A practical guide to getting out of debt
Welcome to Hit Refresh. This month, we'll be bringing you articles created by experts that will help you live your best life in 2018. Today, finance and money expert Vanessa Stoykov tells us how to get out of debt - once and for all - in 2018.
Debt is one of those things that can have a huge emotional impact on your life. Debt used well, as a way to leverage your access into things like a home can be a good thing. As long as that mortgage isn’t crippling, it’s an excellent way to access home ownership. Debt for constructive investments that employ people and create things is also good debt. It has a purpose.
But debt in the form of credit card debt and personal loans can be debilitating. Usually the shine of the purchase has worn off well before the payments to the credit card are completed. It traps people into a cycle of paying for things long after they have been consumed, and having to keep using debt to keep spending.
It took me a long time to understand that credit cards don't equal having choices - in fact they limit your choices. Whatever you buy on credit ends up costing you at least 20 percent more when you only pay the minimum off. The only useful thing a credit card can do is give you rewards, or frequent flyers. I still use one, but I pay it off the same day. Yes, that’s right, the same day.
Internet banking gives you instant access and the minute I see a charge on that pesky card, I pay it off. Because I understand the burden debt puts on you, and the mental load is significant.
If you want to clear you debt and make 2018 the year you get that monkey off your back, you are going to need a plan. Here are five steps you can take to make a debt-free life a reality:
1. Don’t keep racking it up. I mean it
Stop spending on credit. Take the cards out of your wallet and pretend you don't own them. This is the first and most important step to getting out of debt. Until their balance is zero, you cannot put them back in your wallet.
2. Add up how much you owe between cards and personal loans
Look at the minimum payments you are paying for each. January is a great time to take up offers of 6 months interest free on balance transfers, or talking to the bank about rolling all your debt into one personal loan at a lower interest rate. Don’t accept the status quo. Look for ways to bundle your debt and get a better deal. That way you can afford to pay off more than the minimum.
3. Do some numbers
How many months or years will it take to pay off your debt if you pay X? How about you if paid more? Do some simple calculations and figure out the timing on when you can be debt free. If you need help here, ASIC has put together some good calculators to help you figure this out on moneysmart.com.au. Once you settle on the most you can pay, highlight that date – write it on the wall, in your phone and on your desk. This is a date you need to be focused on and working toward. It will help your mindset greatly, and keep you on track for becoming debt free!
4. Change your plans till it’s done
If you are spending valuable funds on items that don’t make you truly happy, or add long term value to your life, stop. The desire for the latest clothes, makeup, food, movie or dinner out is holding you back and keeping you in debt. Make the mental decision to stop spending your hard earned money on these things and funnel it into your debt until it’s gone. While you will feel some short term pain, the feeling of being debt free is so good, you won’t regret it. Debt free means you have choices about how you spend your money and your time.
5. Do you have any savings
Because if you are paying off debt, but slavishly holding into savings, you are costing yourself money. The interest on your debt is increasing your burdens. Keep a small amount aside for peace of mind, but use your savings to dump your debt. Then you can start saving in earnest.
The hardest part about getting out of debt is making up your mind to do it. It’s like losing weight – it’s not fun, but neither is it rocket science. You have to really want it, and take action to get there. Speaking from someone who has done, I can tell you, it feels great.
Vanessa Stoykov has worked in financial services for 24 years as a storyteller and educator. Her website has valuable tips and resources to help you unlearn back mistakes with money and start growing your long term wealth.
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