When it comes to tackling your debts, where do you start and what advice should you follow? No one plans to go into debt, but sometimes it creeps up and you’re left wondering what to do.
We live in a world where there are so many accessible and diverse types of credit at our fingertips. Car loans, personal loans, credit cards… the list goes on. It’s not hard to find yourself taking on more debt than you can afford and only realise later the seriousness of the situation.
When you start to look around for advice on tackling debt, the wrong advice has the potential to turn your situation from bad to worse. Here we look at what money management experts consider to be the top four steps for effectively managing your debt.
Step 1: Act early
It’s true that dealing with the full extent of your debt can be difficult and stressful, but ignoring the mounting bills won’t make them go away.
Take an open and honest look at how much debt you’re in. This means making a list of exactly what you owe and whom you owe it to. Include details like frequency of payment, due date and interest rates.
From here, add up your total debt as well as the minimum amount of money you owe each month. The numbers may sound scary but organising your debts will help map out a plan to pay them off.
Step 2: Stick to one strategy
The best strategy for you is the one you are most likely to stick with over the long term.
There are mixed messages about the best way to pay down debt. Some believe you should pay off the highest-interest debt first, while others argue it’s preferable to prioritise debts with the smallest balance.
Paying off high-interest rate debt first allows you to save the most money in interest over time, but paying off the smallest balance first sees your debt disappear quicker – a plus for motivation.
The best strategy for you is the one you are most likely to stick with over the long term. Think about what motivates you and how comfortable you are with making sacrifices to save money.
Work out how much you can afford to pay off your debt each month. Do this by listing your non-debt monthly expenses and compare this amount to your monthly income.
Consider where you can cut back on expenses – ask yourself ‘what is one thing I can do without?’. Write down this saved expense and put it towards your debt. Now that you’ve made your first saving, you’ll have the momentum to make further savings.
Step 3: Consolidate your debt
Debt consolidation is a good option if you have multiple debts and you’re finding it difficult to meet monthly repayments.
Consolidating multiple high-interest rate debts into a single low-interest personal loan will help give you control over your debt. You’ll have the convenience of one payment and a reduction in the total interest you’ll pay over the life of the debt.
Refinancing your home loan to encompass other debt is also possible. A benefit is that you can significantly reduce the amount of interest you pay since home loan interest rates are typically lower than for credit cards or personal loans.
Speak to your mortgage broker about whether a debt consolidation home loan could be a viable option for your situation.
Step 4: Eliminate bad habits
It’s much harder to pay down debt if you’re still overspending. Stick to a budget and cut up your credit cards to resist the temptation to slide back into old habits.
Come and talk to us today. Our advice can make a difference.