8 ways to tame household debt

Canadians often think of themselves as a thrifty people, but economists and financial experts say we are overspending at a troubling rate.

"I have a concern right now we have more debt than our American counterparts," says Greg Pollock, president and CEO of Advocis, the Financial Advisers Association of Canada.

Late last year, Statistics Canada published a report that found Canada's household debt-to-income ratio was over 150 per cent (in the U.S., it's closer to 145 per cent). That means that for every $1,000 that is earned in after-tax income, Canadian households owe $1,500.

Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have voiced concern about Canadian consumer debt, and caution that it will only get worse when interest rates start inching upwards.

These warnings, along with persistent speculation about another recession, have made household spending a pressing issue. So what can you do to curb your debt?

Experts say that the most effective strategy in taming household spending is not to impose draconian rules like cutting your cable subscription or that daily latte but to ask yourself how necessary your individual expenditures are.

"I can't tell [clients] as a financial coach to reduce this and this they need to ask themselves the questions about what are priorities for them," says Pat White, executive director at Credit Counselling Canada.

"One family may say, 'It's important for us to have those cable services, because we never go to a movie, we don't rent any movies, that is our entertainment.' They don't want to cut that expense. Everyone's different."

Here are eight tips that should help you budget better.

1. Organize your finances.

For those who aren't inclined to keeping a ledger, the idea of becoming your own accountant can seem daunting. When Pat White proposes it to some clients, she says they assume it means "sitting down every day and accounting for every penny and having a really complex filing system with nice little tabs and the whole bit."

That works for some people, but for the novice, White suggests a more measured approach. "If you just took the step to say, 'Here's two envelopes, I'm putting all my unpaid bills in one, all my paid bills in the other, and twice a month I'm sitting down to look at what's going on,' that would help immensely."

2. Distinguish between your wants and needs.

If you're going to buckle down on the home front, you have to ask yourself some tough questions and answer honestly.

In going through your regular expenses, decide which items are must-haves and which are luxuries: Do you need to subscribe to more than one newspaper? Do you really need call display?

One way to avoid this consumer quandary when going to the mall is to make a list first.

"You stick to the list, you don't make the shopping exercise a way to add to your debt," says Pollock. "Shopping should not be a hobby. Get a real hobby to keep you busy."

3. Don't pay for things you no longer use.

In going through your expenditures, you might come across payments you'd actually forgotten about, which could be pre-authorized withdrawals for things like magazines, overdraft protection or a gym membership.

Some of these items will be easier to drop than others, but the key is to stop being aspirational and start being rational.

"You look at that gym membership that comes off your chequing account every month and you feel guilty and keep saying to yourself, 'I wish I'd get there,'" says White. "You just need to say, 'I've got to cancel that, because it's just not working for me I'm paying for something I don't use.'"

4. Look for things that are low- or no-cost.

Everybody loves the idea of saving money, but the methods aren't always apparent. By doing just a bit of research, says White, you can discover some low- or no-cost alternatives to some of your regular expenditures. The library is always a good bet borrowing books, magazines and DVDs for free could seriously lighten your entertainment budget, for example.

5. Get rid of your credit cards.

Pollock insists that slaying your debt requires you to take a pair of scissors to your plastic. "The key thing about addressing debt is not to get into more debt," he says. "One way that you can assist in not getting into more debt is by getting rid of credit cards."

Without credit at the ready, you're more inclined to think twice about imprudent purchases.

6. Pay your bills on time.

This seems obvious after all, if you don't meet your payment deadlines, you incur a late fee.

But Pollock says some people are so afraid of their bills, they won't even open the envelope. "[People] just put them aside, like they're going to take care of themselves," he says. "It's not realistic."

7. Build an emergency fund.

Having a cash reserve is a great hedge against unexpected future expenses and stumbling into deeper debt. "If something does go wrong, you don't have to borrow the funds, which then gets you back into the debt cycle," says Pollock.

"The furnace breaks down, the car breaks down, you're temporarily laid off whatever the emergency might be, you can address that with the savings that you have."

The rule of thumb for an emergency fund is typically three to six months worth of income. This is a large figure for most people, Pollack concedes, so the key is to build it up incrementally, but regularly.

8. Put your tax returns toward paying down debt.

For some Canadians, tax season provides a financial windfall. But rather than buying bottles of bubbly, you should put that money to smart use.

"It's not an opportunity to all of a sudden just go on a spending spree," says Pollock. "It's an opportunity to pay down some debt. Pay off the highest-interest bill that's coming through your front door."