Financial debt is one of the biggest drains on most Australian’s financial success and happiness. When you are faced with increasing outstanding debt, your hard earned money is tied up on a financial merry go round that will keep spinning around until you take charge of your own financial future.
Here are 6 simple steps to help you get off that debt merry go round and save heaps of money in interest along the way.
1. Set a Budget
If you are one of the many Australian’s that don’t have a budget in place now is the time to sit down and put one together. Having a budget helps you make sure you have the funds put aside to use with the new repayment plan that you will need to come up with.
There are many phone apps available now to download that will help you work out and prioritise your spending within your budget. These apps allow you to track your spending (either via paper and pencil, or by linking your accounts to a free tracking service such as Mint.com). This will allow you to see where you are spending your hard earned money.
2. Come Up With a Repayment Plan
The days of making your minimum repayments are over. Now is the time to develop a strategy that will get your debt paid down quickly within your budget.
One plan could be what we call the stacking method. The stacking method has you pay as much as you can toward the debt with the highest interest rate until that debt is paid in full. Once this is done you then move down the line to the next highest debt interest rate and so forth. You attack the highest interest loan first, since that’s the most expensive debt on your books. While you do this you must continue making minimum payments on your other accounts.
An alternate plan could be the snowball method. This is where you pay as much as possible toward your debt with the lowest balance regardless of its interest rate. This gives you the psychological win of crossing one of your loans off your list fast, which in turn motivates you to attack the next loan with vigour. The more small wins you accumulate along the way, the closer you are to being debt free.
3. Reduce Your Expenses
One of the main reason people get into trouble these days is because they are living outside their means. Now is the time to get real about the kind of lifestyle you can truly afford. Maybe you need to stop dining out each night, or maybe you need to downsize to a smaller more economical car. Nobody likes having to make these choices but if you are serious about your plan of saving lots of money in interest payments then it’s crucial that you make a few sacrifices now that will benefit you in the long run.
If you’re already living a fairly modest way of life then you may want to consider temporarily reducing (or cutting out) an entire spending category. This could be as simple as cutting your pay TV, cancelling your magazine subscriptions or eliminating your weekly night out on the town. Remember these measures are only temporary while you get back on track. You may decide that radical measures are needed, such as living with a roommate or taking public transit everywhere instead of using your fuel guzzler.
4. Stop Adding to Your Debt
The merry go round won’t stop until you stop taking on new debt. Put your credit cards in the freezer in a slab of ice. This way you need to take the time to thaw out the slab to get to your credit card before you get to use it. Hopefully this thawing period will give you the time needed to re-think about if you really need to go and make that high interest rate purchase. Sometimes you need to put physical barriers in place where necessary to ensure you don’t add any more to your outstanding balances. Next time you get one of the letters from your bank in the mail asking if you want to increase your credit card limit put it straight in the bin. There is a lot that people don’t know about credit cards.
5. Build Your Savings
Although you want to have an aggressive approach to paying down your debt, make sure you are also setting aside enough money each for a rainy day. We often get into debt in the first place because we have come across unexpected expenses that we weren’t planning on. Having a reserve of emergency savings to pull from can help you stay out of trouble in the future.
6. Keep Your Goals in Sight
Keep reminding yourself regularly about what you are trying to achieve. Write down your goals and read them out aloud to yourself every day as you get ready to start your day. This will help you keep positive momentum moving forward and your motivation high.
We can all learn from the mistakes we’ve made in the past, but it’s what you do with that new found knowledge today that will drive where you will end up in the future.