Is your debt getting away from you? Are you hoping to get out of debt free? There are a number of debt relief solutions available to help you. The only trouble is, many of them cost money. You need to pay for many of the Budgeting Guides, there are set up fees for a debt consolidation loan and you need to pay fees to have someone negotiate a Debt Agreement for you.
While these solutions will end up saving you in the long run, you can save the upfront costs by tackling your money management head on. There is no quick fix way to get out of debt free. In fact the only way to get out of debt free is to knuckle down, get organised and budget your way out of debt.
Don’t know where to start? Don’t worry! Here are 5 steps you can follow. These steps will give you the basic knowledge you need to take control of your finances and start managing your money properly.
1. Know what you owe
You would be surprised by how many people we speak to each day who have no idea how much they owe or who they owe it to. We advise them to go through their paperwork, emails and bank statements to find all their debts. When they call back they are bamboozled by the number of forgotten debts they had. Suddenly their $15,000 worth of debt has turned into $25,000.
Losing track of your expenses is the first sign of bad debt. You should always know exactly where your money is going and the easiest way to keep track is with a budget. Don’t grumble just yet. Budgets don’t have to be difficult or time consuming. In fact once you have a budget system set up, you will find it really satisfying to see where your money goes, trust me.
Use this Budget Worksheet to get thinking about your debts. It lists a number of common debts average Australian Households encounter day to day. You will also need to figure out how frequently you may these debts, how much your repayment is and when the next one is due.
At the bottom of the worksheet is a row to fill in your income. Once you have a basic idea of what you owe, you can do a number of things to determine your budget.
2. Get a clue when it’s due
It isn’t enough to know what you owe. Knowing when your debts are due is key to keeping on top of your finances. When you are in debt, you often don’t like to plan too far in advance, well that needs to change. Even working month to month is not far enough in advance. You should plan your debt repayments 6 months in advance, and this is why. You might be tracking along really well for 2-3 months, but then in your 4th month, disaster strikes. Your rego is due and so are your rates and a huge electricity bill. If you only have a number of days or weeks to try to scrape the money together you might end up having to rely on your credit card, or even worse, a payday loan. But if you knew 4 months ago that these debts were coming up, you have enough time to plan accordingly and set the right amount of money aside.
Working from your Budget Worksheet, go through and write your expenses in this Debt Calendar for the next 6 months. If you are feeling inspired, keep going for the whole year. Use a red pen for your debts and a green pen for your income.
Now you have all your debts in an organised planner, you can start to figure out how much you need to set aside from your income.
For Example: On your calendar, you can see your rates of $700 are due in 9 weeks time. At the moment you have no savings set aside so you need to save this whole amount. To save $700 in 9 weeks, you will need to set aside $77.77 from your weekly income in order to pay this debt when it falls due.
3. Waste not, want not
In this case, you need to stop wasting money if you don’t want to be left wanting money for essential bills. From the example above, you might be screaming at the screen – But I don’t have a spare $77.77 to put aside! Go back over your Worksheet and think honestly about your expenses. Do you need to spend that much on hair and beauty? Do you really need the Foxtel subscription? Could you downsize or downgrade? Maybe you could sell your car to pay out your loan and buy a car which is more affordable or has lower loan repayments.
If you have done everything possible to reduce your expenses and you are still struggling to make your repayments, you might need to consider a more aggressive approach to your debt, such as a Debt Agreement, or even declaring Bankruptcy.
4. Stop taking on new Debt
It might seem obvious, but you can not get out of debt by taking on new debt. You can not use a credit card or a loan to repay other debts. By doing this, you are just transferring the debt from one creditor to another. Even if you are managing this way at the moment, you will never be able to get out of this debt repayment cycle and will never get out of debt.
Now you have put a budget together, you know where all you money is going and all your essential living expenses are covered. If you have money left over at the end of each week put it into a high interest savings account (but make sure the account keeping fees are minimal). It doesn’t matter if it’s $5, $50 or $500. Overtime it will add up and will become a significant amount of savings you can fall back on.
5. Plan for failure
Money Management is hard! It is unpredictable and no matter how much you plan, things can always go wrong. It is going to take a few weeks for you to break old habits. And even once that happens and you get into the swing of things, a missed payment might pop up here and there leaving you in a bit of a pickle.
If you find you absolutely have to put a repayment on a credit card, then you can. But adjust your budget accordingly and make sure you aim to make up that repayment as soon as you can. If you are trying to put aside $77.77 each week for your rates, but you need to spend that money on petrol, then go ahead. But adjust your budget accordingly.
If you slip up, don’t panic and abandon the whole plan. Keep at it, persevere and you can get out of debt free. The more you start to think about your money and your spending, the easier it will become to manage it correctly.
Can’t get out of debt free and need more help?
Do you find no matter how much you plan, scrimp and save you simply can’t afford your regular debt repayments? It might be time to take a more serious approach to your debt. You might be able to consolidate your debts through a mortgage refinance, negotiate an informal Agreement or enter a Part 9 Debt Agreement.
If you can’t get out of debt free and would like to speak to someone about your debt situation, give us a call on 1800 00 3328. In a no obligation free chat, we will walk you through your situation and the different ways you can get out of debt.