Getting out of debt can be challenging, but a few smart choices can help you on your way to a debt-free existence. Here you’ll find the best ways to get out of debt.
Change your spending habits
The most common mistake that people make when they are trying to get out of debt is simply to pay off their debts. Although paying debts off is a good thing and will save you money in interest and collection fees, if you don’t change the bad habits that got you into debt in the first place you will just find yourself repeating the pattern over and over again.
Think about the things you currently spend your money on. Do you really need to buy your morning coffee and buy your lunch everyday? If you reduce your spending then you’ll be in a better position to break the cycle and live within your means. It’s the only way you’ll be out of debt permanently.
See a financial counsellor
If you’re having difficulties managing your finances then a financial counsellor can help you.
A financial counsellor knows about credit, bankruptcy and debt collection legislation. They are trained in negotiation and counselling and can offer you emotional support as you get your finances back on track.
A financial counsellor is completely free and will give you advice on what debts you should prioritise, for example, debts that attract a higher interest rate such as credit card debt.
If creditors are chasing you for repayments, a credit counsellor can negotiate with them so you can establish an affordable repayment plan that will see you reduce your debt, while still being able to survive.
The Australian government’s Money Smart website has several links to financial counsellors.
Set a budget
When you want to get out of debt you first need to look at your current financial position by figuring out what your incomings and outgoings are.
Make a list of all your debts including credit cards, personal loans, outstanding bills, fines and any other money you owe (including to friends or family) and then add them together to establish how much you owe in total.
Figure out what you can afford to pay. See if there are any areas in your budget where you can cut back. Separate your spending into essential and discretionary spending.
If you’re making cuts to your budget it’s best to be realistic. There is no point in making cuts if you can’t stick to them.
Prioritise your debts
Now that you know how much debt you owe, you should prioritise which debts to pay first. The debts should be prioritised as follows:
- Rent or mortgage payments, including arrears
- Council rates and body corporate fees
- Electricity, gas and water
- Vehicle repayments if you use your vehicle for work or essential travel
- Internet and mobile phone bills
- Credit cards
- Payday loans or consumer leases
Get a second job
When you take a second job you will earn more money and that will help you get out of debt faster. Whether it’s just a couple of thousand dollars or $10,000 extra per year it all adds up and will help you get out of debt faster.
Aside from earning more money, you will also gain new skills in a second job and that could help you increase your income in your main job.
The average Aussie has around $5,200 worth of stuff in their homes that they can sell. This includes unused clothes, old furniture, home decor or other items. After you’ve sold stuff that you don’t use you can use it to reduce your debt.
Consolidate your debts
If you’re in a position to then you can consolidate your debts into one loan with a single repayment. Before you consolidate your debts you should work out the costs involved. The costs typically include:
- A loan establishment fee
- Exit fees
- Interest fees
You should only take out a debt consolidation loan if after researching the different loans available you would be in a better position. Before you sign a loan agreement you should read the fine print so you know what you’re getting yourself into.
Check your credit report
Every Australian has a right to get a free copy of their credit report every three months and it is worth doing so at least once a year.
Check your credit report for any discrepancies or incorrect information.
A good score is somewhere between 600 and 1000. The higher your credit score, the less of a risk you are to lenders. If you are deemed a high risk based on your credit score you are likely to pay higher interest rates when you borrow, which will cost you money in the long run.
Make extra repayments
If you have the room in your budget then make additional repayments. Aside from chipping away at the principle, you will also lower your interest charges. You can also do this by switching your repayment schedule from monthly to weekly because it is very common for interest to be calculated daily.
Follow the 50-30-20 rule
Following the 50-30-20 rule means you allocate 50% of your income to necessities, 30% to wants and 20% to savings and paying off debt. Whilst you can’t increase your wants, you can divert some of those funds into paying off your debt so that you end up in a better financial position.