December is a month of celebrations and shopping. With so many events, it’s common for debts to continue to increase, and some even end up paying with high interest rates, limiting their budget. If you find yourself in this situation, you should know that you can start the year with a strategy to reduce your debt and, consequently, your financial stress. It’s happened to many of us: we get carried away by the festive spirit and use our credit cards without thinking about the consequences, because “we’ll figure out how to cover those expenses later.” But what a bad time it is when the first payment comes in January? What initially seemed like a great idea turns into a difficult task.
The good news is that with good money management, you can start paying off your debt without accruing more. These tips will help you start 2025 with healthier finances and less debt.
We’ve previously shared tips for avoiding debt, creating a budget for your holiday shopping, and advising you on how to take advantage of Scotiabank card promotions… but what happens when you’re saddled with debt?
Analyze your debt situation..
Before making any plans, it’s important to have a clear picture of your finances. How much do you owe us, and who do you owe? What are your monthly income and expenses? Here’s how: calculate how much each debt represents about your income. In general, your debts shouldn’t exceed 30% of your monthly income; this means that if you earn $15,000 a month, you shouldn’t spend more than $4,500 on debt payments.
Start with the most expensive debts..
Not all debt is created equal. Credit cards tend to have high interest rates, while other loans may have lower interest rates. Therefore, a key aspect when making your payments is to prioritize debts with the highest interest rates, as this will help you pay less in interest and reduce your total debt in less time
For example, if you have a $10,000 debt with a 45% annual interest rate and another $15,000 debt with a 20% annual interest rate, focus on paying off the former. This decision could save you a considerable amount in interest payments over the long term, depending on how quickly you pay them off.
Establish a percentage to cover debts
I..t’s recommended that you allocate between 20% and 30% of your income to cover your debts. That is, if your income is $15,000 a month, the ideal would be to set aside $3,000 or $4,500 to cover these payments. Allocating this percentage will help you meet your payment responsibilities without affecting your basic needs like food, housing, or transportation, and will also provide you with a sense of peace of mind. If this figure seems difficult to achieve, identify expenses you can temporarily reduce or eliminate to free up money to cover your debts. Some people manage to cut up to 15% of their expenses by eliminating impulpurchasesse
Take advantage of extra income..
Although the bonus
It’s an excellent opportunity to save or invest in one of your goals. It also opens the possibility of reducing any outstanding debt and starting the next year with fewer worries.
Prioritizing debt repayment with extra income, such as a year-end bonus or Christmas bonus, guarantees significant financial relief. Condusef recommends
allocating at least 40% of your Christmas bonus to debt repayments to reduce the total interest you’ll pay in the future.
Restructure your debts
If you’re having difficulty making your payments, you can contact your bank to renegotiate your debt. Many banks are open to offering payment plans or lower interest rates if you’re willing to pay. Reducing your debt is possible if you set achievable goals and prioritize your spending. Remember that consistency is key and that, although the process may take time, every little bit of progress counts. Starting the year with organized finances can make a big difference throughout the year and help you achieve financial peace of mind so you can focus on achieving your goals in 2025.
