We may be going through a recession soon, but that does not mean your debt is suddenly going to go away. If anything, you’re likely seeing your debt climb higher and higher. This comes from higher interest rates and inflation eating up your cash faster and faster.
But there are certainly ways to pay off debt in 2023. Yes this year. Here are the tips I would take on right away, and get rid of your most pressing debt this year.
Create a list
First off, create a list of all the debt you owe. Every single thing, from credit card payments to car payments to student loans and your mortgage. Now, organize that list not by how much you owe, but the interest rate.
Interest rates are what can seriously create more debt. Debt that will only climb higher and higher. It’s very likely that at the top of the list is your credit card, which could have interest rates around 20%! That means $100 on your card suddenly turns to $120 from missing payments. Then $144. Then $172.80! You get the point?
This list will tell you where your debt should go first and foremost. Line up your debt due and pay the highest rates down first, and leave your lowest rates at the bottom.
Next, budget
We say this until we’re blue in the face. Yet, only about half of Canadian households actually have a budget. Even less stick to it! But during a recession or even a downturn, this can be the difference between paying down debt, or swimming in it.
Look at the past three months and take a hard look at your spending. See what you’re actually spending and put that in a budget. Now, be hard on yourself. What can you cut? For example, my family is currently going through a spending freeze on anything we don’t really need. Clothes, subscriptions, eating out, it’s all frozen until we create a little nest egg that makes us comfortable spending on these items again.
You don’t have to go to that extreme, but if you want to pay off debt you should certainly consider it. If you’re really struggling, even consider something like selling your car for a cheaper version. Once you get to spending you’re comfortable with, put your debt payments into your budget, and treat it like your bill payments (also included in your budget). You can even go so far as to create automated payments towards your debt so it’s done without a second thought.
Need some help? Consider passive income
If you’re at Motley Fool Canada, you likely already invest. This can definitely be helpful if you’re looking to pay off debt, while also keeping your cash safe to put towards future investments and emergencies. What I don’t want you to do is take out all your cash to pay off debt. What I do want you to do is perhaps allocate some cash available in your accounts towards passive income payers.
A great option would be Canadian Imperial Bank of Commerce (TSX:CM). CIBC stock is down the most of the Big Six Banks, but will absolutely rebound in the next year or so as it has done decade after decade, downturn after downturn. It also means you can bring in more dividends that you would have at 52-week highs.
Shares are down 20% in the last year as of writing, with the stock offering a 5.44% dividend yield in that time. You can therefore use those dividends to help pay off your debt, transferring out the cash as needed, or again creating automated contributions.
Once your debt is paid down, you can continue to use those payments to reinvest in CIBC stock to create even more returns in the long run! And with shares already up 12% in the last quarter, it’s definitely a great time to consider CIBC stock during this recovery.
Bottom line
Whether you’re swimming in debt and need drastic measures, or just want to feel in control of your finances once more, you can certainly pay down much of your debt in 2023. What’s more, you can create habits that will assure you secure spending and passive income for decades to come.
