Step 4
Use the 50/30/20 rule
How much of your paycheck should go towards your debt payments? This can vary, but a good place to start is to follow the 50/30/20 rule.This means that 50% of your spending should be spent on must-haves, 30% on wants, and 20% on paying down debt.
50%- Must haves
Essential spending that you have youcan’tavoid:rent, mortgage, utility bills etc. Pay these as soon as they are due and keep track in yourbudgetso you are up to date.
30% - Wants
These are non-essentials, butthey help keep you and your family happy. These are meals out, treats,trips,etc.
20% - Paying down debt
Now you have listed and restructured your debt,use 20%topay off debt.Once you’ve calculated how much this is, a great tip is toset up aRecurringPayment(for credit cardbalances) oraRecurring Transfer(to pay down aScotiabankLine of Credit). Set it for the day after you receive yourpay checkor other income.
Terms you should know
Here’s a cheat sheet to help you understand the language around debt.
Assets
An asset is anything you have of value that can be converted into cash. Common assets are cash, property, or investments.
Bankruptcy
Filing for bankruptcy is a legal process that can eventually relieve you of your debt obligations. However, it also lowers your credit score which can make it very difficult to get a loan, credit card, mortgage, or even an apartment in the future.
Creditcounselling
There are many non-profit agencies that can offer youeducation on budgeting and paying downyourdebt.You can find a trusted onehere.
Credit score
A credit score is a value between 300-900that shows your creditworthiness (i.e.how much a lender can trust you to pay back a loan). The higher the score, the better you look to a lender. Getting too close to, or going over, your credit limit and missing paymentswilllower your score. You can keep track of your score on your mobile banking app.
Default
To be in default means to have failed in making your loan payments for some time. This can reduce your credit score and lead to seizure of property.
Interest rate
This is how much it costs to borrow money. This is the percentage of a loan that you must pay back in addition to the money borrowed.
Liability
A liability refers to the amount of money you’re responsible for paying back such as a credit card balance.
Mortgage
A mortgage is a home loan. It’s considered a good debt because a home builds equity over time.
Revolving debt
Revolving debt (ex: credit card debt) is credit you can borrow from a lender over and over again, up to a certain limit. Your monthly payments aren’t fixed amounts but depend on the balance.
Secured debt
This kind of debt is secured against some kind of collateral, such as your house or your car. If you default on a secured debt payment (i.e. mortgage or car loan payment), the property can be used to pay back the lender.
Unsecured debt
Unsecured debt isn’t attached to property or an asset and is generally associated with high interest. To be eligible for this kind of loan, you need to be a borrower in good standing. Credit cards or lines of credit are examples of unsecured debt.