Your Money

6 steps to face reality and ditch the debt

- March 23, 2022 4 MIN READ
Ditch the debt for good

It can feel like a never-ending cycle of pain, but there are things you can do to ditch the debt and step off the carousel.

There’s nothing worse than feeling overwhelmed by debt. It is a harrowing experience which can often seem to have no end.

But there is a solution. It is never quick or easy, but you can ditch the debt and set yourself free.

Don’t accept debt as a way of life, take control of your money and secure your financial future.

This six-step debt diet will whip your finances into shape. Instead of cutting out carbs, I want you to cut out credit. Instead of getting rid of kilos, you’ll get rid of unwanted debt. Your budget is your training program, stick to it and you’ll be on your way to a whole new you.

Step 1: Face reality

Many people ignore their debt problems until it’s too late. The sooner you act, the faster you can ditch the debt and the better off you will be. Here’s a quick quiz. Are you:

  • Spending more than you earn each month and regularly dipping into savings?
  • Putting day-to-day expenses on credit because you have no money?
  • Only able to afford the minimum payment on the monthly credit card bill?
  • Not prepared for unexpected expenses that crop up, like house and car repairs?
  • Receiving legal notices in the mail?
  • Taking menacing phone calls chasing payment?
  • Enduring relationship instability such as marriage or relationship breakdown?
  • Adopting bad lifestyle habits such as increased drinking, smoking or gambling?

Be honest. These are all telltale signs of financial distress and a warning you must act now to resolve it. The worst thing you can do is ignore your debt problems until it’s too late, hoping things will work out for the best and your creditors won’t notice. They will notice.

Step 2: Ask for help

If you’re in trouble, talk about it. Credit card companies and financial institutions will be much more lenient if they know you’re trying to tackle the problem.

Talk to them about a payment program to help you manage your debt. Ask if you can reduce or postpone some repayments, or pay less interest until you get on track.

Step 3: Control your spending

For the next month write down everything you spend and then examine where your money goes. You will be amazed, and maybe a little horrified, at what you really spend your money on, but I bet you’ll think twice in future.

Start living within your means so you don’t go further into debt. From now on use cash for everyday expenses like groceries, clothes and entertainment so you only spend what you have. Resist impulse buys and save up for big purchases.

If you’re going to struggle with the temptation of credit, get rid of it. Replace your credit card with a debit credit card. It allows you to purchase things online or over the phone like a regular credit card, but only uses your own money… so you can’t go further into debt.

Step 4: Stick to a budget

Balance your family budget and develop a debt reduction plan. The fastest way to pay off what you owe is to make extra repayments. Look at your budget and work out the maximum you can afford to pay off your debts every month.

Each pay period, set aside money to cover your basic expenses such as food, transport, utilities, and rent or mortgage payments. Also contribute to an emergency account to cover any unexpected bills. Use the all the cash left over to pay down debts like your credit card bill.

5 steps to build your emergency money stash

If you’re not making much of dent in your overall debt, you have to increase your income. Get a second or third job in the evenings or on the weekend until your debts have been cleared. Make sure all the extra money your earn goes towards paying them off.

Step 5: Avoid the minimum payment trap

The monthly credit card bill looks horrific, but then you take comfort in the much smaller minimum balance owed. Big mistake.

It will take years to eliminate your debts if you only make minimum repayments. Your credit card provider will charge you interest on the rest of your bill, adding to your overall debt.

To get ahead, you really do have to pay more than the minimum repayment. Every month.

Step 6: Pay off your most expensive debt first

It’s common sense, but pay off the debt with the highest interest rate first. Credit cards are charging up to 20 per cent interest, so focus on that debt to start with. Then look at personal loans, which will be costing at least 10 per cent interest, and so on, down to your least expensive debt.

Don’t even think about saving or investing until you’ve paid off your bad debts. There’s no point playing the share market or investing in a managed fund when you’re being charged 20 per cent interest on your credit card debt.

Your home loan is probably your cheapest debt. Borrowing to buy a home or invest in quality shares or property is generally considered to be good debt, and not as much of a concern.

If you have debt, you should have no savings – only your emergency fund. It should all go in to the credit cards or loans instead.

Think about it logically. Why have savings earning one per cent (at best) when you’re paying 3-20+ per cent interest on home loans and outstanding credit card balances? Ditch the debt first, then you can start saving and investing to create a buffer against future debt.