Is your debt worrying you?
Debt can lead to big problems, just look at the mess Europe is in. The likes of Greece, Spain, Italy, Ireland and Portugal simply borrowed too much and couldn’t afford the repayments. The same trouble lots of average Australians find themselves in all the time.
It would be great if we could afford to live debt free but the reality is most of us can’t. We need to borrow money to put a roof over our heads, to buy a car to get to work, or to pay for tertiary education. This is usually considered good debt, money borrowed to improve our quality of life and job prospects.
But there’s also the money we borrow to pay for stuff we don’t really need. You guessed it, that’s our bad debt. Credit cards used for new clothes, expensive dinners out, or holidays we can’t really afford and personal loans to cover second cars or home extensions. It’s a slippery slide once you get started.
Luckily this is the day to get proactive about your debt position.
Now is a great time of year to take stock of your debt. You have all your financial information at hand to fill out your tax return so while it’s out add up how much you owe and what you’re forking out each month in repayments. For your bad debt I bet a lot of that money is just covering the interest you’ve racked up and not even paying off the principal amount borrowed.
If you only have enough cash to service the interest and not pay down overall debt levels, then you have too much.
To help you get a grip on your financial position here are 6 steps to get your debt under control and keep it that way.
1. Consolidate Bad Debt
If you have more than one lot of bad debt then look to consolidate it into the lowest interest/fee account. This will bring down interest charges, give you a more accurate idea of how much debt you’re battling and simplify the repayment process.
Often lenders have initial interest free periods for balance transfers that you can take advantage of, but beware any transfer or exit fees on existing loans.
2. Make Changes
Don’t accept debt as a way of life, make changes. The fastest way to pay off what you owe is to make extra repayments.
It’ll take years to eliminate your debts if you only pay the minimum amount due each month so budget for an extra repayment every week, month, quarter - whatever you can afford -then stick to it.
3. Pay Off Bad Debt First
Pay off your bad debt first because it usually comes with the highest interest rate. Credit cards are charging up to 20 per cent interest, so focus on that, then personal loans which will be costing you at least 12 per cent interest. Good debt is probably your cheapest debt, so tackle that last.
4. Put Surplus Cash Towards Debt
Look at your budget and work out the maximum you can afford to pay off your debts every month. Each pay period set aside money to cover your basic expenses such as food, transport, utilities, and rent or mortgage payments. Also contribute to an emergency account to cover any unexpected bills.
Use all the cash left over to pay down debts like your credit card bill. If you’re not making much of a dent in your overall debt you have to increase your income. One option might be to get a second or third job in the evenings or on the weekend until your bad debt has been cleared.
Also, if you come into some extra cash don’t blow it on an impulse purchase or risky venture because often your best investment is paying off your debts.
5. Start Living Within Your Means
Start living within your means so you don’t go further into debt. From now on use cash for everyday expenses like groceries, clothes and entertainment so you only spend what you have. Resist impulse buys and save up for big purchases.
6. Tick the Checklist
When weighing up any kind of debt or loan in the future run through this checklist before you sign on the dotted line.
- Why are you taking on the debt?
- Do you really need to buy this or will it make your life considerably better?
- Can you buy it without taking on the debt?
- Will this loan affect your borrowing power in the future?
- Can you comfortably handle the debt repayments?
Only once you have addressed these questions can you take out a loan.
Towing the line with these six tips will ensure a better financial future by reducing and managing your personal debts.
If you need further encouragement into action, now is the best time to start in terms of the interest rate environment too. Credit cards, mortgages and personal loans should all be paid down because with inflation so low and the possibility of European troubles increasing bank interest rates, it isn't a time to have debts.
Even on the flipside, if Europe is whipped into shape and the global economy surges into recovery mode then the RBA will be quick to increase interest rates too. Either way it looks like we’re near the bottom of the current interest rate cycle and debt will only get more expensive to service.
So focus on bringing your debt levels under control. If you have debt you should have no savings. Any spare cash should be used to pay off debt rather than sit in a savings account earning tiny interest on which you have to pay tax anyway.
Think about it. Why put spare cash in a savings account paying 6 per cent when you can pay down outstanding credit card balances and SAVE the 18 per cent interest you’re being slugged. It makes sense.
Remember, credit is easy. Containing it is the hard part.