Six steps to mastering your debt successfully

Australian households are the fifth most indebted in the world, according to 2020 data from the OECD[1]. Based on their research, a household with a disposable income of $100,000 has a debt of approximately $203,000. With rapidly rising interest rates and rampant inflation, the cost of living will only continue to escalate.

Home loans, credit cards, car loans, and personal loans all contribute to financial pressure. One and a half million Australian households are currently under mortgage stress[2], so if you feel overwhelmed by debt, then rest assured you’re not alone. But with dedication and a smart strategy, you can get your cash flow back in the black.

1. Know where you stand

When it comes to reducing debt, planning is critical. But before you can work out how to reduce your debt, you need to clearly understand your current money situation. That’s not always easy when you’re struggling just to get through the week. The first step is to figure out exactly what you owe. List your debts and monthly repayments, then calculate the total.

2. Understand where your money is coming and going

Determine your monthly income, including salary, benefits, and any other investment earnings. Then list your essential living expenses for things like accommodation, food, electricity, gas, internet, phone, and transport. Highlight any non-essential expenses that you can eliminate or reduce. Compare money in versus money out to calculate exactly how much debt you can afford to pay off each month. To make this process easier free budgeting tools are easily accessible via the Government’s “Moneysmart” website.

3. Prioritise your debts

Figure out which debts have the highest interest rates and pay them first. Due to the high interest rates for credit card debt, you should pay off your card in full each month if possible. This might include personal loans and credit cards. When considering critical expenses such as mortgage repayments, council rates, taxes, and utility bills, if you genuinely can’t afford to pay these, then you may be able to request financial hardship assistance from the service provider. If possible, it is better to be proactive in approaching your providers to work out a payment plan. Contact a financial counsellor who will be able to assist you.

4. Avoid bad debt

Once you begin to pay off your loans, don’t be tempted to go further into debt, and especially take care to avoid bad debt. Good debt is money owed for things that can build wealth or create an income stream, such as home loans, education loans, or a car loan (if driving is essential for your job). Bad debt refers to money owed for consumer products that don’t improve your financial situation, such as holidays or entertainment.

5. Build a safety net

Once you’re on top of your debt obligations, you can use any surplus income to build an emergency savings fund. If you’re a homeowner, then a good way to do this is to request an offset facility on your home loan. This way you can pay off additional principal each month, reducing your interest repayments, and then withdraw from this buffer to cover unexpected emergency expenses.

6. Seek help if you need it

Don’t be afraid to ask for help. If you’re feeling overwhelmed by your situation, or if you need to get your debt master plan back on track, then you can always seek advice from a financial counsellor or professional financial planner.

Sources

[1] https://data.oecd.org/hha/household-debt.htm

[2] https://www.news.com.au/finance/economy/interest-rates/how-interest-rate-rises-could-send-hundreds-of-thousands-of-aussies-into-mortgage-stress/news-story/e4b8476a13b3712d2def0f25178265f3