How To Get Out Of Debt
What is the Best Way to Get Out of Debt?
When it comes to getting out of debt, there is no shortage of articles, tips, and "5 point plans" available on the internet. It seems that when it comes to giving debt relief advice there are a lot of experts out there and an overwhelming amount of information, so much that it can become confusing.
At the risk of adding to the volumes of information already available, this page attempts to cut right through to the core of the matter by providing practical options which are tried and tested. So, without any further introduction, here are our tips.
The Top Tips to Reduce and Get Out of Debt Sooner
Spend Less and Live Within Your Means
Spending less money is easier said than done, but a good way to start is by tracking where you spend your money (compare these 12 free apps to see if it can help you track accurately).
After a few weeks of tracking your day-to-day costs, you should have a pretty comprehensive list of expenses. Divide the list of costs into two groups i.e. “needs” and “wants”.
"Needs" are costs that are essential for living, such as food, accommodation, transport, etc. "Wants" describe those costs that are discretionary, such as money for coffee each morning or buying takeaway food.
When you record your costs, be as thorough as you can be but don’t be too shocked or too surprised if the wants outweigh the needs – this is pretty normal. The list should point out expenses that can be curtailed resulting in funds that can be used to offset debt.
Earn a Higher Income
Finding alternative (higher paying) employment, taking a second job, or working overtime - these are examples of good options as long as the extra money is used solely for the purpose of debt reduction. It defeats the purpose if you increase your expenditure in proportion to your higher income.
The key takeaway is to use the income you earn and prioritise paying off your debt without downgrading your lifestyle. Read more on debt management and learn how you can regain control of your finances.
Don’t Take Financial Risks
Speculative “get rich quick” schemes are usually fraught with high risk. If you have debt and don’t have any surplus funds (i.e. spare money after needs and wants are met) you are probably not in a secure enough financial position to risk losing your money because such losses would undoubtedly impact on your ability to meet future needs and wants. More often than not, people who make risky financial decisions lose more than they gain with such behaviour often becoming as addictive as gambling.
When it comes to spending your hard earned money on “investments” or speculative schemes, it’s probably better to take a more conservative approach depending on your appetite for risk.
To prevent individuals from taking undesirable financial risks, try to remember how hard you worked to get that money in the first place or how long that money took to save before you commit anything and consider how long it would take to recover from the financial mess that would be left in the wake of an investment gone bad. Fortunately for most people, the thought of losing everything that you’ve worked so hard to get is sufficient to take the shine off any get rich quick scheme.
Budget, Save, and Set Goals
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Budgeting or putting together a money plan is reasonably straightforward these days with the assistance of a budget program. It’s easy enough to find a free online budget program these days; in fact, the Government has made one available on their Money Smart website as part of their endeavour to improve consumers' financial literacy. Debt Fix also has a free budget calculator tool hosted on its website.
Be wary of companies that offer budgeting services as they usually charge a setup fee and ongoing administration charges. In return for these services, you may be required to pass over your whole salary for them to pay your expenses less their fees. This may be appropriate but you need to be aware of all the benefits and consequences, including the fact you may have to forgo your weekly pay-packet to the budget company for them to manage your finances, and they may only allow you to keep a fraction for yourself.
Alternatively, you could set up a separate transaction account dedicated only for bill repayments and transfer money to that account on a weekly basis.
Use Cash Instead of Credit
If you want to get out of debt, the first thing you should do is stop using credit. This means you should consider cutting up the cards and stop using the overdraft. Possibly the worst financial decision you could make is come to rely upon short-term “payday” lenders. Whilst such loans may be convenient, they usually attract a high interest rate which makes them difficult to repay. A lot of people then borrow more to pay the debt and before too long they have found themselves in a debt spiral. This is a particularly risky situation but sadly one that is too common.
These days, using cash has never been easier with pay wave, tap and go, and “EFTPOS”. If you simply rely on cash you will never spend more money than you have, not to mention the fact you will never incur interest. This is exactly where the expression “Cash is King” comes from, as there is never a better way to avoid being in debt or becoming overcommitted if you only ever rely on cash.
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