Most people have small debts like credit cards or store cards or even the odd Personal loan. These sort of loans start out small and manageable but if you aren’t careful they keep growing until they take over your life. If this is you, don’t despair as we will share our tips on debt management and how to take back control of your finances.
1. Needs, wants and impulse buys
Now that you have decided get on top of debt you should take some time to understand what happened to get all that debt. Think about how you feel before you buy and what the circumstances are that makes you behave the way you do. Understanding yourself is the first step in changing what has happened in the past.
Take responsibility for your situation and then take action.
A small debt can easily become a large burden when we get trapped in misunderstanding the difference between needs and wants. For example everybody might want a new pair of shoes but if you have holes in the ones you have on now, you need a new pair. Buying the shoes because you want them creates a debt that isn’t necessary. Buying the shoes to keep your feet dry is a smart decision based on need.
The cost of the shoes is also something to consider. Buying the shoes in the window as you walk past just because they look good is very different than buying the shoes because it’s raining.
Buying on impulse is rarely a good idea but buying for a reason makes a lot of sense.
2. Recognize when your debt is too much
You know you have too much debt when you keep reminding yourself to increase your credit card limit. Increasing the limit is putting off dealing with the issue as it just encourages you to keep spending. Think of it this way. A credit card is very good as a substitute for your bank account, so if you have no money in your bank account, don’t buy anything on your credit card. As long as you have the money in your bank account to pay for your purchases you can use your credit card. Simply recognizing that the debt is getting out of hand is a great start to regaining control of your money.
By the way, having a lot of debt does not mean you are a bad person or not worthy of good things. Controlling money is just a habit to be learned, that’s all. Anyone can do it. The funny thing is, once you learn to save, you will never go back.
3. Build momentum
Human nature is a funny thing. If you had to walk up 5 flights of stairs it would be overwhelming. But looking at it as just one step, then another and then another and it isn’t such a daunting task. Everyone can make one step right? Looking at the bigger picture can be demotivating sometimes so break it down into smaller pieces, such as paying off your credit card for example. Commit to paying some extra off each payday. Notice its each payday and not each month? Don’t wait for the Credit card statement to turn up if you are getting paid fortnightly or weekly.
Commit to paying money each pay day. Pay this extra money off your credit card first, before you pay anything else. Remember, you are creating a habit by putting money away, by reducing debt, every pay day. Guess what? Once your debt is paid off you can then keep paying the money into your savings account and before you know it you are a saver, not a spender.
4. Reward yourself
One of the traps you can fall into when changing habits is not feeling good about yourself. Yes, building up a large personal debt is not the result you want but making inroads into paying it off is something to be celebrated. One word of advice though. Celebrate small!
Buy one of those coffees you gave up as a cost cutting exercise and maybe pay cash for it, just to be on the safe side.
Every time you reach a milestone take some time out to celebrate. For example when you have reduced your debt by $500 celebrate with a coffee, you’ve earned it. Make a pact with yourself that for every $500 or $1000 you reduce the debt you get something as a reward, like a bag of lollies, a magazine, anything, as long as it’s small.
There will be times when you get some extra income or money that you didn’t allow for, like Overtime, birthday money, Tax refund or anything like that. Put that money against your debt and celebrate. Once you can see that reduced debt gets you a reward it won’t take long before you are doing everything possible to pay off your debt.
5. Minimize your expenses
You may have noticed how Banks and utility companies like Telco’s and electricity providers like to charge a fee when you pay past the due date. The charge isn’t a lot but if you get in the habit of paying late it all adds up. Sometimes the bill comes before your pay day which is really annoying. Rather than being late, call the provider and ask for the billing date to be changed so it comes after your designated payday. That way, you always have money to pay on time with no more late fees.
Oh, here’s another tip. Avoid using an ATM that isn’t your Banks. Getting money out of another Banks machine costs a fee and fees are annoying so avoid them by making smart choices.
6. Minimum payment equals Bank profit
There is a reason why the Banks put a warning on your credit card statement saying how long it will take to pay off your credit card if you only pay the minimum amount. They know most people don’t read it. Next time you are tempted to pay just the minimum, look at the amount of money you will pay back only using the minimums. It’s frightening.
Multiply your card balance by the millions of Australians doing exactly the same thing and you will quickly realise why our Banks are amongst the most profitable in the world. Don’t pay the minimum as it just makes the Banks richer! A top tip is to always add more to your repayment because the more frequently you pay extra off the balance, the quicker you will be debt free.
7. Keep going, don’t stop the habit
Once you have conquered your debt you have every right to splurge. Maybe have two coffees! It’s a wonderful feeling to climb out from under a mountain of debt and know that all your hard work has been worth it. There are many more opportunities available to you now that you are free from debt.
During this journey you have probably had the odd set back along the way which hopefully have been outweighed by the small celebrations of the successes. Don’t worry about how you got into trouble with debt because all the skills you learnt along the way to controlling your money have built healthy money habits that will be very difficult to break. Now you can see how Financial Management leads to debt solutions.
However, the final step is the hardest and also your biggest challenge. You have to keep going using the habits and skills you learnt but this time everything is reversed. You aren’t reducing debt anymore, you are creating savings which can be a safety buffer for any unexpected expenses. The more you save, the better you will feel about yourself.
Right now, you are on the way to building wealth and creating a better future.
Overcoming crippling debt can seem overwhelming and giving up is an easy option. Creating new spending habits and learning how to control your own money will be uncomfortable at first but the end result is more than worth it. Seeking Financial Advice is a good start and by starting small you will see the benefits immediately helping build your confidence to keep going.
Besides, at Investors Direct Financial Planning we are here for you, delivering relevant financial services whenever you need us.