Expert Advice with Ken Raiss. 12/12/2017
Debt sounds like such a bad word, doesn't it?
The thing is there is good debt and bad debt.
Good debt makes you money – such as a mortgage on an investment property.
You're technically using other people's money to create wealth through capital growth.
On the other hand, bad debt costs you money – such as a personal loan for a new car or, worse still, using your credit card to pay for an overseas holiday that you can't really afford in the first place.
One of the hurdles that many would-be property owners face is reducing their existing debt so they become more attractive to lenders.
It might seem easier said than done, but there are some simple strategies to get out of debt.
1. Track your spending
It's a sad reality that many people have no idea how much they spend every month.
In fact, many Australians live from one pay period to the next with not much left over before they eventually get paid again.
One of the first steps to getting out of debt is to simply track your spending.
A good way to do this is to create a spreadsheet or similar where you can input all of your spending in a month.
If you do this for a month or two, you will soon start to see where all of your money is going.
You see, buying your lunch and two coffees every day for $30 soon becomes $150 per week – and $600 a month!
2. Have a budget – and stick to it!
Using the above example, then, another strategy would be create a budget and stick to it.
So, instead of buying lunch every day, you could only do that on Friday's as a treat.
That way, you'll save nearly $500 a month, without missing out entirely.
No one wants to live on baked beans to reduce their debt so it's important to create a realistic budget.
In my experience, an unnecessarily strict budget is doomed to fail from the start.
3. Create some extra income
In today's world of the sharing economy there are a number of ways that you can boost your income.
However you choose to create extra income, it's a sound strategy to increase what's coming in so you can reduce your debt more quickly.
By earning at extra $500 a month, perhaps you can pay down that personal loan faster, which will allow you to save a deposit for your first home.
Again, be realistic about the time that you have available to take on extra work.
Reducing debt shouldn't turn you into a slave to the red numbers while you're trying to them into black ones instead.
4. Say no to credit cards
There is nothing fundamentally wrong with credit cards – as long as you can pay back the balance in full every month.
That way you're not getting stung with sky-high interest rates for the privilege of using someone else's money, which is the bank's.
If you can't afford to pay off your credit card balance every month, then you can't afford a credit card. It really is that simple.
Too many Australians get caught in the debt-trap of paying the minimum off their credit card every month, which means they'll likely never pay it off.
The thing is you can reduce your debt by preventing it from building it up in the first place.
Choose a debit card instead so you're spending money that you do have, rather than money that you don't.
Here's the thing...
Getting out debt involves planning and it involves dedication.
By getting professional advice you can create a debt reduction strategy that will enable you to get out of the quagmire of owing much more than you should.
But that plan must be realistic so you've got every chance of replacing bad debt with debt of the good kind.
Ken Raiss is director of Metropole Wealth Advisory and gives independent expert advice for property investors, professionals and business owners. He is passionate about real estate investing and small business and is a regular commentator for Michael Yardney's Property Update.
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.