Breaking the Cycle of Debt on Financial Ground Hog Day
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By Bromwich+Smith Staff | 1155 words | Reading Time: 5 minutes and 46 seconds | Last date: 2023/02/02
When you think of February you may think about love, relationships, or even heart health. On February 2nd, you may think of Groundhog Day in reference to North American folklore where a groundhog would emerge from its home and people would gather round to see if the groundhog would cast a shadow. If the skies were clear and a shadow was seen, legend was that winter would continue on for another 6 weeks. If it was cloudy on this day and no shadow was seen, spring would be arriving early.
The meaning of Groundhog Day took a turn in 1993, when a movie by the same name was released, featuring Bill Murray as a weather forecaster who gets trapped in a time loop, forcing him to re-live Groundhog Day over and over again.
In theory the idea of repeating the same situation day after day sounds humorous, and maybe if you were able to select the best day of your life to repeat it may even be fun. For those struggling with debt and paying creditors, Groundhogs day is more of a reality than they would like. Being stuck in a never ending loop of paying minimum payments, month after month and seeing no change to the amount of debt owed, can be frustrating. In this reality, the debt doesn’t stay the same and snowballs onto itself, increasing each month instead of decreasing, causing more debt, stress and worry. Not only are you trying to pay back the original amount owed, you are now trying to reduce the ever accumulating interest on top.
If you continue to pay the bare minimum, and not add to that debt how long will it take to pay off? Lets explore the payment details, if you are able to pay your minimum payment on a $5,000 balance, with an interest rate of $19.99%
Paying Only Minimum Payment
Your Balance: $5,000
Annual Interest rate: 19.99% (Some credit cards are even higher. Department store cards are often 25% or greater).
Your Minimum Payment: 3% of balance (3% is a common amount usually set by credit card company. Your credit card may vary).
Total Time to Eliminate Your Balance: 21 years
Total Interest Paid on Top of Original Amount Owed: $5,983. Meaning you have paid this on top of the original $5,000 debt.
Now, lets look at what happens if you were to pay the minimum plus an extra $100 a month
Your Balance: $5,000
Annual Interest Rate: 19.99% (Some credit cards are even higher. Department store cards are often 25% or greater).
Your Minimum Payment: 3% of balance + $100
Total Time To Eliminate Your Balance: 3 years and 2 months
Total Interest Paid on Top of Original $5000 Amount Owed: $1,491
By law, in Canada, credit card companies are required to include a similar break down on each statement. This can be a great tool to determine how much your debt is really costing you, and how putting a bit more down each month can make a significant difference in the how much you owe and how long it will take you to pay off the total debt.
Tips and Strategies for Breaking the Cycle of Debt
One suggestion to break the Groundhog Day debt cycle, can be as simple as financial planning, including creating a budget, and finding where you can decrease expenses or increase income. There are plenty of budgeting tools available online to give you a hand. You may want to look into some simple ways to reduce expenses including:
- Groceries are a huge expense, and prices continue to increase. Consider looking at weekly deals and flyer sales. Meal plan and know what items you need to stock up on and avoid stocking up on items you don’t need unless they are on sale and you will use them before they expire.
- Small costs add up. You may think the $10/ week magazine subscription, or $15/ month streaming service are too small to make a difference. Consider if you continue paying out of convenience or if it is something you use. By reallocating the money you would pay to these small expenses will add up and could help you reduce your debt.
- Consider Decluttering your home and sell items you no longer have a need for. Used baby items, childrens books, clothes that no longer fit. If you do not currently recycle pop bottles consider if this is a feasible option.
While these small suggestions are just that, exploring small changes you can make to your budget will not affect your day to day life but will make a big impact on your overall debt over time.
Creating a financial plan will help manage your finances, eliminate debt and set you up for a clear financial future.
There are many strategies for breaking the cycle of debt, some we suggest include:
1. Prioritizing debt payments: Create a budget that gives you space to pay off high-interest debt. Without making a conscious effort to increase your payments, you will continue in the cycle of debt.
2. Consolidating debt: Consider consolidating multiple high-interest loans into a lower interest loan, or refinance in effort to reduce the amount being paid. If you can take the difference in what you were paying, and the new payment amount and apply it back to the debt you will see the debt reduce quickly.
3. Talk to your creditors: Contacting your creditors directly, and ask if they are willing to reduce the interest. Being open with your creditors may help them decide to accept a payment plan or reduce your interest on the debt owed. Keep in mind that you are their client, and even though you are in debt they want to keep you as a client and may be willing to work with you.
4. Generate Savings: We understand that it may seen counter productive to set up savings while you are paying off debt. By having a savings account, you may find yourself less likely to reach for the credit card or other high interest loan options in an emergency situation. By having the money on hand, you will end up saving yourself from additional debt later on.
What happens if even with budgeting, you cannot get out of the perpetual debt cycle?
You may want to consider looking into debt relief options from the assistance of a professional debt restructuring service like the Licensed Insolvency Trustees at Bromwich+Smith. Our team of debt relief specialists will go over all details of your financial situation with you and find the best solution for your specific situation, meaning no more groundhog day for you!
No matter how difficult or complicated your financial situation may seem, you can rest assured there are options available to get you out of the perpetual cycle of debt. Contact Bromwich+Smith today for your free consultation. Our Debt Relief Specialists are available by phone at 1-888-917-6288 or you can request a call back via our contact us page.