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Canadians in debt: How to get from red to black

Canadians have some serious debt. About 1.7 million households have a total debt-service ratio of 40 percent or more, according to a recent report by the Vanier Institute.

"The Current State of Canadian Family Finances" notes families struggling to balance persistently high debt loads against modest savings and precarious income flow are especially vulnerable to potential adverse events such as rising interest rates or job loss.

Younger and older family members in particular are struggling with the current economic climate. Youth are finding it difficult to get into the job market as people aged 55 and up have garnered half of the net jobs made available since the low point of the recession in 2009.

And despite older people's increased participation in the labour market, there's been a huge increase in the number of seniors declaring bankruptcy — a 1,700-percent rise over the last 20 years.

The statistics are a wake-up call, according to Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada.

"Canadians are kind of skating by right now, and my concern is that they're not really looking at ways to get their financial house in order and prepare themselves for anything that might come their way—and it really could be anything," Schwartz says from his Toronto office.

"Somebody could go through divorce or separation. Job loss is a big thing; younger people are having trouble getting jobs because older people are staying employed longer because they need to. Older people are losing jobs but have to work and end up working at fraction of their wage as before. What we end up with are people in debt."

Schwartz says there are several practical steps Canadians can take to get their debt under control and their family finances in order.

Take a look in the mirror. Ask yourself some questions and be honest answering them. Are you living within your means? Do you even know if you're living within your means?

"If you don't know, the first step is to work with a budget," Schwartz says.

"Are you saving money? How much of money goes toward saving? Do you have a plan around savings? The same questions apply to debt repayment. Are you paying bills on time? Or are you constantly having finance charges or late-payment charges with something as simple as a utility bill? A lot of people don't have an idea of how much they've spent over the course of a month, especially if they're always using credit cards instead of cash."

Track your expenses
"Budget is often looked at as if it's a dirty word," Schwartz says. "It's nothing more than a snapshot of how you're spending your money. If you left the house with $100 and came home with $20, where did you spend that $80? Every time you buy a pack of gum, flowers, or groceries, write it down."

You can track your spending in a little black book or download the CCCSC's free iPhone Budgeting App. The app helps identify areas of high spending, suggests ways to cut spending, and gives warnings when you're coming close to a spending limit in a specific area.

"Knowledge is power," Schwartz says. "If you have an idea where you're spending money in most cases the light bulb will go off. If you know you're spending $10 a week going out for coffee, you can decide to make coffee at home. Take that $10 and put it straight into savings account that you can use for a vacation or to pay off debt. All of a sudden have options and alternatives. It's liberating."

Pay off debt as quickly as possible
"Once you've decided to budget and have put aside money every month, you now have a pool of money you can apply to debt," Schwartz says. "Pay it off as quickly as you can and stick to it — make it a habit."

Pay off high-interest debts first
"Make your money work as efficiently as possible. If you have a credit card at 19 per cent and a mortgage at three percent, get rid of that credit-card debt first. Be ruthless about paying it off. Once you've done that go to the next highest one: say it's a line of credit at 10 per cent. Then go down the line."

Try the snowball technique
"There's an emotional, mental side to paying down debt. Start with a small debt; say it's with a department store for $575. Commit to paying it off within six weeks. Then it's done. Check that one off the list. Go to the next biggest one. Check that off list. Go for small wins, small celebrations, to work yourself into the habit. These create behavioural changes."

Increase your revenue
"We talk a lot about reducing cost but we don't talk about increasing revenue very much," Schwartz points out. "Are there other opportunities where you can put yourself to work to earn extra money even for short period of time? Maybe it's a seasonal thing. Take that money and put it directly to your goals."

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