Canadians have been striving to reduce the burdens of debt, but their efforts often prove ineffective as one debt is often traded for another. In many instances an individual pays off a car loan only to assume more debt in the form of a mortgage or student loan. Even in situations where a person is able to lessen their overall debt balance, it is just as important to effectively manage the remaining debt.

Getting organized is key. Individuals should know exactly what interest rates they are paying on each loan obligation and the payment cycle. That way you can focus on eliminating the highest interest debts first.

Asset Liability Matching: This is a strategy that has been employed by pension funds, banks, and insurance companies for decades.  More recently, these methods are being applied to the management of investment accounts for individuals under the banner target date funds. Target date funds tend to allocate a higher weighting to cash as the target date nears. The objective is to match long-term assets with longer-term liabilities. In this same manner, it makes sense that individuals should finance long-term assets such as a house with a longer term obligations such as a mortgage rather than one intended to be short term such as a credit card.

Liquidity Management: Individuals should ideally maintain at least six months of cash or near cash reserves to finance living expenses. This will help to prevent the accumulation of debt in the event that you are unable to work or face unexpected expenses such as costly home repairs.

Manage Interest Rate Risk: Borrowers need to be careful with variable interest rate loans, as the costs will rise when base interest rates increase. Given the near historically low interest rate environment and the continuing economic recovery, it is becoming increasingly likely that central bankers will start the rate hiking process. The higher burden to service these debt obligations could have a severe impact on cash flow.

It is easy to forget these points as you become preoccupied with everyday routines, however keeping them in mind will help you to service your debt obligations more effectively.