Squeeze your debt to seize wealth

BY CLEVE DeSOUZA

We are well into 2021, and most experts agree that we’re on the right path to get past the pandemic and its restrictions on our lives. It’s time to start making plans again.

Before you make too many plans though, consider all you have gained in the past year. The pandemic likely forced you to slow your spending. Dinners out, concerts, even some personal-care services were discouraged. What happened to your spending? For many of us, it dramatically shrunk.

If you were smart, you used the extra money to pay down your debt. Congratulations! You have taken a big step on the road to financial freedom. If you did not do that, it’s not too late to start. Today, I am going to explain how crushing your debt is the key to building wealth and creating financial security.

Credit cards are one of the worst ways to carry debt. The interest rates vary, but they all add up fast. If you owe $200 on a credit card charging 19% interest (the average rate in Canada), your minimum payment is only $15. If you never borrow another dollar on that card and keep paying the minimum payment, it will take 16 months to clear the card and you will pay $26 in interest.

On average, though, very few of us owe only $200. The average Canadian carried $4,240 on credit cards in 2019. If you have that average amount on your cards and never charge another dollar, you are still going to pay thousands of dollars in interest.

If you make just the minimum payments on that $4,240, which is usually about 2% of your balance or $84.80 in this example, it will take you more than 25 years to pay off the card. And you will pay almost $7,000 in interest.

If instead, you pay $106 every month, you will pay the $4,240 off in a little over five years. It will cost you $2,530.03 in interest. That is still too much of your hard-earned money to give to the bank, but it’s better than the minimum payment scenario.

Once you clear that debt, you have more money to invest. Investments are how the billionaires made their money and how they keep growing their fortunes.

While you are paying off your debt, think about buying a home. For most Canadians, a personal home accounts for most of their wealth. Be sure you do your homework and buy a home you can afford, and that is in a neighbourhood where the value is sure to grow.

Many families take the simple step of buying a second home and turning it into a rental property so they can passively collect income every month.

Another tried and true investment option is to find compounding interest accounts. If you put $500 per month into a compounding interest investment with 10% interest rate starting on your 20th birthday, you’ll have $5.2 million in forty-five years at retirement.

As you pay off your debt, you will have more freedom to take on higher-risk investments. Higher risk means higher pay off. It is best to consult with an expert before you consider high-risk investments. The market is constantly evolving, and an expert can guide you to the best choice for you.