One of our goals is to help Aussies manage their money better by providing insights and education through these blog posts and that includes talking about debt. Guest writer Anthony Fensom gives us 3 practical tips for managing debt.
Saving is back in fashion in Australia, with a recent survey finding a surge in household savings and early mortgage repayments. But while we are getting more financially savvy, the issue of how to manage debt still catches many out.
Borrowing to invest in productive assets like a business, property or shares can generate wealth as well as tax savings. However, if the investment performs badly then the burden of interest repayments can prove crippling to the hip pocket as well as relationships.
Cut up the credit card
If you’re a compulsive shopper, the best option might be to switch from credit to debit cards to avoid any temptation to overspend.
Credit cards are often at higher interest rates than personal or home loans, so missing repayments means the interest bill usually adds up. For those unable to make the full repayment every month, it might be best to simply cut them up.
Alternatively, look for credit cards with lower interest rates, but perhaps without the gimmicks of travel or other spending incentives.
For those already with a stack of credit cards, the first option is to talk to your financial institution about debt consolidation. It might be possible to pay off the credit cards by increasing the size of your mortgage, although while this will reduce the short-term interest cost, it will make the debt more long term.
Other options may include switching your home loan to a cheaper provider or, if necessary, downsizing by selling your home. It’s far better to sell your property yourself rather than wait for the credit provider to do so at a knock-down price in a mortgagee sale.
If you’re really struggling, it is possible under the National Consumer Credit Code to request a “hardship variation” with your lender. According to ASIC, you need to request a change in repayments under section 72 of the code, explain why you are having difficulties and how long they will continue, and advise how much you can afford to repay.
It’s possible to request an extension of the loan period, a postponement in repayments for a set period, or both. Meanwhile, make sure you continue repaying as much as you can and that you do not lapse back into bad spending habits.
ASIC’s MoneySmart website provides details of further options for those in need, such as financial counselling, legal advice or emergency relief.
Avoiding dealing with the problem can lead to intervention by debt collectors and ultimately court action, so it’s best to take the initiative first.
It’s easy to become overwhelmed by a large debt burden and put off dealing with it for another day. Instead, try approaching it in manageable steps that will provide small victories along the way.
Review your debts to determine which has the higher interest cost and attack that debt first before moving on to the next one. Credit cards typically have the highest interest rates, so it’s advisable to repay them first before dealing with a car loan or mortgage. By drawing up a budget, you will have a good idea of what savings are possible and how expenditure might be cut or income increased to reduce debt. With every potential purchase, ask yourself whether it’s in line with your financial plan and if you really need it?
Similarly, set up milestones along the way to show progress, such as repaying $5000 off the mortgage in the first six months and another $5000 the next. Financial advisers suggest saving 10 or even 15 per cent of income, and reducing non-mortgage debt to less than 15 percent of income. Another tip is to conduct a year-end clean-out of your finances, ending any wasteful spending such as subscriptions to magazines you never read, or selling goods that are no longer needed by the household.
Keep your eyes on the prize: what will your life be like in one or five years time when your debts are under control again and you have less debt worries to get stressed about? Australians should be taught how to manage debt, but since it’s not on the school curriculum, it’s important to teach yourself before you learn the hard way.