Calculators: Debt-reduction solutions

The OECD is calling on the Bank of Canada to raise interest rates this fall with a target for the overnight rate of 2.25% by year end. Yet with household debt at an all-time high and more than one million Canadian families burdened with a debt-service ratio of more than 40%, higher interest rates will be costly ó making reducing debt a top priority. The Knowledge Bureau's Debt-Reduction Solutions Calculator can help you do just that.

The first step in reducing debt is to assess the family's current cash flow situation and address the issue of spending.  Clearly, debt cannot be reduced if spending consistently exceeds income.  Deficit financing may have been the only solution in tough economic times when income levels dropped, but the long-term effects are devastating.  Financial health depends on finding a way to spend less than you earn.

Once you have balanced spending vs income, it's important to develop a plan to reduce, then eliminate debt.  Even for families whose income exceeds expenses, debt service can be a financial drain on family wealth. So, you need a plan to eliminate "bad" debt, even if you are doing well financially.

The Debt-Reduction Solutions Calculator, which is featured in the Debt and Cash Flow Management course helps advisors crunch the numbers for three debt-reduction options.  After cash flow has been tamed and you have determined a monthly amount to be used to service debt, the calculator shows the way to becoming debt-free using the following three strategies:

• Maximum mortgage payment - by using the full amount available for debt service to pay the mortgage, the debt can be eliminated in the shortest possible time.

• Fixed-term mortgage - by leaving some cash available for emergencies, you can eliminate the debt over a planned mortgage period.

• All-in-one account - for maximum flexibility, the all-in-one account allows the family to deposit all income into one account and use that account to pay expenses and the remainder each month to reduce family debt.