​​In a Nutshell: Consumer debt is terrible. It robs your financial future. If you are carrying credit card debt from month to month paying 19.99% interest, you are throwing away money. If you are not on track for a secure retirement and have significant consumer debt, then you are heading towards a troubled financial future. You need to tackle your consumer debt now! But don't worry, there are four easy steps to get rid of your consumer debt, but it takes discipline and time. Follow the steps and get on the path to financial security... or don't and be financially doomed... the choice is yours!

audi a4 2012 2.0T used car

12 Month Plan To Improve Your Finances:
Month 5 - Let's talk about debt baby... (aka. Avalance Avoidance Method) 

"Don't stop til you get enough" is a good song but a terrible shopping mantra...
“If the interest you pay on your consumer debt is more than what you save for retirement every year... you have a massive problem!”

Let's talk about debt baby​
Let's talk about you and fees
Let's talk about all the good things
And the bad things debt may be
Let's talk about debt ...

Apologies to Salt-N-Pepa, but maybe it's time we talked about debt for a change...

Debt used well can be a great wealth creator. If you are borrowing at say 3%-5% interest and investing in opportunities whether they are in stocks, businesses, real estate, etc and earning 8%+ annually, then debt is a good way to go. Debt used for an investing return is good debt. 

Debt for things that do not give you an investment return is generally a bad thing... unless perhaps for a house... but that is something I will discuss in another article. 

Debt for consumer goods and services that you can't really afford (like a vacation, car, jewelry, smartphone, smartwatch, sneakers, clothes, purse, dinners out, clubs, that 5 star hotel with a natural waterfall and spa in your room, etc...), leaving you not only with the debt but with interest payments forever as well, is a bad form of debt.  If you're in debt and paying interest for things like a depreciating car that you can ill afford, that's not so good and you're better off buying a used car you can afford with cash.  If you're buying more things on your credit card than you can pay off each month, leaving you with a balance carried from one month to the next on your credit card, that's not good at all. You're probably paying a lot more than you think on interest for those things you bought on your credit card. Forget investing your money, get that credit card paid off!

If you're spending so much on your credit card that you are getting a consolidated loan and putting that debt on your house to reduce your interest rate and pay off your credit card, only to run up debt on your credit card all over again then you have a significant problem. 

You should be limiting your spending to the point where you are able to pay off your credit card comfortably every month with a zero balance. Or save for the thing you want in a savings account, and wait until you have saved enough and then buy it with your credit card and immediately pay off the credit card with the savings in your savings account.  If you can't do that, then you can't buy it. If you can't save enough to be able to afford it, what makes you think you can afford it paying 19.99% interest on it?? You're spending too much and you need to focus on needs instead of wants. And you need to delay gratification.

If you can't afford the basic necessities of life and you have debt carried forward every month then you may need to invest in yourself to be able to earn enough to meet and exceed your basic spending needs. But I think for most of you with credit card and consumer debt that you are carrying month to month, we are probably looking at too much spending on wants and a lack of financial discipline.

As an example, I went to a mall this past Cyber Monday, and after walking around most of the mall, all I bought was a cup of coffee (malls sap me of energy!). There were plenty of things on sale, and I could afford to buy more stuff... but I didn't really need anything. I also didn't really want anything! So I didn't buy anything. What did you buy this Black Friday/Cyber Monday weekend and how much was needs vs wants? (And why did you buy more things... as I've previously discussed, we all already have so much stuff! )

The average Canadian carries $23,271 in non-mortgage consumer debt as of October 2018! It's $34,933 for the average 46-55 year old Canadian! ( http://www.digitaljournal.com/pr/3984196 ) Given the way averages work, that means there are some people with a lot more non-mortgage consumer debt than just $23,271!! And some with perhaps zero non-mortgage consumer debt (yay you! Feels good doesn't it!).

Look back at your work from Month 1 where you added up your consumer debt . How much non-mortgage consumer debt are you carrying? Car loan? Credit cards? Those cards you didn't include in credit cards like cards from department stores or other retailers? Lines of credit? Home equity lines of credit? Past due bills? Do you know how much interest you are paying every year on all that consumer debt? Whatever interest you're paying is money that is not going into investments for your future. Debt interest on consumer stuff is robbing your financial future. You are voluntarily allowing your financial future to be robbed! Calculate how much you pay in interest on your consumer debt every year and compare that to how much you save for your retirement every year. If the dollars of interest you pay on your consumer debt is more than what you save for retirement every year... you have a massive problem!

The average credit card debt for American balance carrying households was $9,333 in November of 2018. Assuming that balance gets carried all year at 18% annually and compounded daily, that would cost a household $1840.13 in interest annually. Instead of $1840.13 going to pay interest on credit cards every year, if you had no credit card debt and $1840.13 was put in an investment account each and every year earning an average market return of 7%, you would have $272,180 after 35 years. If it was invested at that point in a 5% yielding dividend portfolio, it could provide $13,609 passive income every year. So not only does credit card debt cause you to waste money on interest payments, it robs your future of financial security! (And that was only looking at credit card debt interest payments, that didn't include car loan interest, or line of credit interest payments.)

American credit card debt - ValuePenguin
OK, so you've got a lot of consumer debt. Don't fret! Let's fix the problem instead. Every problem has a solution. It's quite simple really. And if you have some self control, it's quite easy as well. It may take a long time depending on your set of circumstances but the sooner you start, the better off you'll be. 


Michael said, don't stop 'til you get enough...well... STOP! YOU GOT ENOUGH!!

If you can't change this one behaviour, you're financially doomed. If you're loaded with no debt and can afford to blow money on things you want and your financial future is all set, then this article isn't even for you... instead go check out some things you might want to invest in, in the investment section of this blog. If you're spending on things you want and can't afford and you're racking up consumer debt and your financial future has you worried, the good news is, you're in control of the situation... just stop spending money now on stuff you don't need.  Remember, if you don't stop now, you're financially doomed. The choice is clear and it's entirely yours. Just stop it! Stop spending. What choice will you make?

If you have chosen to stop spending on things you don't need and can't afford, move on to step 2. If you plan to keep spending and not save for retirement, you're doomed, go back and review Month 4 to help reduce your spending then come back here and go back to the top of this Step 1.


So you've racked up a bunch of consumer debt. Ok, breathe... just breathe. (Sorry I'm editing this on May the Fourth, and so words of Luke Skywalker came to my mind... and like Michael said, "the force has got a lot of power"... but I digress...) We've stopped adding to your debt in STEP 1. So now we tackle the existing debt that you've racked up over your years.

Write down all of your debts and write down which debts have what interest rates... perhaps it will look like this... 

Credit Card Debt: $8000 @ 18% interest
Car loan: $15,000 @ 5.99% interest
Home equity line of credit (HELOC): $30,000 @ 4.45% interest

You're going to want to try to reduce the interest rate on all your debts. Even if you reduce the interest rates, the first debt to pay off is the one that will be at the highest interest rate after any low introductory rate expires. And if you're putting money into investments that grow at 7% while paying 18% interest on credit card debt... what are you doing?? Get rid of the credit card debt that you pay 18% interest on before you start investing to get a 7% return! Once you have debts with interest rates below your investing returns you can start putting money towards investing returns.

As a side note, an important aspect to getting lower interest rates is to have a good credit report. Having a good credit report occurs when you make payments on time, and when you borrow responsibly. How have you been doing? Do you have a good credit report? Or is your credit report bad enough to raise your cost of borrowing money? The better your credit report is the lower you can get your interest rates on borrowed money. So find out what your credit report is and then do your best to improve your credit rating in order to help lower the rates you get charged.
So Step 2... reduce your interest rates... 

I know a lot of people advocate consolidating credit card debt onto your mortgage to get a lower rate... that can work, but from what I've seen, what can also happen is people do that, then they see a zero balance on their credit card and they feel like they can rack up their credit card debt all over again. They get into a vicious cycle. Now you have all that debt transferred to your consolidation loan and you've added a whole bunch of new debt at 19.99% on your credit cards again!

Until you can and do control your own out of control consumption, there's no point doing that. Really make sure you've stopped spending on wants. If you can have the discipline to not spend on your credit card once the balance is zero if you take a consolidation loan, then speak with some banks about that option. Transfer your credit card debt to a consolidation loan at a much lower interest rate. If you think you might wind up spending on your credit card all over again once the balance shows zero after a consolidation loan, then I suggest, you try to transfer your credit card debt to another credit card that offers a zero to low introductory interest rate for 6 months and that has a lower interest rate than what you currently pay, once the introductory rate expires and it goes back to the higher rate. That way, for half a year, you can tackle paying off your credit card debt while paying a very low interest rate. If you can earn more and save more for those few months and put all that additional money towards paying down your credit card debt, then this strategy can work.
Let's say you have a credit card balance of $10,000 with a 19.99% interest rate. If you were able to pay $1,671.48 every month for 6 months, you would be left with $586.11 still owing on your credit card. If you transferred that balance to a credit card with a 0.99% introductory interest rate for 6 months, and paid the same $1,671.48 every month for 6 months, you would pay it off completely and have $0 balance on your credit card! So transferring $10,000 to a lower rate card, even with a $29 annual fee, can save you $557.11. Before you say that's not much, that's 37 hours of minimum wage at $15/hour. Saving 37 hours of work is a good thing! That's almost a whole week of full time minimum wage employment saved!!

Try to find lower interest rate credit cards that you can transfer your balance to. I'm an affiliate of Scotiabank credit cards, so you'll find a couple of cards with low introductory interest rates on balance transfers on this blog.


If you move to a consolidation loan then work towards making regular payments on a schedule to eliminate the consumer debt as quickly as possible. And don't add more consumer debt while you're at it.

If you opt to transfer your credit card debt to another credit card with a low introductory rate for six months, then in that six months really dedicate yourself to making the sacrifice of cutting all but your essential spending and put every dollar you can find, towards paying off as much credit card debt as you can. 

Now, there's a guy out there who talks about snowball methods of paying off debt and paying off the smallest debt first and getting a psychological win and then paying off the next larger debt and so on... well I live in a place with a lot of snow... and trust me, getting rid of small snowball might feel good... but if you have a larger amount of debt with a larger interest rate... you're going to get creamed by an avalanche! 

Money doesn't know what pile it sits in, it doesn't care, it grows based on simple math... that math is determined by the interest rates. If you focus on a smaller debt with a low interest rate and ignore a larger debt with a higher interest rate, you're going to get further behind not further ahead!

Focus on interest rates! Pay off the highest interest rate debt first. Keep making the minimum payments on all your debts to avoid late fees and non-payment fees. But focus all your remaining debt paying money on the highest interest rate debt first!

Let's compare the Snowball Method (paying smallest debts first) with the SmarterSquirrel Method (paying the highest interest rate debt first). Let's assume you have a car loan with $15,000 owing at 3% annual interest rate, credit card 1 with $10,000 owing at 19.99% interest, credit card 2 with $7,500 owing at 16.99% interest, credit card 3 with $5000 owing at 12.99% interest and a student loan with $12,000 owing at 6% interest. That's total debt of $49,500 in both scenarios. Let's also assume for both scenarios that you have $12,000 ($1,000/month) to put towards debt payments every year. And let's assume for both scenarios you have to pay a minimum of $200/month on your car payment so $2,400 annually, a minimum of $50/month on each credit card so $600 annually and a minimum of $100/month on your student loan so $1,200 annually. 

The only difference between the two scenarios will be that in the Snowball Method we'll pay off the smallest debts first. In the SmarterSquirrel Method we'll pay off the higher interest rate debts first. Let's see what happens when we do that...
As you can see, the Snowball Method works but not as well as the SmarterSquirrel Method... and let's face it, the SmarterSquirrel Method is really just the common sense method. Pay off debts with higher interest rates first... doing so in this example saves you $7,383.10! In the Snowball Method, focusing on small debts and ignoring interest rates results in the credit card 1 debt of $10,000 with a 19.99% interest rate growing to $17,508.75 before you start to tackle that debt. Leaving high interest rate debt to grow while paying off smaller debts with lower interest rates is setting yourself up to be wiped out by an avalanche! As a result even though you started with $49,500 in debt, with the Snowball Method you wound up paying $71,572.11 in debt payments to get rid of it all over 6 years. With the SmarterSquirrel Method (which maybe I should call the Avalanche Avoidance Method) you started with the same $49,500 in debt but focused on paying down the highest interest rate debt first and wound up paying $64,189 in debt payments to get rid of it all over 5 years and 5 months. Again, that means you paid $7,383.10 less to get out of debt by using the SmarterSquirrel Method and you got out of debt 7 months quicker than you would using the Snowball Method. 

Stop using the Snowball Method and save yourself a lot more money by focusing on paying off the highest interest rate debts first! The SmarterSquirrel Method is way better!!

You can do it... you can get rid of your debt! It all comes down to you. Can you sacrifice and save enough to get rid of your consumer debt while you have a low introductory rate from a credit card that is lower than the rate you would get from a consolidation loan? Then go for transfering to the low interest rate credit card. Will you be unable to pay off your credit card debt within the low rate period and wind up with debt at a higher rate than the rate would be on the consolidation loan, after the introductory rate expires on the credit card? Then go for the consolidation loan instead.

To recap the Avalanche Avoidance Method:

1. Gather all the information on all your debts, how much do you owe, what's the interest rate on each, what's the minimum monthly payment on each? 

2. Pay at least the minimum payment on all of your debts every month or whenever the minimum is due. Keep doing that throughout this process.

3. After paying the minimum on all your debts, and after paying to feed, house, heat/cool, medicate, and after paying for other actual needs, put every last penny you have remaining towards paying down your highest interest rate debt. (To stay motivated you may want to track the amounts and watch how they move every month. Pay particular attention to the total debt number across all your debts.)

4. When you've completely paid off your highest interest rate debt, start paying off your next highest interest rate debt. When that's fully paid off, go to the next highest and keep doing this until all your debt is paid off. 

5. You can try to earn more and spend less throughout this period so that you have more money to put towards your debts.

6. You'll notice as you pay off your higher interest rate debts that the growth of your debt slows, this is why the Avalanche Avoidance Method is better than the Snowball Method.

With the snowball method, as you get rid of the small snowballs around you, there's a bunch of snow getting heavier and heavier on top of the mountain that is going to come rampaging towards you and bury you whole. With the Avalanche Avoidance Method, you control the build up of snow by blasting it with dynamite periodically, that's your extra debt payments on the highest interest debt! By reducing the debt with high interest, you avoid it becoming too heavy to control. Thus you avoid the avalanche of debt caused by high interest rates.

Remember, keep paying your bills on time, pay any past due bills, make regular payments on your credit card and other debts to try to improve your credit rating. Keep an eye on your credit report to see how you're doing.

Avoid extending the term of the payments, you want this debt gone sooner, not later, no matter what they tell you. So look for lower rates, and the ability to make penalty free early lump sum payments.

If you can't change the terms, then after you get rid of your highest interest rate debt, focus on the next highest. In the example above, after credit card debts, the student loan was the next highest interest rate, then the car loan. 

Remember, stop spending on anything but the essentials until you have gotten rid of consumer debt. Sure have some fun, but remember how you got in over your head in consumer debt in the first place. Try to have inexpensive fun... go for a run, play tennis on a public court, cook at home, have a friend over for drinks and watch the hockey game on TV, play charades, throw a frisbee around, go for a swim in the ocean or lake... etc... ​


Now relax a little. Up the spending on wants just a little if you like, maybe celebrate with a nice dinner (that you pay for with cash you've saved not by going back into debt!). Life is too short to live it without satisfying any wants. Don't live a completely austere life. Everything in moderation including moderation. Now make sure you're saving and investing enough every year to provide you with what you're going to need to get you through a very long retirement. If you don't know how much that is... just find out over here, where I help you figure out how much you need for your retirement.​  Once you know you're saving enough for retirement, you're now free to spend your excess money as you see fit... go on better vacations, treat loved ones to nicer things, or save more and retire even earlier... up to you.

Make sure you pay off your credit card debt in full every month before you get hit with an interest charge! Never carry your balance month to month! Save enough money before buying big ticket items to pay it off as soon as you buy it with your credit card. Don't finance purchases with your credit card. Use the credit card to buy as long as you have the money saved to pay it off instantly.

If you think you might be prone to running up the consumer debt on your credit card again, you could always look at getting a prepaid credit card instead, where you load money on to the card and then spend that instead of taking on credit card debt.

Congrats! You've done it. You've gotten rid of useless consumer debt. That means you no longer have to make all those interest payments and should have even more to save for retirement. So by sacrificing and saving to get rid of consumer debt, you've figured out how to reduce your cost of living and increase your saving which can now go towards your retirement portfolio instead of going towards paying down debt. Now regularly save and invest money in your retirement portfolio so you can retire comfortably one fine day.

You're all set. Just make sure you follow those 4 easy steps.

So this was Month 5 of the SmarterSquirrel 12 Month Plan to Improve Your Finances: Month 5 - Let's Talk About Debt Baby... Now you're ready to invest... you've already figured out where you are in terms of networth and net cash flow in Month 1 , you've figured out how much you need to save each month to retire well in Month 2 , you've figured out how to earn more in Month 3 , how to save more in Month 4 and just now in Month 5 you've learned how to get rid of your debt. So stay tuned for Month 6, where now that you have cash to invest, you'll learn how to invest and build a portfolio. So look for Month 6 - Prudently, Fruitfully, Frugally Invested coming out in the first week of June 2019. 

​Be a SmarterSquirrel... Save. Invest. Enjoy.

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Lessons Learned:
  • Find out how much consumer debt you have and the interest you pay on all that consumer debt every year
  • If you pay more in interest on consumer debt than you save each year for your retirement, you have a massive problem
  • If you can't afford the basic necessities you may neeed to invest in yourself to earn more
  • There are four steps to getting out of consumer debt
  • STEP 1: Stop spending money on stuff you don't need
  • STEP 2: Lower your interest rates on your consumer debt by transferring credit card debt to lower interest rate credit cards or, if you now have the  discipline you didn't have before, by using lower rate consolidation loans and try to improve your credit rating by monitoring your credit report
  • STEP 3: Pay off your consumer debt, starting with the debts that are going to have the highest rates after any introductory low rates expire (ignore the Snowball Method... use the Avalanche Avoidance Method!)
  • STEP 4: With consumer debt paid off, spend a little more on wants, but make sure you are saving enough for retirement first
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