Tips for paying off Debt faster

Over the past three decades, Australian household debt has experienced a steady increase, attributed to a higher rate of home ownership and continued reliance on loans and credit cards. This trend has been facilitated by the availability of financial products such as car loans and credit cards. The persistent rise of household debt has implications for the financial stability and well-being of households.

In fact, the ratio of household spend to income has more than doubled between 1995 and 2015, going from 104% to 212%, according to the OECD Data released in 2015. This means, if the average person earns $80,000 net, they are spending $169,600 per year.

Compared to the rest of the world, Australia ranks fourth highest in the world for household debt (total as a percentage of net income) see chart below.

While many other developed countries have seen a decline or “levelling out” of personal debt since the 2008 global financial crisis, Australia’s debt levels have continued to increase. As a result, Australia is now reported to have some of the highest personal debt levels in the world.

As of 2016, Australia’s total debt was $2 trillion, and the average Australian household owes over $250,00. The debt is broken into 5 categories: mortgages, investor debt, personal debt, student debt and credit card debt.

Types of Debt

Although, not all debt is ‘bad’ debt, some debt is ‘good’, we’ll explain the difference below:

Good Debt

This type of debt is taken as a way to build your wealth.

For example, your home loan is a good debt, which allows you to work towards owning your own home, and an investment property mortgage allows you to earn income from a property you rent out or re-sell at a higher price.

Bad Debt

This type of debt decreases your wealth over time.

This means that the debt is not attached to any asset, and usually indicates you have paid for items or services you would not be able to afford based on your income. For example, relying on a credit card for non-essential items, or those that diminish in value over time, would lead to bad debt.

Fortunately, there are strategies that can help you pay off debt faster.
If you’re ready to get out of debt, contemplate these methods:

Know what you owe

The first step to paying off your debt faster, is to get a clear picture of what you owe.

Make a list of the debts, showing how much each debt is and the minimum repayment if any.

Make sure to include credit cards, loan repayments, unpaid bills, fines and any other money you owe. Then add up all your debts and see how much you owe in total. This is a good starting point and this will remind you why you’re taking charge of your debts in the first place.

Prioritise your debts

Work out which debts are your priority debt and try to pay those off first.

Priority debts include; rent or mortgage repayments; council rates and body corporate; electricity; gas and water and car repayments.

Try the snowball method

If you want to pay more than the minimum monthly payments on your credit cards and other debts, consider using the debt snowball method to speed up the process even more and build momentum.

The first step is to list all the debts you owe from smallest to largest. Throw all your excess funds at the smallest balance, while making the minimum payments on all your larger loans. Once the smallest balance is paid off, start putting that extra money toward the next smallest debt until you pay that one off, and so on.

Work out what you can afford to pay

The easiest way to work out how much you can afford to pay off your debt, is to do a budget.

List all the money you have coming in each month (income), such as salary or benefits. Then list all the money going out (debts and expenses), for things like food, rent or mortgage, credit cards, electricity, phone and transport.

Tally these up, then compare money in and money out.

The next step is to identify some expenses that you can cut or reduce, but ensure to be realistic – don’t make it impossible to stick to.

Ask for lower interest rate

Why not ask for a lower rate from your credit card provider?

Believe it or not, asking for lower interest rates is quite commonplace. If you have a solid history of paying your bills on time, there is a good possibility of getting a lower interest rate.

Switching to a lower interest rate, can make a big difference to your finances if you’re struggling to keep on top of your credit card bill.

A great negotiator will prepare the below:

• Past credit card statements and payment history.
• Copies of credit card offers you’ve received.
• Any other relevant details that you can assemble to help strengthen your case (your credit score, income and expenses etc.).
• Ensure to be persistent and polite.

There are a variety of websites, that can help you research and compare to find best deals on credit card products, such as Ratecity, Compare the market and Canstar.

Pay more than the minimum

It is tempting to only pay the minimal on your credit card a month. The small payments are easy to afford, so it makes you feel like you’re in control of your finances.

Because those payments are so small, paying that amount can result in several problems, and it’s better to pay extra when you have funds available. Paying more than the minimum, can help you minimize interest costs, shorten your borrowing time, and improve your credit.

Set up a Bane-Bones Budget

A barebones budget is a budget that covers only the basic necessities.

The barebones budget strategy requires you to cut your expenses as low as they can go and live on as little as possible for as long as you can.

Switching to a barebones budget, isn’t for everyone, as it does not allow for extra spending. It can hard to maintain over the long term, but it can be a great way to considerately pay more off your debts.

Remember, a barebones budget, is only meant to be temporary. Once you’re out of debt, or close to it, you can start adding spending back into your monthly budget plan.

Cut expensive habits

Cutting expensive habits will help you free up some cash to pay down your debts.

For example, if your expensive habit is smoking or drinking, that’s an easy one — quit.

If your expensive habit is slightly less incendiary – like a daily latte, restaurant lunches during work hours, or fast food — the best plan of attack is usually cutting way down with the goal of eliminating these behaviours or replacing them with something less expensive.

Consider using savings to pay your debt

You may have some extra money in savings, consider whether it’s worth using any of it to pay down your debt. The interest you need to pay on your credit card debt is usually higher than how much you would earn on a savings account. So, if you don’t have need it for anything else and you’ve got enough for a rainy day, consider using savings to clear debt.

Consolidate “bad” debts

You may have several credit cards and personal loans you’re currently repaying; it may be worth consolidating them into one account.

This simplifies your repayments, which means you only have to deal with one interest rate. Depending on the types of debts and how much you owe, you may be able to take advantage of a 0% balance transfer credit card or a low-rate personal loan to help save money on interest charges.

How to pay off your debt

• Spend less – reduce your expense by examining your budget.

• Pay more than the minimum – even if it’s only an extra $10 or $20 per month it makes a difference, but more is better.

• Consolidate your debts – will help you save on interest costs.

• Avoid temptation to rack up debt again after you pay down your debts.

• Try using the snowball strategy if you want motivation to slowly pay your debts off.

No matter what type of debt you’re in, whether it’s credit card debt, car loans, or something else — it’s important to know there is a way out. It may not happen overnight, but a debt-free future could be yours if you create a plan — and stick with it long enough.

No matter what that plan is, any one of these strategies can help you get out of debt faster. And the faster you become debt-free, the quicker you can start living the life you truly want.

Before you jump into any of these methods, it’s worth having a chat with a financial advisor, they can explain your options and help you formulate a tailored plan to get you out of debt.

Contact us or book a complimentary consultation today!

Important information - Oracle Advisory Group makes no representation or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. The information in this document is general information only and is not based on the objectives, financial situation or needs of any particular investor. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek their own professional advice. Past performance is not a reliable indicator of future performance. The information provided in the document is current as the time of publication.