How to Defeat Debt and Turbocharge Your Savings - Dundurn
Jan 27, 2022

How to Defeat Debt and Turbocharge Your Savings

Are you wondering how to survive and thrive in today's reality? We know, it's tough, and with so many different services and strategies available, it can get kind of confusing. Globe & Mail personal finance reporter Erica Alini has a four-step system to help you defeat debt and turbocharge your savings! To get more tips like this, read more in her book Money Like You Mean It.

1. You need a vision for your financial goals.

If you’re thinking about paying off debt or stepping up your savings game, you’re probably thinking something like: “I have to start paying off my [insert dollar figure here] credit card debt.” Or, “I have to ramp-up my savings for my down payment.” But I bet that is not the way you think about your splurges. I also don’t think “I have to spend $300 on this designer jeans” ever crossed anyone’s mind. No, buying the jeans is an impulsive, emotional decision. We want the jeans because they’re cool – because they will make us look cool. It’s all about envisioning the outcome of that purchase (the reality may or may not correspond to the fantasy, but that’s a problem for after we’ve swiped the card). 

I want you to start to think about paying off debt and boosting your savings in the same way. Can you envision what will happen once you’re no longer paying hundreds of dollars a month in credit card bills? Maybe it will free up enough of your budget that you can finally ditch the dingy basement rental you currently call home and move to an airy, sunny bachelor suite. Or maybe you’re trying to save for your kids’ education. I want you to envision what you’ll feel like at their graduation knowing they aren’t bogged down by tens of thousands of dollars of student debt because you saved up for them.

If you attach a powerful vision to your financial goals, they become something you want to do rather than something you have to do. 

2. Chop up big goals into smaller ones.

Having a vision is a start. But if your goal is a big, long-term one, it’s hard to stay focused. To keep up your motivation, it helps to break up those larger goals into shorter-term targets. 

You know how in a race, no matter how exhausted you feel, you find it in yourself to pick up the pace again when you see the finish line? That’s a well-documented psychological phenomenon: the closer we feel to achieving a goal, the more oomph we get to reach it. So set up some intermediate finish lines along the way and throw yourself a little party every time you cross one. 

You may also want a visual aid. You could use a paperchain, for example. Every loop represents $1,000 that you paid off or saved up. Every time you reach an intermediate target, you shred one loop and watch the chain get smaller.

3. Map your cash flow.

As psyched as you can get about saving up or attacking your debt, you need to have a handle on your cash flow. How much can you realistically set aside for savings or debt payments? Here’s the good news: you don’t need to track every cent you spend, nor a spreadsheet with every imaginable spending category. You need a Money Bucket System. You probably already have two or three buckets for your money: a chequing account where your paycheque and government benefits land, a savings account and maybe also an investment account like a tax-free savings account (TFSA) or registered retirement savings plan (RRSP) for your retirement savings. The Money Bucket System is about managing your cash flow by setting up a few more accounts. 

For example, you may want to open a second chequing account to which you transfer money for all your monthly fixed expenses, like your rent or mortgage payment, bills and recurring debt payments. It’s also handy to set up regular monthly transfers to pay infrequent, larger bills like property taxes and some utility bills. You can also set up several savings accounts for short-term goals like vacations, Christmas presents or variable annual spending like clothing or your kids’ after-school activities. Consider also having two savings accounts for emergencies – because when financial disaster strikes, you’ll want some cash on hand. One of these money buckets is for smaller emergencies, like your AC breaking in the middle of a blistering summer. The other is for the mother of all emergencies: unemployment. The general rule is to have three to six months of living expenses socked away to keep you afloat through a spell of joblessness. 

But what about bank fees, you may ask. If your bank is helping itself to a bit of what’s in each of your many accounts every month, the Money Bucket System can get pricey. So I’ll shout this from the rooftops: You don’t have to pay fees for the privilege of giving the bank your money. There are many online banks and credit unions these days that offer no-fee banking. Even the big banks will often waive some fees if you have several products with them (for example, your banking accounts and a mortgage) or if you maintain a certain minimum balance. Financial institutions generally have a limit on how many accounts you can open but if you rely on a couple of them, you should be able to set up all the money buckets you need. Make sure you have free e-transfers so you can move money quickly and at no cost between accounts and different banks.

4. Automate as much as you can.

Once you’ve mapped out your cash flow, you can set a lot of it on autopilot. Automate your bill and debt payments and set up regular contributions to your investment accounts and any other savings accounts for long-term goals. You can then plan time-limited transfers to your other savings accounts. For example, let’s say it’s January and you need $3,000 for a vacation by the beginning of August. You can schedule monthly transfers of $430 ($3,000 / seven months) so that your vacation will be fully funded by Aug. 1. Once you’ve used those funds, you can rename the account according to whatever short-term goal is coming up next. For example: “Christmas Gifts.” You get the idea.

Erica Alini is a personal finance reporter at Globe and Mail. At Global News, she wrote the wildly popular newsletter Money123 and was the face and creator of the network’s Money123 personal finance series, which aired on Global National every Saturday evening for nearly two years. She lives in Toronto. Learn more here.