The average Canadian citizen now owes over $22,000 (not including mortgages). Consumer debt in Canada is $1.7 trillion. Yes, I said TRILLION. That is a scary thought.
If you are anything like I was, you may be haphazardly throwing money at your liabilities without much of a plan. Well, I am here to teach you that there is a better way!
One of the most common ways to pay off your debt is a method called the Debt Avalanche. The accountant in me knows that this is also the post practical way to pay down debt, but it isn’t my favourite method.
The concept of the Debt Avalanche is simple. You begin by organizing your debt in order of the highest interest rate.
- Credit Card (19% interest) – $1,500 balance
- Student Loan (6% interest) – $32,000 balance
- Car Loan (4% interest) – $6,500 balance
Now, you begin putting as much money towards paying off the account with the highest interest rate. In the above example, you will focus on paying any extra money you have in your budget towards the credit card debt. With the remaining accounts, you will only pay the minimum payment.
Once you have paid off the first balance, you move on to the balance with the next highest interest rate. This process continues until you pay off the balance with the lowest interest rate.
This method could save you thousands of dollars in interest charges every year. For this reason, this method is mathematically the best method for paying off your liabilities.