How to dig yourself out of a financial hole

It doesn’t matter whether you’re in debt due to circumstances way out of your control, or because of poor money management skills – what matters is you get yourself out.

Certified credit counsellor Mary Huntley has a few financial tips to help people get back on their feet.

First, she advises everyone to take a look at their budget every couple of months.

“Take a hard look at the numbers,” says Ms Huntley. “Really [look at] what you’re spending, and where, and think about where you want to make some changes.”

It might become obvious where you’re haemorrhaging money, for example, a lot of people spend excessively on food delivery or dining out.

“Think about where you can get a better bang for your buck with your food budget,” Ms Huntley suggests. “But groceries have gotten more expensive as well. The general cost of living is going up like crazy.”

Investing is another area people should think about, but an emergency fund should be at the top of your list.

“Investing is different for everyone – it depends on your comfort level,” says Ms Huntley. “You don’t want to invest money that’s going to be at risk unless you are mentally and financially prepared to take some kind of a loss if that happens. Or look for ways to keep that safer, like a tax-free savings account. It really depends on the individual as to where they want to invest and how. Before investing, though, start an emergency fund, so you don’t have to turn to credit if you have an unexpected expense come up.”

Here are a few tips to get yourself out of a financial hole.

Make a plan
The best time to sort out your finances is now. While you may not be able to do every item on this list right now, you can make a plan.

You might want to consider talking to a financial adviser or accountant for their expertise. If you don’t want to go that route, a conversation with a loved one can help you formulate your plan, a fresh mind that’s not personally involved in the situation will usually see things more clearly.

Read more: Australians too embarrassed to discuss debt issues

Stop adding to the debt
Data released by the Reserve Bank of Australia in November 2020 show Australians owe almost $20 billion in personal credit card debt.

It’s easier said than done but stop adding to the debt. This is where a strict budget comes in.

Make it a point to examine how you spend your money; you likely won’t be aware of where money gets wasted on a daily basis until you start keeping track of everything.

Although you might have a general household budget that you follow, it’s those smaller daily incidental expenses that go unnoticed and can really add up.

Change the way you think about spending
Every time you want to make an unnecessary purchase, think about it this way: every dollar you spend is a dollar that can’t work in your favour.

Adding more debt doesn’t just mean more interest in the long run, it also means that money can’t help you become more financially stable.

Read more: Aussies planning to rein in unnecessary spending in 2021

Unleash your frugality
There is a whole spectrum of frugality – from washing out sandwich bags to collecting plastic bottles to recycle, it just depends on how far you want to go. When it comes to purchases, it might help to ask yourself these four questions:

  • Do I really need this?
  • Do I have something similar that might work?
  • Can I borrow the item for free?
  • Can I get this item cheaper from a thrift store or online?

Create a workable budget
Many people follow the 50/30/20 plan: spend no more than half your income on needs, 30 per cent on things you want and 20 per cent on savings and debt repayment.

You can tweak these percentages at any time if needed though, you might want to put 40 per cent of your income into debt repayment for three months to cut interest costs in the future, for example.

If you can go without frivolous purchases for a while, your ‘want’ dollars may be better off in other areas.

Make a plan to repay debt
Not all debts are created equal. When making your repayment plan, you’ll need to assess which debts need to be paid first. Experts say to target high-interest debt first.

“There are a number of things that impact paying off debts, such as early exit fees. But, theoretically, the debts to pay off first should be the ones that have the higher interest rates,” says Torrance Kassabian, a financial planner with BT Financial Group.

Imagine you have some or all of these loans – a $300,000 mortgage at 4 per cent, a $20,000 car loan at 8 per cent, a $15,000 student loan at 2 per cent, an $8000 personal loan at 10 per cent and a $4000 credit card debt at 13 per cent.

All things being equal, the debts should be repaid in this order – credit card, personal loan, car loan, mortgage, student loan.

Mr Kassabian says consumers should make the minimum allowable repayments on lower-rate debts such as mortgages so they can devote the maximum amount of money to higher-rate debts such as credit cards.

If your debts have similar interest rates, consider paying off the smallest one first. Completely repaying a debt helps motivate you to keep going and once you’ve paid that off, move onto the next smallest debt.

Read more: How to get your credit card debt under control

Look at debt consolidation
Debt consolidation could help you to combine your outstanding debts into one convenient loan potentially at a lower rate than you currently pay. Simply put, you’ll have one loan, one regular repayment, one interest rate and one set of loan fees.

Look at the bigger picture to ensure consolidating won’t be more expensive in the long run. Alongside the interest rate and loan term, check for other costs such as penalties for paying off original loans early and application fees for the new loan.

Beware of switching to a loan with a longer term; the interest rate may be lower, but you could pay more in interest and fees in the long run.

Reduce your credit limit
To avoid the temptation to overspend on your card, ask your credit provider to reduce your credit limit. You can do this online, by phone or by visiting a branch. In most cases, it takes between one and two business days.

If you need to increase your limit to buy something special, aim to pay it off quickly. Then reduce your limit again to a manageable amount.

How often do you take a good look at what you’re spending? Have you ever consolidated debt? Do you have a credit card?

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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Ellie Baxter

Writer and editor with interests in travel, health, wellbeing and food. Has knowledge of marketing psychology, social media management and is a keen observer and commentator on issues facing older Australians.

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