Easy to slide into, hard to climb out of; debt can feel like an ever-deepening hole. So how do you smash it and move on with your beautiful debt-free existence? Frances Cook has some tips.
Debt is one of those areas of life that can quickly make you miserable.
The good news is that the combination of a smart money mindset and sound repayment strategies can turn this around, and your debt could be paid off more quickly than you expect.
Here’s where to start.
1. Know good debt from bad
Ideas of ‘good debt’ and ‘bad debt’ are a little simplistic, but not entirely wrong.
Think of debt like fire. It can actually be pretty useful sometimes, and few of us would have got where we are in life without it.
But it can also be very damaging, especially if you let it rage out of control.
If you’re using it for something that increases your wealth, then that’s not so bad.
This could be a mortgage, interest-free student loan, or business loan. Sure, these debts can still go wrong, but when used carefully they’re helping to build your financial future.
The mortgage helps you get a home, and you’ll ideally pay it off and save hugely on living expenses. It might also appreciate at a rate that supercedes the interest you’re paying on the loan.
The business could increase your earning power. So could the student loan.
Easy to slide into, hard to climb out of; debt can feel like an ever-deepening hole. So how do you smash it and move on with your beautiful debt-free existence? Frances Cook has some tips. (Source: Breakfast)
Meanwhile, if you use debt for something that doesn’t have value, or goes down in value, then that’s a red flag for bad debt. Think credit card spending, or a car loan.
High interest rates (again, think credit cards) are another red flag for bad debt.
And if the debt is costing you more than you can afford, or causing you to lose sleep at night, well that’s a whole parade worth of red flags. Let’s cut it, and get back to getting a solid night’s rest.
2. Hit the snow
Once you’ve figured out which debts are helping and hurting you, it’s time to decide which ones you want to pay off first.
There are two strategies to use, and you pick which one you like best depending on your personality.
Money Avalanche means you order your debts from highest interest, to lowest interest. You then focus all extra money that you can on the highest interest debt, until it’s paid off. Then you move on to debt with the next highest interest.
This method will save you the most money, and therefore help you pay off your debt in the shortest amount of time.
If we were all robots, it would be the only way to do things.
But we’re not, so there’s another method, for those of us that need a little motivation boost.
Money Snowball means you order your debts from biggest to smallest, and you focus all of your extra effort on the smallest debt first.
You’ll pay it off in record time, then be able to move on to the next. It gives you that quick win, boosts motivation, and proves to you that you actually can do this.
If you’ve struggled with going back and forth on debt in the past, then this is a great approach to try.
3. Don’t put life on pause
Depending on how much debt you’re in, this may be a marathon, not a sprint. That means we have to create a strategy that let’s you keep living life, while crushing that debt-free goal.
Try to include small treats in your budget. Maybe you attach them to when you hit a certain debt repayment milestone, or maybe you schedule them regularly, such as once a fortnight.
What matters is that they’re manageable within your current budget, and are a genuine treat.
If you go for the money equivalent of a crash diet (cash diet?) then you’ll never stick with it. Build some treats in, so you stay sane, and don’t give up before you can hit that bigger goal.
It’s also worth funneling a small amount of money into building a smaller savings account, such as $1000.
Bigger savings goals can come once you’ve paid off your debt, but that small savings account will save you from reaching for the credit card again, if one of life’s no-fun surprises pops up.
4. Block out bad influences that could trip you up
Let’s be honest, you built up debt in the first place because the world is full of companies trying to convince you to spend money with them.
So give yourself the best chance of success by tuning out the noise wherever you can.
Unsubscribe from marketing emails. Turn down the TV and make a cuppa when the ads come on. Unsave your credit card details from your phone and laptop – I can’t tell you how many times the pure laziness of not wanting to stand up and go and find my card has saved me money.
Make it easier to do the things you want to do more of.
Make it harder to do the things you want to do less of.
Information in this column is general in nature and should not be taken as individual financial advice.