Dealing with Debt: A five-step plan to be debt-free in three years or less

If your employer tells you to expect a week’s delay for your next pay check, how will you respond? Will you find yourself panic-stricken, scrimmaging to rub two cents together to get by, or will you rest easy knowing you have a contingency plan—money saved in an emergency nest egg to see you through this minor financial setback?

The Vanier Institute of the Family authored a report in early 2010 assessing the current financial state of Canadian families. It cited research that found 59 per cent of respondents stated “they would be in trouble if their pay check was delayed by even a week.” The study also revealed that Canadian families are “walking a financial high wire” with research from 2009 indicating several troubling trends. 2009 saw a 50 per cent increase in mortgages running 90 days or more in arrears compared to 2008. The number of credit card holders behind at least three months in their payments rose 40 per cent from 2008 to 2009. Also, household debt climbed to an astounding $96,100 in 2009, creating a debt-to-income ratio of 145 per cent, the highest it’s ever been according to the report.

Along with the rest of the world, Canada is slowly recovering from one of the worst recessions experienced in a generation. Governments and corporations have begun to pick up the pieces and to lay out plans which will prevent repeats of some of their mistakes. But the “great recession” or “credit crisis” also brought to light the abysmal state of personal finances for many Canadians, and exposed financial missteps which have led to overspending (on credit), under-saving and far too much consumer debt.

Warning Signs
Are you on the verge of a credit crisis? Are you a slave to your debt? Do you:

• Use credit cards for everyday purchases because you do not have enough money in the bank?
• Increase your credit limits to make more room for purchases?
• Find yourself further in debt from one month to the other with no repayment plan?
• Find yourself borrowing from friends and family to handle your debt?
• Have multiple credit cards that are maxed out or close to the limit?
• Hide retail “therapy” purchases from your spouse or significant other, or suffer from buyers’ remorse?
• Have only a vague idea of how much you really owe?
• Avoid answering collection calls, or opening your bills when they arrive in the mail?
• Lack an emergency fund for important or urgent unplanned expenses?

According to Credit Canada (a Canadian charity which helps individuals and families prevent and respond to financial difficulties), all of the above are telltale signs that an individual’s personal finances are spiralling out of control. If you answered yes to any of them, you should create an action plan or seek professional help to address your debt management and spending habits. Tackling debt can feel like an overwhelming challenge, but where there’s a will—and a plan—there’s a way.

“Get real about what it is you’re spending. Then you can deal with the debt.”

According to Gail Vaz-Oxlade, a personal finance maven and renowned finance author, a columnist, and the host of the hit TV show Til Debt Do Us Part, “People have no idea how much money they make or how much money they’re spending. They are completely clueless about their money; I show people what they’re making and they’re surprised because people think their income is gross dollars, but what you earn is your net.” She stresses the importance of realizing exactly what you earn and spend each month before trying to create a repayment plan. Vaz-Oxlade vehemently states, “Get real about what it is you’re spending. Then you can deal with the debt.”

“All those people who say ‘It’s not so bad, I have a handle on my debt’ . . . I ask them, ‘Do you pay off your credit card balance every month?’ ‘No.’ ‘Well you’ve totally gotten rid of your overdraft protection?’ ‘No.’ And there are people out there who still believe their line of credit is their emergency fund,” says Vaz-Oxlade. “I make people get real about what it is they’re spending. Then you can deal with the debt.” She shares her debt-tackling action plan in her most recent book, Debt-Free Forever: Take Control of Your Money and Your Life. Here, Black Ink Magazine takes a look at a few of Vaz-Oxlade’s steps to eliminate debt:

Debt Detox: Five-Step Debt Repayment Plan

Step 1 – Add up everything that you owe
People tend to think about their debt in terms single debts (my student loan payment, my visa payment etc.) instead of the sum of the parts. To get a sense of just how deep your debt is, start by adding it all up: bills, credit cards, car and mortgage payments, loans, etc. List them all in a spreadsheet to figure out your monthly spending. Next figure out your net monthly income to determine money earned vs. money spent. Are you in the red or the black?

Step 2 – Rank your debts from most expensive to least expensive
The most expensive debt is the debt with the highest interest rate, not the highest principal amount. Using a list of your debts, write down the interest rates beside each. You may want to start a new list, with the highest-interest debt at the top, going in descending order to the lowest-interest one at the bottom. Starting at the top, this is the order in which you want to repay your debts.

Step 3 – Figure out what you have to pay each month to remain in good standing
Using your debt list, write down the minimum monthly payment for each item. These amounts are important because if you can’t keep up with them, you will damage your credit score. But don’t stop there, because it will take you ten years to pay down your debts if you only ever pay the minimum payment.

Step 4 – Figure out what you have to pay to get out of debt in a reasonable amount of time
According to Gail Vaz-Oxlade, a reasonable amount of time is three years or less for consumer debt. The same amount of time is reasonable for student debt, if it represents five or fewer years of classes (for example, a four-year undergraduate degree). If your debt is tied to a professional degree, it will take longer to pay off, and in this case Vaz-Oxlade recommends setting a 10-year payment period. Figure out the amount and frequency of all the payments you need to make in order to free yourself from each debt in your chosen amount of time (ideally, three years or less).

Step 5: Implement the “Snowballing technique” to tackle debt
First, make your minimum payments for every item of debt. Then, take the money you would have otherwise used to make additional payments to any debts, and instead use it only to make an additional payment for your most expensive debt, the one at the top of your priority list. Continue this pattern each month until your highest-priority debt is paid off, and then direct the additional payments to the next-highest debt instead. Keep moving down the list as you pay each debt off, “snowballing” your payments until all of your debts are paid in full.

Tip: Don’t forget savings during debt repayment
A good rule of thumb is to set aside 10 per cent of your net income for your savings. According to Vaz-Oxlade, “Saving is a habit and as long as you haven’t established [the] habit then you won’t save.” Not that this habit will be easy to start, or to stick to; but discipline is key. “There’s always a good reason not to save (a long needed vacation, a new car, etc.). A good reason to save is because you are supposed to and a rainy day always comes along.”

For more information about Debt-Free Forever: Take Control of Your Money and Your Life and Gail Vaz-Oxlade’s other publications, go to


Dawn Vernon
Associate Editor