Sure, inflation is a new experience for Gen Z. But as a Zoomer, you're part of a financially savvy generation. So while inflation might be new for you, you likely already have the solid financial habits you need to help you get through these inflationary times: You get why it's important to save. And you use your credit cards responsibly.
Of course, this doesn't mean you don't have any debt—after all, in this day and age, who doesn't? In fact, according to the Canadian Bankers Association1, 73% of Gen Zers hold some kind of debt, with an average debt load of $14,100.
But with inflation rearing its ugly head, it's perfectly natural to be feeling some not-too-great vibes around your debt. The good news? You can tackle your worries head on by using a debt repayment strategy to help reduce your debt load. Here's how.
Being prepped will help you get the numbers you need to start cracking down on what you owe:
- Make a master list of all your debts. A spreadsheet is a great place to store this info. Use exact figures, and include minimum monthly payments and interest rates.
- Create a budget. If you don't already have a budget, now's the time to make one. Be sure to include all your expenses—so if you have a weakness for those 75% off gaming app deals, make space in your budget for them.
- See what changes you can make. Take a good look at your spending habits, and identify expenses you can reduce (or live without). And are there ways you can add to your income, like with a side hustle? Adjust your budget numbers as needed.
- Determine a monthly debt repayment amount. It's an easy equation: Income - expenses = the money you have available to pay down your debt. You may or may not want to use all of it, but make sure you commit to a monthly amount.
So which of the following three debt repayment strategies is the right one for you? It depends on your personality, and your financial circumstances. The key is to select a strategy you can stick with.
With the debt snowball method, you'll focus on paying off your smallest debt first while making the minimum monthly payments on all your other debts. “Snowball" refers to the way the amount you have each month to pay off your smallest debt gets larger with each debt you retire.
How to implement the debt snowball method:
- Take your master list of debts and sort it according to the amount of debt, from smallest to largest. Your smallest debt will now be at the top of your list.
- The first month, make the minimum payments for each of your debts, other than your smallest debt.
- Put the rest of your monthly debt repayment amount toward this smallest debt.
- Do this each month until you've paid off your smallest debt. Be sure to celebrate! Then delete this debt from your list, so you can work on your next smallest debt.
- Continue with this process of paying the monthly minimums on your other debt and putting the rest of your debt repayment funds toward your smallest debt.
- Credit card A, with a balance of $1,100 and a minimum monthly payment of $35.
- Credit card B, with a balance of $3,000 and a minimum monthly payment of $90.
- Student loan of $9,000, with a minimum monthly payment of $210.
With the debt snowball method, you'd pay the minimum monthly payments of $90 (credit card B) and $210 (student loan). After making these minimum payments, you'd have $300 left of the $600 you've budgeted for debt repayment. You'd put this $300 toward your smallest debt, credit card A.
You continue this process each month until you've paid off your credit card A balance. It's a small win, and you're pumped up to keep chipping away at your debt load. So the next month you pay the $210 minimum monthly payment on your student loan, and put the remaining amount ($390) on credit card B, which now holds the honour of being your smallest debt.
Why choose this method? With this method, it's all about the psychological effect of the small win. If frequent small wins motivate you more than a longer-haul big win, the debt snowball method could be a good choice for you.
The cons: On the downside, you won't always be tackling your highest-interest debt with this method. Which means you'll likely take longer to pay off all your debt. Plus, it'll cost you more overall.
Tip: You can speed up the snowball debt repayment strategy by enrolling in a program like Scotiabank's Bank the Rest®.
Yes, basically Bank the Rest puts your savings on auto-pilot. And the bonus? You can use the extra amount you save each month toward paying off the smallest debt on your list or the minimum monthly payments on your other debts.
Like the debt snowball method, with the debt avalanche strategy you're consistently paying more than the minimum on one debt each month. But that's where the similarity ends. With the avalanche method, you'll focus on paying off your highest-interest debt first, while also making the minimum payments on all your other outstanding balances.
How to implement the debt avalanche method:
- Take your master list of debts and sort it according to interest rates, from highest to lowest. Your debt with the highest interest rate will now be at the top of your list.
- The first month, make the minimum payments for each of your debts, other than your highest-interest debt.
- Put the rest of your monthly debt repayment amount toward this highest-interest debt.
- Do this each month until you've paid off your debt with the highest interest. Chances are, this might take a while, so be sure to celebrate! Then delete this debt from your list. The next debt will now be your highest-interest debt.
- Continue with this process of paying the monthly minimums on your other debt and putting the rest of your debt repayment funds toward the debt at the top of your list (your highest-interest debt).
- $3,000 balance on credit card A, with a 21% interest rate and a minimum monthly payment of $90.
- $1,100 balance on credit card B, with a 14% interest rate and a minimum monthly payment of $35.
- $9,000 student loan, with a 6% interest rate2 and a minimum monthly payment of $210.
Using the debt avalanche method, you'll pay the minimum monthly payments of $35 (credit card B) and $210 (student loan). After making these payments, you'll have $355 left of the $600 you've budgeted for debt repayment. You'd put this $355 toward credit card A (your debt with the highest interest rate).
You continue this process each month until you've paid off your credit card A balance (don't forget to celebrate—it's a big accomplishment). The next month, you'll pay the $210 minimum monthly payment on your student loan and put the remaining amount ($390) on the debt that now has the highest interest rate: credit card B.
Why choose this method? With the debt avalanche method, you end up paying less interest overall than you would using the snowball method, since you're paying off your highest-interest debts first. It's a great method if your personality leans toward discipline and patience (since it does take longer to see that initial "win" of retiring a debt).
The cons: This approach requires commitment, even in the face of unexpected obstacles. For example, an emergency expense that eats into the amount you've budgeted for debt repayment can seriously derail your progress, making it an even longer haul before you can retire your highest-interest debt..
Tip: If you have a student loan as part of your debt load, but you're in a non-repayment period — for example, if you're still in school — consider opening up a Scotiabank MomentumPlus Savings Account (MPSA).
By setting up pre-authorized contributions equivalent to the minimum monthly payment you would have paid on your student loan during this time, you can take advantage of MPSA's Premium Interest3 periods.
And once you begin repaying your student loan, you can use the funds you've saved in your MPSA to help supercharge your debt repayment by making a lump sum payment toward your highest-interest debt.
With the debt consolidation method, you'll use a consolidation loan to pay off your other debts. The key to this strategy is that it lets you consolidate all your debt payments into a single monthly payment.
How the debt consolidation method works:
- Apply for a consolidation loan at your financial institution. Scotiabank, for example, offers Scotia Plan Loans to help consolidate your debt and reduce interest costs.
- Compare the combined annual percentage rate (APR) of the debts you want to consolidate with the APR of your consolidation loan—a consolidation loan is ideal if the combined APR of your debts is more than the loan's APR. If you find the math getting tricky, an online consolidation loan calculator can help.
- Use the proceeds of this consolidation loan to pay off your other debts. (And yes, don't forget to celebrate, even though you still have this new debt on your books.)
The cons: When it comes to finances, additional breathing room is great. But consolidating your debts won't be effective unless you can commit to not taking on any new debt while you're paying off your loan.
Chances are, one of these debt repayment strategies has your name written all over it. Here are some additional things you can do to help you meet your debt reduction goals:
- Stick to your budget. No matter which debt repayment strategy you choose, you'll get the best mileage by tracking your spending and sticking to your budget. Overspending hurts your progress because it reduces the amount you have each month to put toward your debts.
- Use your credit cards wisely. How? Don't put anything on your credit card that you can't pay off by the payment due date. Because there's nothing more soul crushing than seeing your debt grow while you're trying to pay it off.
- Build an emergency fund. There are ways to take the pain out of saving even when you're trying to pay down debt, such as enrolling in a program like Scotiabank's Bank the Rest®, or automating transfers from your chequing account to an MPSA.
Inflation's brought on a lot of gloom and doom in the news lately. But with a bit of planning and a large dose of commitment, you can still work toward paying off your debts—yes, even in the face of rising prices. The right debt repayment strategy paired with solid financial habits can go a long way toward reducing your debt load—and your worries.
This article is provided for information purposes only. It is not to be relied upon as financial, tax or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, and other investment factors are subject to change without notice and The Bank of Nova Scotia is not responsible to update this information. All third party sources are believed to be accurate and reliable as of the date of publication and The Bank of Nova Scotia does not guarantee its accuracy or reliability. Readers should consult their own professional advisor for specific financial, investment and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
2This interest rate is for illustration purposes only. The federal government has suspended the accumulation of interest on student loans until March 31, 2023, after which interest on the federal student loans will be eliminated.
3, 4 A maximum of five Premium Periods at any one time, each of which can have a length of 90 days, 180 days, 270 days, or 360 days. For each Premium Period, Premium Interest is calculated daily by applying the Premium Interest Rate to each deposit, including any accumulated Regular Interest, until the end of the Premium Period. Premium Interest is paid at the end of each Premium Period, so long as NO DEBIT TRANSACTION HAS OCCURRED within that Premium Period. When a debit transaction occurs, no Premium Interest is payable for that Premium Period and a new Premium Period of the same length will commence the same day. Refer to Current Rates Page for current Premium Interest Rates, which are subject to change.