Get Out of Debt Once and for All, And Turn It Into $12,592.38 in Your TFSA

By astutely managing your budget and paying down debt, you can free up more money to invest in your retirement.

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If you’re looking at the stock market, wondering if there’s going to be a rally, but with no cash on hand, I feel you. There are many in your situation, who have far too much debt to worry about investing. What’s more, that debt has become worse over the last few years. Inflation has meant more debt taken out, and high interest rates mean, well, higher interest on your debt!

Use the net-zero budget

The first step is to create a budget. But the budget you’ve been using hasn’t worked if you’re in debt. Which is why now is the time to cut back, and become tight with your cash. That’s why using the net-zero budgeting method can be a great tool during this time.

The key is you’re going to look at all regular net income coming your way, and assign every single dollar to an item until you’re down to zero. This can be done through budgeting tools online, even through artificial intelligence if you choose! Once you assign every dollar to your budget items, essential and non-essential, whatever you have left should be assigned to debt.

Again, you’re going to want to be tight here. Cut out every single thing that isn’t essential to your daily life. I’m not saying you have to do this forever, but just for now while you work on bringing debt down.

Now, snowball it!

So you now have an amount that you can put towards debt. But you have student loans, credit cards, car payments, all of it! Next, then you’re going to want to line up your debts from the highest interest rate to the lowest.

You’ll still want to schedule automated payments towards your other loans, just keep them at the minimum amount. Then, put everything else towards the highest interest rate debt. This will likely be your credit card.

Once paid off, put your credit card out of reach and continue to pay off your other high-interest debts. Keep doing so until they are all paid off, and honestly it will be sooner than you think! There are calculators online that can also help you find out exactly how long you’ll have to pinch pennies and get debt down.

It’s not over yet

Finally, needless to say, you’re never going to want to get into this much debt again. So you’ll need to continue the net zero-budget method for a little longer. This will help you create an emergency fund. The fund should hold between three and six months of your salary in case of a medical emergency, lay off, or other developments.

From there, you can now start to relax a bit. But not too much! Continue to put cash away every month towards your emergency fund as well as perhaps a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). These can help you save for retirement, as well as short-term goals such as a home or even vacation.

And to make even more cash, you’ll need to invest! Finally, you can look to the stock market and see how to make more emergency funds and go on that trip sooner. But start simple. A great option to consider is the iShares MSCI USA Quality Factor Index ETF (TSX:XQLT). This exchange-traded fund (ETF) looks to invest in quality American companies that have strong books and growth. It’s made for long-term investments, with managers constantly on guard to keep up your growth.

Shares are up 25% in the last year, with a little dividend to consider as well at 0.92%. This can bring in a lot of growth, as well as income to reinvest at your leisure. In fact, here’s what you could get from a $10,000 investment in a year.

XQLT – now$34.50290$0.292$84.68quarterly$10,000
XQLT – future$43.13290$0.292$84.68quarterly$12,507.70

You now have $12,507.70 in your portfolio and $84.68 in dividends. That’s a total of $12,592.38! So bring down your debt and start saving today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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