What is the Best Way to Pay Down Debt to Deal with Financial Difficulty in Edmonton – Start with Highest Interest or Highest Balance First?
As licensed bankruptcy trustees, we sometimes see people who are anticipating the possibility of a job loss and want to discuss their options. These are the rare exception. The overwhelming majority of the people who walk through our doors have one thing in common – they are all experiencing some degree of financial difficulty in Edmonton and are looking for immediate solutions.
Many come to us after a long struggle to deal with their debts, ready to declare personal bankruptcy. Others come to us ready to begin paying down substantial amounts of credit card and other unsecured debt. They need help setting up a personal budget to see if they can cut expenses enough to be able to tackle their problems without resorting to structured repayment solutions, like orderly payment of debts, consumer proposals, or even bankruptcy.
In some ways, establishing a budget is easy. For those serious about getting out from under, it is easy to overestimate their ability to continue with the personal sacrifices a strict budget calls for. It is one thing to put down on paper a strict limit or even complete elimination of entertainment expenses. It is quite another to live within that limit for the number of years it might take to get fully out of debt.
We think the debate over which debts to tackle first – highest interest or highest balance – needs to consider which could be paid off fastest. This is “out of the box” thinking, but have you considered starting with the lowest balance account? Most financial experts agree you should select one account to apply the maximum repayment you can afford, leaving the others to a minimum monthly repayment.
If your balances are so high on either the highest interest or highest balance account that it could take two or more years to shed that debt, are you going to be able to stick with it?
The idea behind starting with the lowest balance first is simple. Most Canadians get a huge sense of satisfaction when they post a final payment on an account, and seeing a zero balance the following month. With a task as difficult as paying down significant amounts of debt, people need to see some tangible results to stay motivated and keep going. While some of us might be content noting the dollar reduction in the total unsecured debt we owe, it is hard to match that up against the feeling of actually reducing the total accounts we have open from five to four or from four to three.
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