Don't turn a blind eye. Here's how to get out of debt once and for all.
Many people view debt as a negative thing, but debt can often start out as something positive. Debt can help you get the things you want and need faster and can help you live a lifestyle you might not have previously been able to. As long as you can retain control of and stay on top of your debts, things can remain hunky-dory. It's once this control is lost that debt can become a problem.
The reality of Australia’s household debt
In 2014, the Australian Bureau of Statistics (ABS) commissioned a study titled 'Australian Social Trends, 2014'. The study examined various forms of household debt using data from the ABS National Accounts and the ABS Survey of Income and Housing.
The study revealed interesting trends of how Australians handle their debts.
Why do people struggle with debt?
A look at the numbers above reveals that debt is a part of the majority of Australian households. While some of us continue to struggle with debt, others manage their debts with complete assurance. A different approach and a different mindset make a big difference when it comes to dealing with debt responsibly. How do you deal with your debt? People who struggle with debt:
- Do not monitor their income and expenses. This may be due to not knowing how to budget properly, or not sticking to their budget
- Have expenses that typically exceed their income
- Are experiencing financial distress brought on by conditions such as a reduced income, being underemployed, etc.
- Engage in certain wasteful habits such as shopping for things they don't need
- Lack proper money management skills
- Have little or no savings for dealing with unforeseen expenses such as medical emergencies, or loss of income
- Don't compare products or review their financial products to see if they could save
- Remain in denial and refuse to acknowledge that they have a debt-related problem on their hands
- Fail to pinpoint the real reasons that got them into debt in the first place
- Make only the minimum payments towards their debts
What debt consolidation methods are available?
If you're struggling with your debt, there are strategies you can consider to reduce it. The most important step is to find the debt consolidation method that is going to work best for your needs and the type of debt you have.
- Debt consolidation loans. If you're juggling multiple repayments, you could consider consolidating them into a single loan. This can help reduce the amount you're paying in interest, as well as fees on separate accounts. A debt consolidation loan can come in the form of an unsecured personal loan, or by you accessing equity you have available in your property. Keep in mind you will need to have good credit to qualify.
- Balance transfer credit cards. If you have credit card debt across multiple accounts you can consolidate it into a single card with a balance transfer. You will pay 0% interest for a specific period of time, with some card providers offering up to 24 months. Certain credit card providers also let you balance transfer personal loan debt. For this method, you will also need good credit to be approved.
- Part 9 Debt Agreements. If you're having trouble paying your debt, you could enter into a debt agreement with a third-party organisation and your creditors. The agreement essentially freezes the interest you're paying and gives you a certain repayment period to pay back what you owe. Some creditors agree to accept less than the full balance for repaying your debt, but entering into a debt agreement shouldn't be taken lightly as it is considered a form of bankruptcy.
- Credit counselling. Enlist the services of a reputed credit counselling organisation for formulating a Debt Management Plan (DMP). Once you enrol in a DMP, the creditors will often reduce your interest rates. Afterwards, you will need to make one monthly payment to the counselling organisation. This organisation will handle the repayment to your creditors. This is worthwhile if you can repay your debt within five years, but again, it isn't a decision that should be taken lightly. This should only be entered into if you are having difficulty repaying your debts on your own.
Staying out of debt
When it comes to staying out of debt, there are quite a few things you can do. You could look at developing an emergency fund by trying to save up to 15% of your income. If you find this number a bit high, or just want a way to ease the financial strain, you could consider ways to create alternate sources of income. There are a huge amount of ways to make money online with freelance work by charging people for your skills. You could also consider selling some of your unused items, or looking at your expenses and seeing ways you could cut back. As always, creating a budget and sticking to it is a surefire way to keep you on track.
Debt reduction strategies you can consider
If you are considering tackling your debt head-on without taking out another type of credit, there are ways to help you take back control of your finances:
- The "snowball" or "domino" method. This involves you writing down your total outstanding debt on each of your credit accounts, except for your mortgage and HECS-HELP debt. You don't need to consider interest rates at this point. Whichever account has the smallest balance is the account you make additional payments into and you pay off first – then the next smallest balance, then the next smallest, and so on until you are out of debt. This method helps get more accounts closed quickly, saving you interest and fees and gets you motivated by paying off debt. If two accounts have similar rates, pay off the higher interest rate account first. Remember to keep paying the minimum balance on all accounts and to consider early repayment fees for your personal loans.
- Pay off your highest balances first. Another strategy is to pay your highest interest balances first. Paying off these accounts will save you money on interest repayments and have the same benefit as the "snowball" strategy in that it will help get your accounts closed. Start by writing down all your accounts, the balance outstanding on each and the interest rate. Remember to consider the balance of credit accounts when starting to pay them down and to keep making minimum repayments on all accounts.
- Lose your loyalties. Finding the money to make additional payments can be a struggle. When was the last time you compared your savings accounts? Before making a purchase, have you looked to see if you could find it cheaper with a coupon code? Saving where you can and putting all your additional funds into your prioritised debt (according to the strategy you've adopted) is key to being debt-free.
- Budget, budget, budget. Developing and sticking to a budget is of paramount importance when it comes to getting out of debt. There are a wide amount of budgeting websites and tools available that can track your spending, saving and expenses, so see which one works for you.
If you're stuck in a debt rut, picturing yourself finally getting out of it can be difficult. However, it is possible. With the right tools and the right strategy under your belt, you can be debt-free.