Tips for Successfully Managing Your Personal Debt
Australian household debt has risen steadily over the past three decades. As a result, we now have some of the highest levels in the world.
According to the latest ABS statistics, average household debt was $261,492 in 2021-22, while average household gross disposable income grew 3.7 per cent to $139,064. When compared to the average of all households, the highest income quintile held 1.98 times the debt, and 2.07 times the gross disposable income. The fourth quintile had the largest discrepancy between debt (1.26) and gross disposable income (1.11) when compared to the average of all households.
If your debts are spiraling, or you’re simply feeling overwhelmed by high-interest repayments, here are some of our top tips to getting things under control.
1. Work Out What You Owe
While thinking about your debts can be stressful, getting your head around exactly what you owe, and to who, is the first important step to taking control. So, if you haven’t done so already, it’s time to sit down and scour through those statements and bills.
As well as paying attention to your balance, look at the minimum payment, interest rate (APR) and payment due dates. In addition, calculate how long it will take you to pay each back if you maintain the status quo – a good reality check for inspiring action.
If you can’t find the information you need easily, contact your creditor and ask for it.
2. Create a Realistic Budget
Once you’ve got your head around your debt, your next move is to draw up a realistic budget. The realistic part is important. While good intentions are great, if you over commit or deny yourself, you won’t be able to stick to it and will end up back at square one.
First, work out all of your monthly living expenses such as your rent or mortgage, insurances, taxes, groceries, utilities, fuel. If some vary, budget for worst case.
Once you’ve done this, look at what you have left over and work out how much of this you can afford to put towards extra repayments. If there’s not much left to play with, try to find ways to cut back on your budget.
3. Focus on High Interest First
Rather than making minimum repayments across all of your debts, rank your debts from highest to lowest interest then focus on paying the high interest ones, such as credit cards and short term loans, first – an approach known as ‘debt avalanche’.
By focusing your efforts on your high interest debts i.e. paying more than the minimum repayment each week or month, you can save money because the interest that’s accruing on the amount you owe will decrease.
The only downside with this approach is that, psychologically, you might feel like you’re not getting anywhere. In this case, you could try paying off your smallest debts first so can cross some off the list quicker. This is known as the ‘debt snowball’ method and is the recommended approach in the popular book, The Barefoot Investor.
4. Pay by Direct Debit
Rather than having to remember to make multiple repayments by multiple due dates, set up direct debits so that what you owe comes out automatically. Not only does this mean you’ll never miss one, it also helps you avoid additional charges for late payment.
Importantly, make sure you always have enough in your bank account each month to cover each repayment. If any bounce, your creditor won’t be paid and you will face a non-payment charge. If you’ve already drawn up a budget, and are sticking to it, this shouldn’t happen.
5. Take an Interest ‘Holiday’
When it comes to personal debt, interest is a killer. The longer you leave your debt unpaid, the more money you have to pay back, meaning you end up paying significantly more than you actually borrowed in the first place.
The good news is, there are ways to put a pause on interest so every dollar you pay towards your debt is reducing it, helping you knock it down quicker.
One way is to ask for hardship assistance. This can result in a loan freeze where you pay no interest for a certain period. Another is to do a credit card balance transfer. This involves moving your debt across to a provider that offers 0% interest on balance transfers, typically over 12 months.
6. Consolidate Your Debts
If your debt isn’t excessive and you have good credit, another smart way to manage your debts is to consolidate them. This means taking out a personal loan or extending your mortgage to pay off all your debts then paying it back over a fixed-term.
Not only is this a good way to reduce multiple debt stress because you only have to make one single monthly repayment, but the overall interest rate for a consolidated loan is typically lower, meaning repayments can be reduced to a more manageable level, and you can be debt-free faster.
By following these tips you should be able to get your debt in check. The key to success is committing to the cause and keeping the end goal – less stress and a better financial position – in mind. One final tip: Cut up those credit cards to remove temptation.
If your debts are spiraling out of control despite your best efforts, contact us today for a free, no-obligation chat.
For more information on personal insolvency, check out our personal insolvency page here.