Debt can be exhausting, discouraging, and a huge burden in our everyday lives, so paying it off can be a major step toward financial independence.
If you don’t have a plan in place to pay off debt, here are some strategies to pay off your debt and achieve financial freedom.
1. Be savvy with student debt
If you have other expensive debts, student loan debt shouldn’t be your priority. You can make minimum payments toward a federal or provincial student loan as long as you’re not behind on your payments.
Focus on paying off debts that are costing you more on interest.
As of April 1, 2023, Canada student loans and apprentice loans will be permanently interest-free to help support those struggling with the rising cost of living, with interest rates for the provincial portion of the loan only.
Interest on government student loan debt is tax deductible, meaning you can claim the interest as a non-refundable tax credit.
If your financial situation is difficult, you have the option of extending the repayment period, which lowers your monthly payments but takes longer to repay. You may also benefit from paying only the monthly interest on your student loan. You can do this for up to twelve months.
If you earn less than $40,000 a year and you’re struggling to make repayments, the Repayment Assistance Plan (RAP) lets you pause payments until you make at least that amount. The government will also pay towards the loan, speeding up the repayment process. If you earn more, there is a cap on monthly payments of 10 percent of your household income.
Lastly, take time to check if you qualify for any provincial student loan forgiveness programs.
2. Focus on expensive debt
Some debts cost you more in interest charges, so it makes sense to focus on paying off debts with a higher interest rate, such as credit card debt.
By paying off high interest debt, you’ll pay fewer interest charges and save money which you can put towards the next debt with the highest interest rate.
3. Use a balance transfer credit card
If you have a good credit score, a balance transfer credit card lets you move your credit card debt to a card with a lower interest rate, often for a set promotional period.
This saves money on interest costs and lets you pay off your debt faster. You can use the money saved to pay other debts.
4. Consolidate your debts
If you’ve run up lots of debts over multiple lines of credit, you can take out a consolidation loan to pay them off.
Debt consolidation lets you make one monthly repayment at a fixed interest rate. Instead of making multiple payments to different creditors, you just make one payment towards the loan.
5. Take advantage of tax breaks
There are many tax deductions and credits that can be applied to your tax return to reduce your taxable income. Some examples include childcare costs, tuition expenses and medical expenses.
RRSP contributions are a great way to lower your tax bill, as they can be deducted when filing your taxes for the previous year. For example, if you contribute $3,000 to your RRSP, your taxable income is reduced by $3,000.
If you get a tax refund, use the money to pay off some of your debt. Then once your debt is paid off, continue to save and invest through your RRSP and TFSA to boost your retirement savings.
6. Make more money
Try to think of ways to increase your income to speed up debt repayment. For example, can you do some freelance work based on your skill set? Can you work extra shifts or negotiate a raise? Do you have the appetite to start a business on the side?
7. Spend less money
If you want to successfully pay off debt and achieve financial freedom, you need a monthly budget. Making a budget lets you see where your money is going, cut back on spending and free up money to put toward your debts.
The 50/30/20 budgeting rule is a good place to start. Budgeting apps can automate the process by connecting with your financial accounts to quickly give you an overview of your spending.
8. Pay your mortgage faster
Many mortgages allow you to take advantage of mortgage prepayment privileges. You prepay a portion of your mortgage principal before it’s due without a prepayment charge, saving you thousands of dollars on interest in the long run. Your lender can advise on how much you can prepay every year.
If you shorten the term of your mortgage, you can reduce the total interest paid and become mortgage free sooner.
If your income rises or you have more disposable income, you could increase your monthly mortgage payment to help pay down your mortgage faster.
Paying off debt is a very significant milestone on the road to achieving financial freedom.
Being financially free lets you choose when and how much you work. It means more free time to travel, pursue your passions, or simply take your foot off the gas. The choice is yours.
Reducing debt can be a slow process, but every step you take toward paying off your debts is a step toward financial independence. To learn more about becoming debt free, read our guide on how to get out of debt.
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