How to conquer your debt

9th of October 2013 | by RateCity Staff

Man_balancing_on_stack_of_coins

Australians are saving more than ever, but our household debt remains at high levels. According to the Reserve Bank of Australia (RBA), household debt has been consistent at 150 percent of household annual income for the past six years. This has a lot to do with Australia’s sizeable mortgages, but credit card debt and other forms of personal debt are also to blame.

Some people take on too much debt or fail to manage the debt they have effectively, placing themselves in a perilous situation. Here are some tips to conquer your debt before it gets out of control.

Take a look at your debt

It’s easy to think of your mortgage as the only debt you have. But what about credit cards, car loans, personal loans, student debt, furniture or other household items bought on interest-free loans? The starting point for managing your debt is to be aware of how much you owe in the first place.

Consolidate your debts

Greg Pride, financial adviser with Centric Wealth, advises debt consolidation – taking out a personal loan to pay off other debts, such as credit card debt or a big furniture or electrical purchase. “It can help people see the wood from the trees,” he says. “When you have unnecessarily complicated arrangements, it can be easy to shrug your shoulders and put off dealing with the situation.”

Learn to budget

“Whether you are focused on debt reduction, not overspending on holidays or planning for retirement, it all hooks around the concept of planning what you are doing and having discipline,” says Pride. His advice is to plan out your entire year at the start of the year and create a budget, including planned holidays and a buffer for unexpected expenses.

To create a budget, begin by listing all your regular expenses (rent or mortgage, groceries, utilities, loan repayments, meals at restaurants, even your weekly takeaway coffee) and irregular expenses (insurance payments, clothing, car and house maintenance). Next, list your income. If you’re spending more than you earn, you have a problem. If you don’t have enough left over after covering your bills, tweak your expenses until you find enough.

Use your credit card like cash

Credit card debt is the biggest debt trap of them all. Rethinking your approach to credit cards can save you hundreds of dollars on interest. “If paid off in full each month, credit cards can be a marvelous tool. Otherwise they are a recipe for disaster,” Pride says. “Credit card interest rates are in the high teens when you can get a term deposit for [less than 4 percent]. It’s easy money for the banks.”