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Strategies for Paying Off Debt During Inflation in Canada
The inflation, which has been recently witnessed in Canada as well as many other countries across the globe, has an astounding impact on the manner of managing as well as the chances of paying off debts. Inflation makes your day-to-day expenses go up, the possibility of high interests’ rates, and a decreased value of your money. However, paying off a debt in moments of inflation is not impossible. There are specific ways to manage and bring down your debt while prices rise, hence the need to plan well and follow the correct strategies.
This article represents some of the best approaches tailored to Canadians to help you manage your debt repayment during inflation.
Gain Insight on Inflation and Its Effect on Debt
Inflation is defined as the general increase in the price level of goods and services within a given time, leading to less purchasing power. Inflation is a factor that the Bank of Canada pays keen attention to, and may increase the interest rates to reduce inflation. Thus, for those with debt, these increasing rates translate to higher interest costs, especially for those with variable-rate debt like those on lines of credit or varying-interest mortgages.
- Rising Interest Rates
When inflation rises, the Bank of Canada raises the interest rates to curb the inflation increase. This may lead to an increase in the cost of borrowing, an issue that affects variable-interest debts like an adjustable-rate mortgage or credit lines.
- Eroding Purchasing Power
When prices increase, available income for spending decreases. This makes it difficult to save for the debt payment since most of the income is used to cater for other expenses such as rent, food and fuel.
- Fixed-Rate Debt Advantage
A fixed-rate debt, for example, a mortgage with a set locked-in rate, has an added advantage during inflation because the amount of money you need to pay remains the same while the real value of the debt amount owed declines over time due to inflation.
Prioritise on High-Interest Debt First
One of the key effective ways to manage debt by Canadians during inflation is to focus on paying off the high-interest debt particularly the payday loans and credit cards. Canadian credit cards commonly bear high interest rates, and if there is inflation, variable interest rates can go higher, creating a higher debt burden.
- Action Plan
Prepare a list of all your debt obligations and their respective interest rates charged. Pay off the highest interest debts using the ‘debt avalanche method’ while paying the other debts with the minimum amount needed. This will assist you in preventing the accumulation of extra interest since these charges are easy to compound and get out of control.
- Consider Debt Consolidation or Refinancing Option
If one has several high-interest debts, it is advisable to combine all debts into a single loan with a lower interest rate; this is especially important to Canadians who may be struggling with their credit card bills or other debts with high-interest charges.
- Debt Consolidation
Consolidation loans in Canada enable a client to consolidate several debts into one, usually at a lower rate of interest. This helps make payments easier and also reduces a large proportion of the total interest being paid.
- Refinancing
If a person has taken a mortgage or a big loan, it is better to refinance in order to get a fixed rate that is comparatively lower in the long term. Since the Bank of Canada continues to change interest rates from time to time, it would only make sense to lock yourself into a lower interest rate before the rates go even higher.
Create an Inflation-Adjusted Budget
Inflation is not restrained to your debt but impacts each and every branch of your financial life. That is why it is necessary to make the corresponding shifts in your budget to align with the high cost of living to be able to allocate yourself funds meant to pay off the debts.
Track Your Spending
It requires that you analyze your spending pattern and concentrate on areas where inflation has the most drastic impact. It is actually getting more costly to buy groceries, fuel, and even housing in Canada. Eliminate any form of expenditure that may not be essential and put that money towards paying of your debt.
Emergency Fund
Creating an emergency fund is also important because one is not forced to use credit cards or take a loan in an emergency. In Canada, try to have between three to six months of living expenses saved up in a high-interest savings account that can be provided by credit unions or online banks.
How to Guard Yourself from the Increasing Rates
Since inflation is already a factor, it only makes sense to prepare ourselves for other potential increases in interest rates. The Bank of Canada may decide to increase rates in order to curb the rising inflation, and this directly impacts those with variable-rate loans and lines of credit.
Switch to Fixed-Rate Loans
If you have a variable-rate debt, it will be good to consider getting a fixed-interest-rate loan to avoid future rate hikes. As has been mentioned, there are many lenders operating in Canada that offer fixed-rate plans that can help offer more financial stability.
Pay Down Credit Cards
In a situation where there is an increased change in the rate of inflation, variable interest rates will actually lead to an increased financial burden. It’s advisable to concentrate on paying off credit card balances so that the effects of rising rates will not affect you significantly.
Conclusion
While it may appear getting out of debt during inflation in Canada is impossible, it could be achieved if one has the right strategies in place. Focus on high-interest debts, look into debt consolidation or refinancing of the loans, revisit your budget for rising costs, and look for ways of increasing your income. It is therefore advisable to learn how to manage the debts you have so as to ensure that you are financially secure despite the inflationary pressures.