Monday, February 28, 2011

Want to be Debt Free? Simple Steps to Get Your Plan on Track

When we think of financial goals, we often think in terms o how much we want to earn or how much we need to save for retirement. A financial goal that gets less attention, but that most of us share, is to be debt free. In fact, a recent Manulife Bank survey of 1000 homeowners1 found that 84% of them considered being debt-free to be a high financial priority (rating it 7, 8. 9 or 10 out of 10). One in three considered it to be their top financial priority.

With “being debt-free” pretty high up on most "to do" lists, you might think we'd be doing well, right? Unfortunately, the same survey also found that 27 per cent of homeowners actually increased their debt over the past year. A further 17 per cent had the same amount of debt as they did 12 months earlier. The remainder did manage to reduce their debt, but 19 per cent reduced it by less than they had expected. In other words, almost two-thirds of homeowners surveyed are not achieving one of their most important financial goals.


The results of the survey provide insights that suggest some fairly simple steps we can take to get our plans on track with our goals.

Sixty-five per cent did not shop around the last time their mortgage came up for renewal. Instead, they simply stayed with their current lender. Within this group, a third accepted the first offer that was presented to them


Shopping around and negotiating require time and energy and, for some of us, take us outside our comfort zone. Consequently, many of us take the path of least resistance and keep doing what we've always done in the past. The problem is that with our debt, as in many areas of our life, the path of least resistance isn't necessarily the best or most cost-effective.

Our mortgage is typically one of our largest financial obligations. Failing to shop around may end up costing us a lot of extra money in interest payments and keep us in debt much longer than necessary.


If you haven't shopped around recently, take some time to educate yourself about the different options available. Interest rates are important, but don't forget to look at product features too, since your ability to become debt-free may be determined as much by the flexibility your mortgage provides as by the rate you receive.
When your mortgage comes up for renewal, remember to look at all of your options and choose the one that's best for you.

Forty-three percent had credit card debt that they didn’t repay in full each month.


Credit cards can provide tremendous convenience in our day-to-day lives — allowing us to make purchases without carrying around much cash and even to earn reward points. The obvious downside is that they make it easy to spend beyond our means. And, if we don't pay our balances in full each month, we're charged interest at relatively high rates - often 20 per cent or more!

Carrying a balance on your credit card can cost you a lot of money over the long term and may make it more difficult for you to become debt-free.


Sit down and look at your credit card bills over the past few months and identify purchases that were "wants" rather than "needs." If you haven't done this before, you may be surprised at how many items fall into the "want" category and how quickly these can add up. Understanding where your money is going is the first step towards bringing your spending back within your budget. As for your existing credit card balance, make this your first priority when it comes to allocating extra cash because it's likely your most expensive debt.

Sixty-five percent had two or more debts outstanding


With investments, we often hear that diversification is key and that we "shouldn't put all of our eggs in one basket." This is good advice for investments. However, when it comes to debts, the opposite is true. Generally, when we have more than one debt, those debts are charged different interest rates. Ideally, we want to have all of our debt at the lowest rate. Anything else will keep us in debt longer than we need to be.


We sometimes associate the word "debt consolidation" with bankruptcy or someone in dire financial straits. In reality, it simply means combining all of your debts into one pool at the lowest possible rate — and it's one of the easiest ways to reduce the amount of interest you pay each month. There are a variety of products on the market that allow you to do this. Some of the most attractive products combine your debts with your mortgage and generally allow you to access very competitive interest rates.

Being debt-free is a goal that most of us share but many struggle to achieve. These are just three simple steps you can take to help you become debt-free sooner.

One additional step is to talk to your advisor. Your debt is an important part of your overall financial health and your advisor can help you find the tools and strategies you need to manage your debt more effectively and become debt-free sooner.

1 Source: Survey of 1,000 Canadian homeowners aged 30-55, conducted by Research House on behalf of Manulife Bank, April 2010.

Adapted from Manulife Solutions for financial planning. Winter Edition 2010/2011