Value of advice: when it comes to paying down debt and building up savings
(Reading time: 3:45)
For many Canadians, paying down debt and building up savings is a bit of an oxymoron.
After all, if you had extra money lying around to put towards savings, you most likely wouldn’t have had to rack up any debt in the first place (or at the very least, not have to carry a balance on that debt).
However, the reality of living in the 21st century is that life is expensive.
Inflation hasn’t been helping much in that regard either.
The cost of pretty much everything from food and utilities to homes and higher education have been rising faster over the last 20 years than the average income. That means today’s working generation (mostly comprised of Gen X, Millennials, and Gen Z) are all having to rely a lot more on credit as a way to fill the gap in monthly cash flow.
Where are education members on the whole ‘debt vs. savings’ spectrum?
According to the Educators Financial Kickstart Challenge, 54% of education members have non-mortgage debt they would like to get under control. When it comes to savings, 53% are putting money away regularly, while the remaining 47% are finding it more challenging to do so.
So, how do you bridge the financial divide between paying down debt and building up savings?
“Well, that’s a question that doesn’t come with a one-size-fits-all kind of answer,” says Educators Senior Financial Advisor Shannon Lamont. “Coming up with a solution depends on a variety of factors, such as how much income is currently coming in, whether you’re single, married, or have kids—and how close you are to retirement. Plus, as an education member, there are additional considerations that also need to be factored in. Yet no matter where you are in life, what your cash flow is like, or how dire your debt situation seems to be, there is always a path forward to greener financial pastures. All it takes is being pointed in the right direction.”
This reminds Shannon of a married couple who were in need of some debt and savings guidance.
“Jeff and Denise were referred to me by a district leader,” recalls Shannon. “They had a growing family and, like all parents, wanted to provide the best possible life for their kids. However, they wanted to do this without jeopardizing their retirement down the line. With increased expenses due to new additions to the family and a new home, debt payments were eating away at their savings and money was tight. The stress was building.”
That’s when Shannon stepped in to help.
“I sat down with Jeff and Denise and together we came up with a strategy,” continues Shannon. “This involved getting them on a debt management plan so we could reduce their monthly payments, which would effectively increase their cash flow. This would put Jeff and Denise back on track toward paying off their debt in a timely manner, while at the same time positioning themselves to rebuild their savings.”
If you’re projecting to reach your 85-factor at age 59 (the average retirement age for education members), many in the education community plan to be debt-free by the time you start collecting your pension.
“Your pension, while a great benefit, won’t be bringing in as much as you were earning during your working years,” explains Shannon. “That’s why Jeff and Denise didn’t want to be stuck paying off debt in retirement. To maximize their pension income down the road, it was important for them to get control of their debt sooner rather than later. That’s where reaching out for professional advice can mean the difference between making serious strides on the debt payment front, or simply spinning your wheels.”
In order to get control of your debt, Shannon recommends familiarizing yourself with the pros and cons when it comes to your credit options:
|Personal Loan||• Set payment term
• Can be paid off anytime
|• Higher interest rate|
|Credit Card||• Low minimum payment
• Revolving limit
|• Higher interest rate
• Can have debt for life
|Line of Credit||• Like a low-interest credit card
• Revolving limit
• Can be paid off anytime
|• No set payment term
• Can have debt for life
|Mortgage||• Set payment term
• Lowest borrowing rate
|• Pre-payment restrictions
• Not easily refinanced
• Long amortization
“Being aware of the types of debt you take on, or currently have, will provide you with the capacity to develop a strategy to pay it all off,” states Shannon. “Just keep in mind that paying down debt and building up savings is a journey. It won’t happen overnight, but if you stick to the plan, you will get there.”
With Denise having gone on multiple maternity leaves, Shannon also had to make sure that any plan was also maximized for retirement (to minimize the potential for a pension income gap).
“This is where the importance of educator-specific advice comes into play,” says Shannon. “With Denise being an education member, the new plan was developed in a way so that she could buyback pension credits. Meaning her multiple maternity leaves wouldn’t affect her pension income come retirement.”
Are you taking or coming back from a leave? You should understand pension buybacks.
With plans for debt and retirement taken care of, the next step was capturing additional goals.
Shannon goes on to explain, “Being able to contribute to an emergency savings account and save for their children’s (post-secondary) education were and are very important to Jeff and Denise. With a solid plan in place, they didn’t have to compromise on these goals—plus they even had extra savings left over to splurge on family vacations, creating everlasting memories with their kids. Moments like those you can’t put a price tag on, which brings us full circle to the true value of advice.”
If you’re looking to pay off debt sooner than later, Shannon offers up the following tips:
- Make more than the minimum monthly payment (when possible)
- Pay off debt with the highest interest rate first and smallest balance outstanding
- Consider lowering the limit on credit cards
- Set spending limits or pay using debit
- Get a consolidation loan
Of all the options above, loan consolidation offers you the following immediate benefits:
- Simplifies your finances (multiple loans/payments become one)
- Saves you money overall in interest payments
- Provides the ability to repay your debt sooner
- Gives you the potential to improve your credit score (I.e. with only one loan payment to keep track of, you’ll be less likely to inadvertently miss/be late making a payment)
For financial advice pertaining to your specific needs and goals, be sure to reach out to Educators Financial Group.
Helping you to pay down debt and build up savings is just the tip of the iceberg when it comes to the expert services, products, and advice we provide. Plus our deep-rooted understanding of how your pay structure works during your working years (pay grid) and retirement (OTPP/OMERS)
Brokerage License 12185