Say goodbye to debt: six tips for a clean slate

Say goodbye to debt six tips for a clean slate

For most of us, our mortgage is the biggest debt we’ll carry through much of our adult life. But debt comes in all shapes and sizes – furniture or appliances bought on interest-free loans, mounting credit card debt and massive car loans are all symptoms of our buy now pay later consumer mentality.

If you are spending beyond your means and getting deeper into debt, the first step is to accept you have a problem. Next, you must take control of the situation and climb out of debt. And finally, a complete rethink of your approach to money is in order.

Consolidate your debts

Paul Cooke, 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. The benefit of this approach is that the interest you pay on a personal loan is often a lot lower than the interest charged on credit cards – for example around 9 percent instead of 15 percent. “You’re not making the debt go away, but you are reducing the interest you have to pay,” Cooke cautions.

Change your spending habits

Do you buy things on impulse? Do you really need another pair of shoes or a new gadget? Take a long, hard look at your spending habits and learn to plan your purchases rather than succumbing to the allure of shiny new things and subsequent skyrocketing credit card debt.

Learn to budget

Creating a budget sounds more daunting than it is. Begin by listing all your regular expenses – rent or mortgage, groceries, utilities, loan repayments, even your weekly takeaway coffee – as well as irregular expenses that pop up every now and again – 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 and fine-tune your expenses until you find enough. The Government’s Money Smart website has a simple budget planner.

Pay yourself first

Financial adviser Paul Bineham, managing director of Noall & Co advises making a regular payment to yourself part of your monthly payment of bills.

“People always say they’ll save whatever money is left after they pay their bills, but often there is no money left at the end of the month after the bills are paid,” he says. “We advise clients to set up an automatic debit before their bills are paid, to deduct a small amount every month to go towards a savings plan. Make yourself a creditor and stick to it like any other bill.”

You can use the savings to pay down your debts, and once you are debt-free you can enjoy the benefits of genuine savings.

Use cash only

The key to getting out of debt is to stop adding to your debt. When you use cash for purchases, restaurant meals and other expenses, you are more likely to think twice about what you’re about to spend. Take your cards out of your wallet to avoid the temptation of frivolous spending.

Seek advice

If you find it difficult to take charge of your debt and make regular repayments to avoid massive interest charges, seek advice from a professional. A financial adviser (who will charge you a fee for their services) or a financial counselor (whose services are free) can teach you to manage your debt, negotiate with your lender and change your spending habits.

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Learn more about savings accounts

How can I get a $4000 loan approved?

While personal loans and medium amount loans don’t offer guaranteed approval, there are steps you can take to help increase the likelihood of your application being approved, including:

  • Fulfilling the eligibility criteria (providing ID, proof of residency, proof of income etc.)
  • Checking your credit history (you can order one free copy of your credit file per year, and make sure that there aren’t any errors that may be bringing down your credit score)
  • Comparing carefully before applying (making multiple loan applications can mean having your credit checked multiple times, which can look bad to some lenders and reduce your chances of being approved by them)

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.