When we’re facing financial uncertainties like inflation and increasing costs of living, it’s tempting to turn to short-term measures that might help you through at the time, but can add more stress in the long run.
Credit cards, personal loans and other types of debt are one kind of short-term measure that many Australians are battling with at the moment. And trying to reduce and manage your debt to crawl out from underneath the mountain of debt can be hard – especially if you don’t know where to start.
Sound familiar? Then keep reading for our top three tips to successful debt reduction and starting the financial year fresh.
1. Understand how you got into debt
If you want to focus on managing your debt, the first place to start is assessing your current situation.
This can be hard. Often it’s tempting to bury your head in the sand rather than talk about your debt, but when you don’t know what you need to pay off, you aren’t able to effectively plan how to do that.
So first, let’s look at how you can understand the full extent of your debt. Ask yourself questions like:
- What type of debt do you have? Is it ‘good debt’ like an education loan, or is it ‘bad debt’ like a credit card (that was only supposed to be for emergencies!) or a personal loan you had to get for an unexpected situation?
- What’s the current outstanding balance of your debt? If you have more than one type of debt, it can be beneficial to begin by paying off the lowest amount first. Starting small might seem counterproductive, but paying off your first debt can be highly invigorating and inspire you to tackle it even faster.
- What are the current interest rates and minimum monthly repayments? It’s worth getting in touch with your debtor/s to discuss potentially renegotiating a lower interest rate or monthly repayment, especially if you’re living on a reduced income. If you have one debt with a higher interest rate than others, start paying that off first as a priority.
2. Create a foolproof budget
Once you have a better understanding of your debt situation, you can establish a budget for paying it off.
Factors to consider when budgeting to reduce debt include:
- Avoiding excessive focus on debt
While you should feel encouraged and motivated to manage your debt, don’t overdo it and funnel too much of your budget towards paying it off – unless you’re absolutely certain you’ve got enough left in the budget to cover everything else.
If you focus too much on debt repayment, you risk falling short in other financial areas. This leaves you at risk of creating more debt and continuing the cycle.
- Tracking your spending and expenses
Alongside your budget, set up an easy way to keep track of your expenses. This helps you see where your money is going and quickly identify any risk areas if and when you see them.
- Build an emergency fund
Debt often happens because we don’t have the finances required to deal with the unexpected. Medical emergencies, car repairs, home repairs or even job loss are all situations that many of us find ourselves in, with little to no savings to support us.
- Don’t forget fun!
Reducing debt doesn’t mean you need to lead a completely frugal lifestyle. You can – and should – still make room for enjoyment. So if possible, include some fun money in your budget.
Set aside a small portion of your income to spend on fun, whether that’s seeing a movie, getting yourself a massage or going on a book-buying spree.
3. Change your financial mindset
This is our most important tip, but it’s one that isn’t mentioned often. When you’re reducing and managing your debt, you need to shift your mindset as well.
Debt brings with it a lot of feelings and emotions; guilt and shame are two of the biggest. When you’re struggling with debt and overspending, it’s imperative to avoid beating yourself up about it.
Actively working on shifting your mindset can make a significant difference in your approach to debt reduction. Acknowledge your debt without any of that additional self-blame or judgement.
Getting into debt is a very common situation for people all over Australia. Debt doesn’t define your worth as a person, so be kind to yourself.
Seek out expert guidance
Reducing and managing debt takes time and effort, but it is possible and you can do it.
If you’ve tried everything to manage your debt but it doesn’t seem to be getting any smaller, seek support. There are so many resources available to help those struggling with debt, so don’t be afraid to reach out.
Our team of financial experts are highly skilled at supporting clients who want to get rid of their debt.
Contact us to discuss an effective debt reduction plan today!