afford to comfortably pay back.

Especially with online shopping and automatic payments, it can be extremely easy to lose track of your expenses. Creating a budget can help prevent the unfortunate circumstance of ending up in debt.

2. You Have No Contingency Fund

If you’re spending everything you earn, you are at high risk for ending up in debt. Why? You’re not overspending, right? Wrong. If you are spending everything you earn, you actually are overspending. This means you are not saving enough or at all. Should an emergency arise – and they often do – you will have no choice but to borrow funds to make ends meet. Once you borrow money, you are in debt. Once you are in debt, you’re in the cycle of debt. It can be very tough to get out of that cycle.

Saving a portion of your salary each week is not only a good idea, but it’s the recommendation of any financial advisor you will speak to you. Saving for emergencies as well as for your old age is essential. Many Canadians end up in debt each year because they did not have a contingency fund. This is one of the most common financial mistakes individuals can make.

3. Not Understanding How to Use Your Credit Card

Credit cards can help you build up credit. They are also useful for large transactions where you don’t feel comfortable using cash, or if you want to purchase things online. However, too many Canadians think credit cards are an easy way to get what they can’t afford right now. Buy now and pay later is the thing that will get you stuck in a cycle of never-ending debt.

Credit cards should only be used if you already have the money to pay the bill. If you are using credit cards to advance you funds you don’t have yet, you are playing with fire. It is so easy to overuse your credit cards and spend more than you can afford to pay back. Credit card debt is one of the main sources of personal debt among most Canadian households.

Remember, credit cards are there to help you build a credit profile. Not paying your bills on time or in full, or using too much of spending limit can actual be damaging to your credit report. Of you can’t control your urge to spend, cut down on credit cards and reduce your limits.

4. A Divorce

A divorce or other unexpected, life-changing event can leave many people on the hook for expenses they can’t afford to cover alone. Unfortunately, there isn’t too much you can do to prevent this, but there is a right way to handle it. Don’t wait until your debts have gotten out of control and you can no longer afford your minimum payments. Meet with a debt consolidator to see how you can get your life back on track.

The same goes for a critical illness. If you don’t have critical illness insurance, you will quickly see that a suspended income leads to immediate consequences. Before things get out of control, meet with a professional who can help. There is no shame in dealing with an unexpected trauma.

5. Mismanaging Your Debt

This may not be the reason you got into debt, but it could very well be the reason you are still in debt. Making payments you can’t afford, paying several creditors per month, overpaying in interest and overage fees – all of these are reasons that contribute to your debt problems. If you are expecting to pay your credit cards off by paying each month, you probably won’t ever get out of debt.

Credit cards are designed to benefit the credit card company, not the indebted consumer. If you hit hard times and had no choice but to incur debt, it’s understandable. However, it’s now time to take control of that debt before it spirals out of control. Instead of owing several creditors at once and paying astronomical interest rates, consolidate your debts and reduce your interest fees. If you’re not sure where to start, meet with a BHM Financial debt consolidator for help. If you continue to pay the exorbitant credit card interest rates, you will find yourself unable to pay your debt down in adequate time.

The longer it takes to pay your debt, the more money you are wasting in interest. That money could be going into your retirement savings instead. Mismanaging debt can have catastrophic effects on your credit and your financial future. Instead of letting debt weigh you down, meet with a debt consolidator for help.

Understanding Debt

You now know how debt happens, but do you really understand what being in debt means? You know debt means owing money, but what kind of debt is bad debt and how does it really affect you? Here is a closer look at what debt means for your financial future and how it can affect your life.

How Much Debt is OK?

Many Canadians consider small amounts of personal debt to be negligible, but this is not the case. In fact, you credit score doesn’t take your amount of debt into consideration. It takes your types of debt into consideration and your payment habits. For example, secured debt, like a mortgage, will not damage your credit. Consumer debt, which is unsecured debt, does affect your rating.

If you are not paying your bills on time or making your minimum monthly payments, your credit report is taking notes. Another thing you credit reports takes into consideration is your credit card usage percentage. Even if you are only $1,000 in debt, it will affect you credit score if your card limit is only $1,200. This means you are using too much of your limit. The amount isn’t critical to your score. The way you are handling your finances affects it much more.

How Debt Can Ruin Your Life

Ok, so now we know which debts can affect your credit score and how. But why is your credit score important? Many people don’t fully realize the implications of a negative credit rating. It’s very important to keep your credit score intact, even when faced with debts. If you need the help of a debt consolidator to keep your credit intact, don’t hesitate.

Maintaining good credit is important for several reasons. Here are a few ways bad credit can ruin your life:

• Poor credit can force you to pay higher interest rates on cars or insurance plans
• You mortgage application can be rejected if you have poor credit
• You may not be able to secure an apartment with poor credit
• A bad credit check can make it more difficult to find a job
• You may not be able to apply for any other loans you need with poor credit
• You may not be able to open up a new account with telecommunications or utility companies

What To Do If You Are Drowning in Debt

If you’re already drowning in debt, it’s too late to go back and change any decisions you made that contributed to it. In some cases, it was inevitable. But once you are in debt, there is something you can do to get out of it. If you are drowning in debt, meet with an experienced debt consolidator at BHM Financial.

If you are overwhelmed with debt, the first thing to do is take control and get your interest rate to a reasonable level that you can actually afford to pay. You want to pay off your debt and eventually become debt-free. Read on to find out how.

How Can I Get Out of Debt Fast?

The quickest way out of debt isn’t an instant way out, but it’s as quick as is realistically possible. Get a loan and consolidate your debts. This is critical to overcoming unmanageable debt. If you don’t get your debts consolidated early on, you will find your debt growing instead or winding down.

Consolidating your debts, reducing your payments, and reducing your overall interest rate is the safest and quickest way to get out of debt. It isn’t a magic bullet that will leave you debt-free overnight. Other than winning the lottery, there isn’t much hope for an overnight fix. But consolidating your debts and developing a manageable repayment plan is the best way to take control of your finances when you are struggling.

How Can I Get Out of Debt Without a Job?

If you don’t have a job, paying off your debt will be much slower. It is advisable to get a job if you are capable of working. Cut out non-essential expenses, reduce your spending, make a tight and strict budget and stick to it. If you are not able to work, you may be eligible for government compensation. If so, apply for your payments so you can get out of debt.

You can also trade in your car for a more affordable method of transportation, or downsize your home. If you have collected lots of stuff over the years that you barely uses – from clothing to housewares – consider selling off what you can. This can help bring in some quick cash to reduce your debt.

What Should You Not Do When in Debt?

If you’re in debt, you should avoid incurring unnecessary expenses. This is not the time to be taking vacations, buy expensive clothes, or applying for a huge mortgage. You want to keep your day-to-day expenses as low as possible so all of your funds can go towards reliving you of your debt. Once your debt is paid off, you will have more money at your disposal for your wants. For example, you can save whatever was going towards your debt and spend it on a vacation, or even put it away for your retirement.

Another you want to avoid when trying to repay debt is using your credit cards. Stick to cash as much as possible to avoid getting caught up in even more debt struggles. Remember, once it’s on your card, it’s subject to interest charges. This means you will now pay way more for your purchases than if you had just paid cash. Adding to your debt is counter-productive. If you don’t think you can control your credit card usage, put them away or chop them up.

Is It Possible to Avoid Debt?

Sometimes, debt is not possible to avoid. If you are going through a divorce, a critical illness, or have unexpectedly lost your job, it can be tough to avoid debt. A global pandemic like the Covid-19 pandemic we are currently battling, is another unexpected twist that has left many in debt.

However, there are some ways that some people can avoid unnecessary debt. You can save while you are making money in the event that you lose your job. You can live below your means to make sure you are never strapped for cash. Another great thing to do is incest in your future and put money into your RRSPs. Start an RESP for your children so you can save for their higher education slowly over time and not have to worry about going into debt when they start university.

Another very important thing everyone can do to avoid debt is become comfortable creating and following a strict financial plan. Preparing a budget is a great way to keep your finances on track and keep you from overspending.

How Do You Recover from Debt?

The best way to recover from debt is to get out of it with as little damage to your credit report as possible. This means you have to properly manage your debt. Paying your bills late, not making minimum payments or using 80% or more of your credit limit all contribute to you credit rating. They can impact it very negatively. Debt in itself doesn’t have to ruin your credit score or your life. All you have to do is manage it properly and make sure it doesn’t control your life.

Why BHM Financial?

At BHM Financial, we understand that debt happens – and it can happen to anyone. We’re here to help you get out of debt. Our experience debt consolidators can help you reduce your payments. Plus, they can help you build a financial plan that works for you. It’s useless to have a repayment plan you can’t afford to stick to. We want you to get control of your debt and feel like you’re on the path towards financial freedom.

Call us today to see how we can help you say goodbye to your debt and work toward a financially successful future for you and your family.