Debt is a normal part of life. Whether it’s a mortgage, credit card, or even HECS debt, it often plays a part in achieving financial goals. Becoming debt-free is the dream for many Australians so they can look to their next investment opportunity or enjoy a more comfortable lifestyle.
Although it may feel unachievable some days, here’s how you can become debt-free.
Dealing with debt
Whether it’s happened through a large purchase, or slowly crept up on you through smaller loans, debt is unavoidable for many of us. When you pay off your debt, there are multiple benefits, including:
- The ability to direct funds to wealth creation and lifestyle
- The ability to look to the future with more confidence
- Reduced financial stress
- An improved credit score
- Ability to focus on other financial goals
- Mental stress relief
- Being able to spend money on things you’d like without feeling guilty
#1 Plan it out
When it comes to eliminating debt, it’s essential you have a plan in place. Creating a financial plan and setting goals with a financial planner will help you look towards the future and keep you motivated to achieve these goals.
Inovayt Financial Planner, Luke Saltmarsh, says, “It’s important to make sure you put a plan in place. Depending on the size of the debt, it’s unlikely you’ll be able to pay it off overnight. Create a budget so you can understand your income and expenses properly. From here, you can figure out how much surplus cash flow you’ve got left to allocate to reducing your debt. Once you’ve completed this, commit to a regular repayment so you can start chipping away at the debt.”
Regardless of how small your repayments are, if they are consistent, the debt amount will slowly start to shrink.
When creating a plan of attack, think about what method would work best for you and create the most momentum. The two most common methods are the debt snowball and the debt avalanche.
Debt snowball – In this method, you start paying off your smallest debt first while still making the minimum payments on your other debts. Once this is paid, you can work your way up to the next smallest debt and keep going from there. This will give you a sense of momentum that builds over time, like a snowball rolling down a hill.
Debt avalanche – This method takes a slightly different approach. Instead of paying your smallest debt, you pay off your highest interest debt first, all the while making the minimum repayment amounts on your other debts. Once the first one is paid off, you move onto the debt with the next highest interest rate. This method helps you to save money on interest over time.
#2 Revise your spending
Once you’ve created your budget, it’s time to crack down on your spending. Where is your money going each month? Is it all going to essential bills or are there a lot of unnecessary transactions? Revising subscriptions is a great way to free up some extra cash. Consider whether you could share a Netflix subscription with a friend or quit your gym if your membership mostly goes unused. These little things all add up and if you’re not making the most out of them, you’re potentially wasting money that could be spent better elsewhere.
Throughout lockdown, online shopping figures went through the roof. If you’re someone who is often tempted to shop online, take a moment to consider if this is something you need. Leave it for 24 hours and if you’re still thinking about it, revisit the purchase. If you use ‘buy now pay later’ apps like Afterpay or Zippay, delete them. Although it feels like you’re spending less money now, you’re only adding to your debt. It’s the same with credit cards except they contribute even more negatively to your debt as they tend to have high-interest rates. By not using buy now pay later sites as well as credit cards, you’re able to save extra funds.
Want to learn about how buy now pay later accounts can affect your finances? Read our blog.
#3 Re-evaluate your lenders
Many consumers loans and policies are created with a ‘set and forget’ mindset. We should be checking regularly if we’re getting the best price for a policy or the lowest interest rate. Often, we don’t realise but we’re paying more than we need to. Call your insurance companies and lenders to see if you’re getting the best deal and how you can go about getting a better deal. Shop around too – don’t settle on one company because you’ve been there for years, or you believe it’s too much hassle. Changing lenders can save you in the long run. Our staff can help you find the best lender to suit your needs.
#4 Consider a debt consolidation loan
Debt consolidation loans are great ways to manage and pay off your debt. Instead of having multiple loans with varying interest rates, this allows you to combine all your debts into one new debt. Debt consolidation reduces stress around payment schedules and fluctuating interest rates. You can choose whether you’d like to combine all your debt, or just certain debts together; such as combining multiple credit card debts into one or consolidating your credit cards with your car loan.
“If you can consolidate multiple loans into one with a lower interest rate or with an interest-free period, it’s a good idea to do so,” Luke says.
For more information on debt consolidation, read our blog.
#5 Prepare for the future
While becoming debt-free is a great feeling, it’s important to prepare and maintain how you manage debts. Plan your budget while taking into account situations both present and future. For example, if tax time is coming up and you know you’re going to be eligible for a return, budget for where these funds will go. Putting this extra cash towards debt is a great way to become debt-free faster – especially if it’s a larger amount. The same goes for any bonuses you receive at work or payouts you don’t usually receive.
When it comes to planning, Luke advises, “If you’ve got something on the horizon (for example, a holiday or large purchase), start putting funds away for this in advance so you don’t have to take out a loan. Another great thing to do is create an emergency fund or cash buffer for unexpected situations. This will help soften the blow of any unplanned expenses that occur.”
Becoming debt-free is something many of us wish for. When it comes to making those dreams a reality, it’s important to create a plan to guide and motivate you through. Looking into options such as debt consolidation loans or changing lenders can also help to save money in the long run and get your debts paid off faster. If you’re looking to become debt-free, talk to one of our professionals on how they can help.