By Darren Robinson,
Special to the Financial Independence Hub
It’s only natural for families to pursue investment opportunities to help pay for costs such as home ownership, health care, food, transportation, entertainment and countless other things. But sometimes investments can fail and lead to heavy losses that can force a family to tap into credit more often to meet monthly financial obligations. Here is a guide for dealing with extreme financial challenges.
There are many ways to invest money, but some investments are safer than others. Although the stock market can be one of the quickest paths to wealth, it can also be a quick path to asset depletion. If you buy a heavy volume of any given financial instrument, it can wipe out an investment rapidly if the security moves the wrong way.
At one time financial experts considered real estate to be the safest investment, but since the financial meltdown it has been an unpredictable market, as not all home values have recovered. Families have also suffered losses from running their own businesses and from aggressive door-to-door marketers who persuaded home owners to invest in home improvement equipment that they couldn’t afford.
Regardless of which investment route you take, you should at least consult with experienced financial counsellors before entering a market. When debt and interest rates present economic struggles, it’s advantageous to shift your focus from wealth building to debt reduction.
- Second job
- Tighter budget
- Short sale
- Debt consolidation
While small debt is not a big concern, growing debt can be a major problem, especially if the interest rate is in the double digits. There are essentially three basic steps to climb out of debt, according to Credit Canada, which are:
Schedule a meeting with a credit counsellor to discuss your financial situation
- Consider all your available options
- Decide on a debt solution and commit to it
Re-mortgaging Your Home
A home re-mortgage provides financial relief by negotiating with your existing lender or shifting your mortgage to a new lender with more favorable terms. A re-mortgage is fairly simple to arrange, according to the Mortgage Advice Bureau. It mainly involves completing paperwork, a credit check and a property valuation. After reviewing this information, if your application is approved, the lender will make a new offer in writing.
Debt consolidation involves moving various credit accounts to one account with a lower interest rate, which can save thousands of dollars. Individuals of all backgrounds are eligible for debt management programs if they have run up too much debt that isn’t backed by collateral. It is a helpful solution for people who want their debt to remain confidential or need more flexible terms, such as lower monthly payments. These debt management programs typically take 36 to 48 months to pay off.
Many people assume their best plan is declaring bankruptcy, but consumer proposals are often a more attractive alternative for the debtor. Basically, you hire a firm to negotiate with the various people with whom you have debts. This is win-win because they still get some portion of the money owed to them, and you avoid the severity of declaring bankruptcy.
You can often freeze interest and work debts down to smaller, more manageable amounts that can be paid over a length of time.
Bankruptcy as a Last Resort
The main problem with bankruptcy is that it puts limits on your financial activity. One consequence of bankruptcy is that it will lower your credit score and limit your opportunities to apply for further financial assistance. On the other hand, it can completely eliminate your debt. The first step to bankruptcy is meeting with a licensed trustee, who will evaluate your finances and provide you with the necessary forms. After the trustee declares your bankruptcy, he or she will then deal with your creditors for you. This will end your payments, salary garnishments and lawsuits filed by creditors.
Tips to Avoid Debt
- Plan a monthly budget
- Pay close attention to all financial statements
- Use credit cards sparingly to build your credit score
- Do not live off credit cards
- Avoid impulsive spending at malls
Darren Robinson is a mortgage broker based in Barrie, Ont. You can reach him via his website here.