Debt has become a way of life in the modern world. Easily accessible in a variety of forms, we have been able to harness its power to achieve goals and dreams that our grandparents could only have dreamed of. It is a factor in our ever-increasing standard of living and is a key part of keeping the wheels of the economy running smoothly.
Debt can also cause a great deal of damage when it becomes out of control. Managing debt, paying it off, and ultimately becoming debt free is the true secret to financial freedom. In this article, we will show you the steps you need to take to manage your debts effectively and to ultimately achieve the objective of being debt free.
- Set a date. Put a clear date in your mind as to when you plan to be debt free. This will largely depend on the level of debt you have and how much you feel you can commit to repaying it so be realistic but provide yourself with a challenge as well.
- Form a plan. Once you set a date work out how much you will need to repay each month to achieve it. Decide how you will fund these repayments and measure your progress against this target.
- Decide you won’t make the situation worse.
- Identify the debt that costs you the most. Different types of debt carry different interest costs. Some of your smaller balances may be costing you more (e.g. credit cards and unsecured loans) than larger debts. Make these a priority in your repayment schedule as they will free up more cash, faster to repay your other debts.
- Pay off small balances. If there is little difference in interest costs then concentrate in clearing some of your smaller loan balances first. This will give you a quick win in terms of achieving your goal.
- Reward yourself when you achieve a milestone. When you achieve a major milestone (paying off a card or getting a loan balance below a threshold level) reward yourself for your effort with a night out, a special dinner or something that acknowledges your efforts – remember not to put it on your credit card however!
- Look to consolidate. More expensive unsecured loans and credit card balances may be able to be consolidated as secured debt (e.g. a mortgage) that will enable you to reduce the cost of interest. Consider this option but be careful not to start using up those available credit card balances again.
- Be regular in your repayments. Little and often can be more effective than paying off a large lump sum. Every dollar you put in reduces your interest costs immediately and this can start to add up. Devote a fixed amount each pay packet to loan repayments and try to pay this first.
- Put surplus funds and bonuses to debt. If you do have a windfall like a tax refund put it against your outstanding balances. Resist the urge to spend it.
- Reduce spending. The most effective way ultimately is to cut unnecessary costs from your lifestyle. This not only reduces the need to borrow more but frees cash to reduce the debts you already have.
Debt reduction is a journey and it will come with its good times and its bad. Don’t beat yourself up if an unexpected expense sees you having to grab the credit card again. Persist with your plan and seek help from an expert such as a financial planner if organising your finances is not part of your DNA. The satisfaction and rewards from freeing yourself from debt will be worth it in the long run.
If necessary, you should consider getting professional advice from a financial planner who can help you understand your options and establish some workable goals for debt reduction.
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The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.