The most important thing about getting into debt is being able to get out of debt!
It’s all too easy to rack up debt – credit cards, car loans – and it may seem all too hard to pay it off. Debt will have a big impact on funds available to repay your home loan, so minimising additional debt is essential.
Here are eight steps you can take towards minimising your debt.
1. Work out how much you’re spending
Create a spreadsheet and track your expenses for a month – record everything so you can see where your money is going. You may be spending much more than you think on some things – more than you can really afford.
2. Decide where you can cut back
With a clear idea of how much you spend each month, you can figure out how much you really need to spend, and where you can cut back. That barista coffee could be costing you $20 a week – that’s $1,000 a year. Preparing your own lunch could save you thousands. With a bit of commitment, you can rein in your spending and have more money to repay debt.
3. Make a budget
The only way to get on top of your credit cards is to stop using them. Make a budget for the money you need to spend each week or fortnight, based on how much money is coming in and what your necessary expenses are, and stick to it.
Calculate how much is left over after you’ve paid for the necessities, then figure out how much you want for discretionary spending and how much you can put towards repaying debt. Also, put money into a contingency fund to cover unexpected expenses such as car repairs that could bust your budget and cause you to reach for the credit card.
4. Prioritise your debt
Work out how much money you owe on credit cards and loans – you may not realise how much it is. When you know how much debt you’re in, you can think more realistically about repaying it.
You must pay at least the minimum amount on time each month to avoid going backwards and in some cases being charged fees and penalties. But by paying only the minimum, you may never get credit cards paid off; you need to pay more to make progress.
Consider:
• paying high interest credit cards and loans first to save on interest
• paying smaller debts first to give you the sense that you’re getting ahead, and that paying off debt is possible (then close the facility).
5. Make a repayment plan
Armed with your budget and having worked out your debt priorities, you can plan which debts you will pay off over what period. Having a plan will increase your sense of control over your debt; sticking to it will increase your sense of achievement.
6. Consider debt consolidation
There are times when debt refinancing can be advantageous. Look at the options!
7. Set goals and celebrate them
The thought of paying off all your debt may seem daunting, so breaking it down into milestones will help you see the way ahead. Set goals such as paying off 10%, then paying off 25% and so on.
Remember to celebrate each time you reach a milestone – buy yourself lunch or go to a movie as a small reward for your achievement.
8. Stick to the plan – and ride out the setbacks
Keep going with your repayment plan. If you miss a payment because of an unforeseen expense, stay positive. Avoid feeling demoralised or derailed by looking forward to the next debt milestone – you can get there.