Here are some handy hints to get your debts under control and get your finances on a positive track for the New Year.
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When it comes to New Year’s resolutions, “getting my finances under control” would have to be right up there alongside “losing weight” or “doing more exercise” as the most popular choice. More often than not, these idealistic declarations quickly become wishful thinking and then fade into the busyness of everyday life.
So what can you do if you really want to make progress to improving your finances? A key part of the puzzle is to get smart about the debt side of your financial situation. Debt is often misused and misunderstood. When used carefully and deliberately it can be a valuable ally, but if used carelessly it can become a real drag on your finances and your enthusiasm to make progress.
To help you kick the New Year off with a positive outlook, here are some great ideas to help you tame the debt monster that may be taking over your life.
Be realistic about your budget
One of the mistakes that can quickly sap your motivation is to be too ambitious about how aggressively you can tackle your debts. Making unrealistic promises to yourself about how quickly you can pay off debt is setting yourself up for disappointment.
Calculate how much you should be spending on living costs and fixed expenses
The best place to start is to take a serious and sober look at your weekly budget. Review your spending for the last couple of months to get an idea of where there may be areas that you can realistically cut back on (without condemning yourself to a meagre existence). You can then set out a budget to guide your spending on living costs and fixed expenses, which then gives you an idea of what discretionary amount you have left over. It is out of this amount that you can now make a realistic extra regular allocation toward debt repayment.
Chances are you will be able to allocate more than just paying off the bare minimum amount on your credit cards and loans, so you can really start to make consistent, steady progress.
Which debts to pay down first
In the same way that you would prefer to save in an account with higher interest, it makes sense to allocate more of your attention to paying down higher interest debts, such as store cards or credit cards. By doing this you will maximise the interest savings.
It is also worth considering whether you can consolidate higher interest debts into a lower interest loan. This will not only save on interest payments, but can simplify your situation and give you a greater sense of control.
Make use of interest free periods on credit cards
Many credit cards offer extended interest free periods. These can be powerful allies if you use them properly. One strategy that many people employ to combine a credit card with a long interest free period (say, 55 days), together with a redraw-style mortgage. All income is paid into the mortgage to help reduce daily interest charges, while all spending is made using the credit card. Just before the 55 day interest free period expires, a repayment is made from the mortgage account to the credit card, thereby avoiding credit card interest.
While this method can work well to reduce your overall interest burden, it does take a significant amount of discipline and budgetary planning to ensure that spending does not get out of control. Without this you may end up spending beyond your means and effectively living off an increasing mortgage debt, so seek advice on how to get this method to work for you.
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Keep an eye out for low interest special offers
Many banks and lenders are now heavily promoting balance transfer offers in order to win business in the personal finance marketplace. It is not uncommon to see 0% interest being offered for 6 or 12 month terms if you transfer your debts to that institution’s credit card or loan product.
These can be useful tools to help you make inroads on your debt reduction, but only if you have the capacity to pay off the debt within the special 0% offer period. You also need to be aware of some other hidden dangers and conditions they may have:
- Always check how long the low rate will be applicable for and what the rate will revert too once that period is over – they can often jump to rates higher than a normal credit card rate.
- Be wary about new spending with the newly acquired credit card. This spending will not be covered by the balance transfer rate and may in fact be higher than the rate you were paying on your old credit card.
- If you do spend on the new card, chances are that any repayments you make will be firstly applied to the 0% balance transfer amount BEFORE they are applied to new spending. This maximises interest payments that the institution is collecting from you.
- Check for transfer fees, as these can reduce or nullify the interest-saving benefits of transferring.
Don't be afraid to seek help from your lenders
If you are having real difficulty in controlling or repaying debts, due to income dips or emergency spending, then don’t hold back from discussing your situation with your lenders. More often than not they will be happy to discuss adjustments to your repayments to get you through a tight spot and ensure that you can continue to pay within your means. The key is to communicate openly and honestly and they will generally be willing to accommodate your situation.
Not all debt is bad
Debt may sometimes seem like a dirty word, but if used properly it can be a valuable tool in your wealth creation. When it is used astutely and integrated with an overall financial strategy, it can be a powerful ally toward achieving your lifestyle goals. This is where a professional financial planner can be of assistance in helping you manage and utilise debt to your best advantage.
Do you have some of your own tips for good debt management? Share your thoughts below.