3 Steps to Deal with your Personal Debts During the COVID-19 Pandemic
Even before the COVID-19 crisis, Canadians were facing mounting personal debt levels. In fact, in the third quarter of 2019 Canadians’ personal debt-to-income ratios were topping 176 per cent. This means that for every dollar of income earned $1.76 was owed. As the COVID-19 crisis continues to play out there is no doubt that personal debt-to-income ratios will rise further and at an accelerated pace as the number of Canadians unemployed increases and incomes decline.
Step 1: Capture your updated financial situation
Chances are that before the COVID-19 crises hit, your income was higher, and you were able to sustain your level of spending and support your debt payments. For many of us, the COVID-19 pandemic has negatively impacted our earnings and savings. As a result, now is the time to sit down and capture your updated financial situation. To start, you will want to be conservative and assume your reduced income level will be around for the next six to eighteen months. In addition, you should identify and list all debts. The psychology of doing so may be difficult, especially if you have been living beyond your means and do not have an emergency fund set up. You might also find yourself asking the following question. How did I let my finances get to this point? You must overcome this obstacle by thinking forward as this is something that is within your control.
Specific things you should be able to answer are: Who are your debtors? How much do you owe? What interest rates are you are paying and what are the payment terms?
Step 2: Prioritize your debts and expenses
The next course of action to take is to prioritize your expenses. For starters only incur basic living expenses such as food, shelter, medical, and transportation. Avoid making online purchases on impulse by reminding yourself that this could exacerbate your debt trouble.
Then, review your debts and look for opportunities to consolidate debts with one financial institution and into one loan with the goal of reducing your interest rate and simplifying your payment process. Are your debts overwhelming? If so, communicate with your creditors and where possible workout payment terms. Many financial institutions have been proactive in providing mortgage and loan deferrals. If you rent and are struggling making payments, then you should open the lines of communication with your landlord to establish realistic payment terms.
Step 3: Put it in writing
Put your debt repayment plan in writing as it makes it official and helps you to take action. Focus on creating a new budget based on your reduced income and level of spending. It is important that you respect your new budget as it will guide you in successfully overcoming your debt burden.
Summary: Identifying the problem is the first step
The solution to resolving any personal debt problem requires that you first identify and accept the presence of the problem. Once you have identified the problem you will be able to formulate your specific action plan. Lastly, we encourage you to consult with a financial planner as they will be able to assist you with identifying the steps required to resolve your credit problems. The reward of all your hard work is that you will be greatly relieved once your have put together your plan to improve your financial position.