How bad is your debt?

“How bad is my debt?” is a common question Canadians ask themselves, but so many people don’t know how to answer it.

Time and time again when I ask people what they owe, they give me a litany of responses. They list multiple sources of debt and their balances one at a time. When I say, “Add it up!” they look at me horror-stricken. When they do add it up, they want to toss their cookies.

Then I make it worse, by asking about their good debt and bad debt. Hey, do you have a buy-now-pay-later plan? That’s debt! How about that Home Buyer’s Plan you have to repay every year? That’s debt! And your overdraft balance? That’s debt!

How bad is my debt? Figure out how much you owe first

Thing is, until you pull your head out of the sand and add it all up, you have no idea how much trouble you’re in. You also don’t know where to apply your payments to save as much as you can on interest.

Start by making a list everything you owe, from the highest interest rate to the lowest, including:

• How much you owe
• What your interest rate is
• How much you pay in interest each month
• What’s your required minimum payment

Don’t include your mortgage on this list. Do include your student loans. If you have a car payment, you’ll have to make the call. It is consumer debt, but you may want to deal with it separately.

Next, add up what you owe and write the total at the bottom. Also add up your total monthly interest and your total monthly payments.

Debt isn’t so bad if you know how to pay it back

The good with debt, whether it’s good debt or bad debt, is to pay off the principle. Take your total owed and divide it by 36. That’s how much you’ll have to make in payments every month to get the principal paid off in three years or less. Add it to the total interest and you’ve got the amount you have to put toward your debt to get out of the hole.

This part isn’t so bad: Save money while paying off your debt

Now comes the saving part. You know what the minimum payments are and you know what your total debt payment needs to be. Now you’re going to apply your payments smartly to save on interest. Take the total minimum payments and subtract it from your total debt payment amount. That’s the money we have to work with to save on interest.

You are going to make your minimum payments on all your debt. That’ll keep your credit history from getting bruised.

Then you’re going to take the difference between your minimum and your total debt payment amount and apply it to the debt with the highest interest rate. When that debt is gone, you’re going to snowball that payment into the payment for the next most expensive debt, and so on, and so on until you’re done.

Use a plan to get out of debt by applying your money in a smart way to save on interest and get your debt paid off as soon as possible. Or you can leave your head buried firmly in the sand and just wait for the worst to sneak up and shoot you in the butt. Hey, it’s your butt.

Breaking down how bad your debt is, isn’t an easy process. There’s a reason you’ve been in denial for so long. Doing this exercise takes work and can be extremely nerve-wracking. But if you’re done with debt and determined to save as much on interest as you can, this is the way to do it.

This article is presented by CIBC Pace It, as part of the MoneySense guide to debt management.