Eric has been retired for a year. At 66, he lives alone in a small condo he bought 10 years ago when he separated. Very close to his six grandchildren, he defines himself as a grandpa-cake. So much so that he finds himself in a difficult financial situation for having spoiled his loved ones.
In mid-December, when he received his credit card bill, Eric panicked. Because to compensate for the missed appointments with his family during confinement, he decided to invite his three children, their spouses and his grandchildren, for a weekend in an outdoor resort in the Laurentians. He even played Santa Claus and handed out gifts. Taking into account his income and the balances to be repaid, his budget is now in deficit of $ 300 per month, even if he makes only the minimum payments.
Three-step plan
To find out how to get out of it and find solutions, he consulted an insolvency professional.
“After analyzing the figures, we agreed with Eric on a one-year debt reduction plan. He didn’t have much leeway, but we managed to find spending cuts that will get him through without too much damage. However, he will have to tighten his belt in 2022 to get there, ”explains Pierre Fortin, licensed insolvency trustee and president of Jean Fortin et Associés.
Although rigorous, this game plan reassured the retiree. And for all those who know a little the same situation as Eric and who poured out their love without counting before and during the Holidays, Pierre Fortin gives some advice to help turn things around.
1. ASSESS THE STATE OF YOUR FINANCES
With the tools available on the internet, it’s easier than ever to know the state of your finances. The debt ratio is the perfect test of where you stand. In fact, financial institutions use it to find out your level of debt, one of the main factors determining your eligibility for a new loan.
The exercise only takes a few minutes and, while not being perfect, will give you a glimpse of the weight of your debt compared to your financial capacity. A result of 40% or more should be a red flag indicating too much debt and the need to quickly take charge of your finances.
“Exercise at least once a year to make sure your situation doesn’t deteriorate. And if it improves, that will encourage you to continue your efforts, ”says Fortin.
2. MONITOR YOUR EXPENSES
According to the Equifax Canada credit agency, for the first time since the start of the pandemic, there has been an increase in credit card use and balances since June. Added to this is a sharp rise in the value of new auto loans and mortgages. As dark clouds loom on the horizon for 2022, with record inflation and a likely rise in interest rates, it is more important than ever to plan for the increases to come in your day-to-day life.
“In addition, for homeowners who have an adjustable rate mortgage, or those who will have to renegotiate their mortgage in 2022 or 2023, the increase in monthly payments will be on top of the increase in the cost of living,” warns Pierre Fortin.
3. REDUCE YOUR DEBT
With inflation likely to continue to rise in 2022, the people who fare the best will be those who took advantage of the current environment to reduce their credit card balances and their costs. To achieve this, make monthly payments that are higher than the new expenses. You could also transfer, if possible, the balance to a line of credit with a lower interest rate.
“Historically, whenever there has been an increase in the interest rate, the repayment of credit card balances has decreased and the rate of delinquency in payments has increased. Knowing that rates will eventually rise, don’t get caught in the trap, ”says Pierre Fortin.
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