- Posted 31 Mar
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All out of luck with the magical debt fairy or better still waiting for the mother lode from lotto? Getting out of debt is something we all want to achieve. Getting out of debt fast is another thing yet.
The first thing getting out of debt when on a budget is to stop digging further in debt. So throw away the shovel and start focussing on paying the debt off.
Have a read through the following tips:
Know your position
The first step to getting out of debt on a budget is to actually understand how much debt you are in. Pull together all your debts whether large or small and compile them. You may have credit card debt, personal loans etc. Better still is to order them by interest rate with the higher interest rate debt first.
Once you know your debt then compare this with any cash you might have around the place. You may have an emergency fund, even cash lying around your house may help with your situation.
One you know your position you can move to step two.
Make a Plan
Put together a plan to pay off your debts. The best strategy is to pay off the higher interest rate debt before the lower interest debt. Put together a budget understanding your income and outgoings and try to realistically allocate income to paying off debt. You’ll be surprised at what you can do when you look at your budget. Don’t forget you need to live so be realistic with your plan.
Decide on What You Spend
If you really truly want to get out of debt fast then you’ll need to understand what you spend your money on. You’ll be surprised at what you actually don’t need. Be strict with your spending and get it under control. Cut out a coffee, a beer and put it into your paying off your debt.
Getting out of debt on budget means that you need to be able to reduce your debt as soon as possible. Paying off the highest interest rate first is an excellent strategy. Paying off the higher interest rate debt will mean you pay less interest overall and will be able to get the debt under control sooner. This does not mean you should only pay off the higher interest debt to the exclusion of other debt, more its means if you have spare cash pay off the higher rate first.
Have the payment come out of your account before you can spend it. Set up an automatic payment with your financial organisation so it comes out painlessly.
Make More Frequent Payments
If you are only paying off debt monthly then find out whether you can pay off your debt fortnightly. The main benefit with paying off debt more frequently is that you’ll incur less interest and as a result be able to pay more off debt faster.
Make More than the Minimum Payment
Banks love you only making the minimum payment for the month, especially on a credit card. Use the funds from one less coffee, one less beer/drink and pay down your debt. You’ll be amazed at how much you can reduce your debt by paying off more than the monthly minimum. By paying off more than the minimum it means you are eating into the principal of the loan faster meaning less interest.
Got lots of debts all over the place? If so think about a consolidation loan where you can take debts and combine them into one easy payment per month. It is likely that the interest rate will be lower and as a result repayments will also be lower. Consolidation loans are useful if you want the discipline of being able to make one payment per month.
There are traps with consolidation loans, they can spread out the payments of the debt over a longer period of time meaning even though payments maybe more affordable you’ll end up paying far more interest.
If you do go down this route think about upping the loan repayment according to your budget and making more than the minimum payments required. Use the points above as guides, if you can pay more frequently, then do so. If you can pay more than the minimum, do so you’ll pay less interest and eat into the principal faster.
If you are disciplined however, and assuming the interest rate of the debt is lower than the weighted average of the debt you are currently paying then you are highly likely to be better off.
If getting out of debt on a budget has simple got too much then you need to seek help. Your first step is to speak to your lenders, they are legally obligated to help you. You’ll be surprised at what they can do. You need to be totally honest with them and give a complete account of your financial situation.
If it is getting too much then the sooner you seek assistance the better it is. If you don’t feel comfortable with speaking to your lender, every state and territory has financial counsellors which are trained to assist with these types of situations. Financial counsellors are paid to help you get out of debt as soon as possible and can provide many ways to achieve this goal. Financial Counsellors can be contacted viahttp://www.financialcounsellingaustralia.org.au/Home or on 1800 007 007. They will be able to put you through to your local financial counselling service.
There are many possible solutions to getting out of debt on a budget. For many the solution is simple, for others it is a far more complex route. The first step in every case however is to recognise the issue. Once recognised deal with it as soon as possible. Speaking with family, friends or even financial counsellors will assist you resolve the problem.
The golden rules always apply when paying off debt. To reduce debt you need to pay it off faster than it goes up. The result is to pay off the highest interest first, pay it off more regularly and pay it off at higher rates than required.
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