Surviving in Quicksand – Learning how to climb out of debt7 min read

You know the movie scene – a person ends up stuck in quicksand. They try to escape but the more they panic, the deeper they get. I’m sure not many of us have ever had this problem, but the feeling is very familiar to people who find themselves drowning in debt and can’t seem to get out. Just like quicksand, there is a way…

Understanding Debt, why you should pay it off

Many of us in North America will likely find ourselves in debt at some point while having to manage various bills and expenses. These debts could include a student loan or multiple credit cards. The scary part is that many people don’t realize the hole they’re sinking into. 

It is important to know why you should avoid accruing debt and instead paying these off as soon as possible.

• Being stuck in debt may impact your credit score in a bad way. You want this to be improving over time, otherwise you may be in trouble when you’re older (see my article, Keeping Score)
• Your debt is borrowed money. If you’re not paying it off, you’re likely paying interest on top of your debt. The money you’re paying in interest is money you’re kissing goodbye. If you’re working to pay off the debt, then that money you would have paid in interest is now freed up for saving and investing

Okay, this all makes sense, so now what do you do?

How to dig out

It may feel overwhelming when you have a ton of debt on your hands (maybe up to 5 figures). Some options people hunt for are a bank loan, payday loan, or someone to lend you money, but this isn’t always possible, or digs you in deeper. The only option left is to dig yourself out. It will take discipline and dedication, but it is possible!

For those of you who have multiple debts that you’ve been struggling to pay off for a while, this was the same story for someone close to me. She was under a lot of debt at one point, with 3 credit cards while paying a double mortgage and bills.

The goal was to start picking away at the debt. Seemed daunting, but there are 2 methods I learned which I shared with her:

• Focus on the debt with the highest interest rate
• Focus on the debt with the lowest balance

Each works best in a certain scenario:

Pay the highest interest rate first

(Recommended when there are a few debts relatively equal balances) 

As long as you have debt sitting around beyond it’s statement period, you’re losing more money to interest each day. Knocking out the balance with the highest interest rate first will help you reduce the amount you’re paying in interest, and start paying more toward the principal amount of your debt instead (the amount you actually borrowed).

This will help you slow down the snowballing effect of your debt growing more.

• When you have many balances to tackle, this can be very intimidating. In some cases, you need to just hit your first milestone in this battle, and that means getting the low hanging fruit, or the easy buckets.
• If you have a small balance that you think you can knockout in the short-term, go for it! This will be one less debt you need to throw money to, meaning that money can go towards the next one.
• For some of you, getting a small balance out of the way may seem like a small dent in the mountain, but it will give you the gratification of making it to that first milestone, and the motivation to keep going.

Whichever strategy you choose, we’ll refer to this debt as the “debt of focus” later on.

Staying committed and organized

Since you may be dealing with a handful of debts at the same time, you’ll want to make sure you are monitoring each one. This is something that helped us in our fight; the more awareness and control you have on each one, the less intimidating it is. Remember, if you choose to look the other way, you’ll only dig yourself deeper each day.

A few details you want to record and update every 2-4 weeks:

• The balance remaining 
• The interest rate on this balance
• The due dates for payments

This will allow you to track your progress over time, while also having rates and dates easily available if you ever need to modify your plan.

Know your bills

To attack your debt, you’ll need to maximize the amount you’re paying towards it. This may seem like a form of budgeting, it goes beyond just knowing how much to set aside for bills, but also knowing WHEN those bills will be paid.

For this, you’ll need to record some more details. Make a list of each expense you pay regularly. This includes: mortgage, auto loan, utilities, insurance, phone, internet, cable, or anything else you may have.

Recommendation: you can also do this with a calendar. This will be more helpful later as we will be looking at pay periods.

For each expense, mark down:

• The amount you normally pay (if it is something variable, like a utility bill, you may want to record a range, or an overestimated amount, based on the last 3-6 months)
• The date or time of the month it is paid (e.g. it may always be paid on the 1st of the month, the last day of the month, or every 3rd Monday of the month. This is most needed when you have bills that are pre-authorized, that will be paid from your account automatically. For bills that you pay manually, you can use the due date)
• The frequency of the expense (not mandatory, but will help keep this information easily available as well)

Now that you have this list made, do the same for: your paycheque, and any regular savings contributions you make (like a savings account, TFSA or RSP). These are important because it will help us keep track of when money is also coming in, or the additional money you would need to allocate elsewhere for saving or investing.

Putting your plan into action

So why did I recommend using a calendar? 

The plan that we used to tackle our debt was aligned to her payment schedule, which happened to be bi-weekly, on a Thursday. Also, remember your “debt of focus”, it will come into play here.

The rules we used:

Step 1: Every time you get paid, allocate your money immediately for any bill that is due before your next paycheque.

1. Pay the minimums for debts first (for your “debt of focus”, see more in step #3)
2. Pay your bills (the ones you pay manually)
3. Contribute minimums to your savings (we decided to save something every paycheque, you can do this every other paycheque if you need)

Step 2: Calculate how much you will need to keep in your account until your next paycheque

1. See what preauthorized bills will be coming out over this period, subtract each from your account balance
2. Consider how much you may need for food or groceries over this period and subtract this as well (increase this by another $50-100 if possible, this is in case you underestimate or have unforeseen expenses. Over time you will be able to estimate this easier based on your behaviour and habits)
3. You should now have a remaining amount calculated. This will give you the disposable amount you have as extra to pay to the “debt of focus”. 

Step 3: Pay the extra towards the “debt of focus”

• As mentioned in step 1, you want to start by paying all minimums that are due, but you can wait to pay the minimum toward the “debt of focus” until this step to avoid making two separate payments. Just make sure you have enough to pay the minimum!

Repeat this cycle every paycheque, hopefully you’ll begin seeing the overall balance dropping over time. 

Remember, it’s a marathon, not a sprint. Stay patient and persistent, and you will see these habits paying off (literally!) Consider also reviewing your lifestyle – e.g. eating out less, cutting back on the fancy starbucks drinks – small changes matter!

VERY IMPORTANT – if you find yourself still stuck in the same hole or that your specific situation is a little more difficult to dig out of, please don’t struggle with this alone

As I’ve mentioned in my other articles – if you’re still stuck, don’t hesitate to reach out to a friend or family member you trust for help or advice, or even an advisor at your bank if you’re comfortable.