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.
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.