For many young Australians, the idea of becoming debt-free can seem like a pipe-dream. Large student loans, hefty mortgages and high-interest credit card debt repayments can consume a significant portion of your income without ever appearing to reduce the debt itself.
Perhaps you want to sort out those pesky credit card repayments once and for all. Or maybe you’re hoping for complete financial freedom so you can retire early. Whatever your situation, it’s important to consider the type of lifestyle you want and to set clear, realistic goals.
Most people use debt to finance their lives to some degree or another. Low interest and no-interest debts such as mortgages and student loans are commonly referred to as good debt as they help borrowers achieve important goals (like owning a house). Bad debts are high interest loans which can be subject to regular interest payments without return (for example, paying interest on a credit card).
Once you have decided your financial goals, simplifying your finances by categorising and consolidating debt is an excellent way to stick to a budget.
Go on a ‘spending diet’
This can be a good way of quickly raising funds to meet unexpected outgoings or pay off a decent bit of bad debt. By setting limits on how much you are allowed to spend on certain needs and wants, you’ll be able to pocket those saved dollars at the end of each pay period.
Repay debts on time
This might seem obvious, but debts are almost always time sensitive, and paying at the right time can mean the difference between paying interest only, and paying back the principle. To make sure you don’t drown in credit card debt, make a rule to pay back any transaction immediately. This will ensure your credit card is always budgeted for and will reflect well in your credit score.
NB. Rather than waiting for your monthly credit card bill before making a payment, set up a direct debit so it is paid automatically at regular intervals in order to avoid late fees and additional interest charges.
It is important to prioritise high-interest debts such as cash advance loans and auto loans, as these will cost the most.
Save and/or Invest
Building a decent savings account can be difficult, but it’s the easiest way to stay out of debt. A savings account is essential for long-term financial planning and budgeting for unexpected costs like medical bills or car expenses. Having some money put aside will also stop you putting unexpected or smaller expenses on your credit card.
Making smart investments can put your money out of immediate reach while ensuring you earn interest. It is best to talk to a financial adviser regarding investment options, however bank and term deposits, managed funds, and property investments are worth researching