In today's economy, it's downright normal to have a home mortgage, some student loans, and even a bit of credit card debt. But what should you be doing to protect yourself and make the most of your money? Sure a small amount of debt is normally fine, but sometimes if you don't take control of it, it could have control over you.
Welcome to the debt spiral.
Here's a well-kept secret: Once you start borrowing money, it can be challenging to dig yourself out of the hole.
Consider your mortgage—most people's single largest source of debt by far. The average Canadian home loan is a five-year fixed mortgage, amortized over 25 years for $200,000, with a 3.5 percent interest rate. But, until your home is paid off, you'll pay an extra $100K in interest alone, assuming rates hold steady when you renew.
What many people don't realize is just how powerful extra payments—even small ones—are for drastically knocking down debt.
In our mortgage example, the monthly bill for that loan works out to roughly $1000/month. But what if you were able to add an extra $300 to each of those payments over the lifetime of the loan? You'd actually pay off your loan eight years ahead of schedule and save nearly $35,000 in interest payments!
Pay down debt or build up savings?
So you might think that the best strategy for tackling your debt is throwing every dollar you have at it. But you're in for a world of hurt if you're not saving money on the side. Without an emergency fund, unexpected financial setbacks send you running right back to your lines of credit and trap you in a debt spiral.
At the same time, shoving all your money into savings will cost you. Most debt sucks up way more in interest than what your bank accounts pay you. A savings account pays out—at best—2 percent interest, while the average Canadian credit card runs at an eye-watering 19 percent interest rate. Fixed-rate student loans demand 8 percent interest, and your mortgage is likely costing you at least 3.5 percent in interest.
And to make matters worse, many traditional home lenders penalize you severely for early repayment.
Is consolidation right for you?
For some borrowers, the best step you can take is loan consolidation, in which you replace a set of your existing debts with a single loan. Then, you pay just once every month to cover each of your debts. And the interest rate on your consolidated loan is typically much less than the highest interest rate on your individual loans.
Many banks offer loan consolidation. And, while you're there, you can also stash your emergency fund in a savings account, pay your bills from a checking account, and even tap into a home equity line of credit.
Some banks, however, are making money management even more streamlined. Manulife One, for instance, is a unique, premium product that combines not only your debts but your banking accounts as well.
When you deposit money into a Manulife One account, that cash doesn't simply gather dust as it does in traditional savings. Instead, it's automatically applied to your debt—with zero prepayment penalty—reducing future interest costs and accelerating the time until you're debt-free.
And, since your savings and loans are all in one place, you don't have to choose between building an emergency fund and prepaying your mortgage. Plus, just as with a standard banking account, you can write checks, make withdrawals via debt card, and transfer money online.
Of course, no mortgage or loan will fix all of your money problems. But, if you're facing temporary hardship or are working to make more responsible borrowing decisions, a product like Manulife One may be just what you need. With competitive interest rates and nearly foolproof banking, you'll give yourself the convenience of managing your money easily and the breathing room to conquer your debt once and for all.
This post is sponsored by Manulife.
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