Many people wonder what is the secret to getting out of debt – but really there is no secret – you just need commitment and a plan of action.
And once you’ve committed to your plan of reducing your debt, there are some key rules to follow to make it happen.
- Budget for repayments and savings when reducing credit card debt
When you’re concentrating on reducing your debt, the last thing you’re thinking about is saving money.
But if you’ve stopped using your credit card by going cold turkey, what will you do when an unexpected expense comes up - like paying for a higher than expected utilities bill, a burst water pipe, your child’s school excursion or car repairs that always crop up at the worst possible time?
You should budget for the repayments you need to make towards your existing credit card debt, while at the same time put funds aside to build up a small kitty of savings specifically for those unexpected events.
Alternatively, if you feel you can be disciplined in how you use your credit card, it’s more financially beneficial to make that small kitty of funds work harder by putting it directly into the credit card repayments.
Think of it like an offset loan on your mortgage, reducing the interest calculated each day.
Should you need to, you can always pay an expense with your card. But at least you’re actively reducing your debt and paying off your credit card quicker in the mean time.
Keep in mind the big picture goal – paying off that debt as soon as possible.
A little short-term pain now will have you reaping the longer-term gains and set you up for a more stable financial future.
- Go back to basics
What in the world did people do before credit cards!? They worked hard and they waited while they saved to buy the things they wanted – in cold hard cash.
The modern expectation of instant gratification is actually producing a generation of Australians that will struggle with debt their entire lives.
Buck the trend - go back to the basics of a little financial self-control and start to understand your finances from the ground up.
Set a budget of income versus expenses and decide realistically just how much you need for the necessities.
Once the ‘needs’ are covered you can look at adding in some of the extra ‘wants’ depending on how everything shapes up.
Look at areas where you can reduce your spending but do so with some common sense. If you restrict your budget too much it’s unlikely you’ll stick with it in the long term.
It’s all about balance and self-control – but there still needs to be a little life in your budget!
Create a macro budget for the whole year to see how your finances will look and to check if your current lifestyle is affordable, or where you need to make some changes.
When you make these changes to your expenditure, you may not think a lunch here and a coffee there will make much of a difference - but saving as little as $50 per week by diverting your discretionary spending and turning it into an extra loan repayment can go a long way to reducing your debt.
For example, assume your home loan is $450,000 at 4.5% for a 30-year period. That extra repayment of $50 per week saves you nearly five years off the term of your loan and interest savings of almost $70,000.
Who wouldn’t like an extra $70,000 in their pocket instead of in the bank’s?
- Refinance and secure a home loan with a lower interest rate
If you’re struggling with your mortgage repayments, it’s a good idea to talk to a broker about refinancing your loan.
With record low interest rates and with no indication of any increases on the horizon, there has never been a more opportune time to reposition yourself by restructuring your existing loans to take advantage of faster debt reduction strategies and/or diverting the additional cash flow to acquire more wealth creation assets.
Refinancing presents one of the biggest opportunities to pay off your mortgage more quickly by securing a cheaper interest rate.
- Lower your fixed expenses
Often fixed expenses (the items in your budget under the ‘need’ category) are seen as a non-negotiable, but there are some things you can do lower these regular payments.
Household bills such as electricity, phone and internet can all be negotiated if you can prove a good track record of paying on time and are prepared to take some action.
Keep an eye on specials from your providers who periodically offer up deals (usually within a contract period – check that fine print!) that can really pay off.
Even a call to your electricity provider to renegotiate a discounted rate is recommended periodically – it’s always a no unless you ask.
Don’t forget to look at your options for receiving statements electronically rather than by post, or direct debit options. Many companies offer small savings for switching to their preferred (and overhead-reducing) digital solutions.
Again, redirecting those small savings into your debt reduction strategy can save you thousands of dollars and years off your debt repayments.
- Consider debt consolidation
If you’re struggling to manage all your debts, it can be a good idea to roll your loans into one loan.
This will often lower your overall repayment obligations. Yet if you maintain your current repayment obligations on the new loan, you will fast track the repayments of all your debt instead of just drip feeding each individual debt.
Psychologically, this can make the task of paying down your debts easier as you’re just focusing on paying one debt as opposed to many.
It can also give you a clearer picture of your financial future.
Typically, debt consolidation means taking out a new personal loan to repay your other existing debts, and then paying this new loan back over a set term.
It’s wise to speak to professional when considering debt consolidation so the loan can be tailored to your situation.
Again, the path to fast tracking debt reduction requires commitment and action on your part.
If you would like to start taking the steps towards reducing your debt and getting your finances under control, or need advice on your particular situation We Find Finance is here to help.
Take action and call me or Kelby on 1800 600 890 to start improving your financial future today.