Crisis debt management
You wouldn’t wish a personal financial crisis, or PFC, on anyone. It can be so debilitating across your entire being. It can feel as though your whole life is about to come crashing down like a house of cards.
A PFC can be triggered by a range of factors but the most common is a debt burden which has careered out of control.
But with discipline and some hard work, there is a way out. Here’s our six-step guide on how to handle a PFC, so that you can turn things around as quickly as possible.
- Understand the big picture
Before anything else, draw up a list of all your assets and debts to get a bird’s eye view of where you’re at financially. Then, build a budget to work out where your money actually goes.
It’s simple to do. In one column list your income and in another pull together all of your regular and irregular monthly expenses.
Run a fine-toothed comb through last month’s receipts and bank statements to make sure you’ve listed expenses accurately.
- Set smart financial goals
If you’re in a sticky financial situation, your main goal is probably to get out of it as quickly as possible, which is perfectly reasonable.
But it’s not a good financial goal.
A good financial goal has a definite deadline and can be broken down into smaller, more manageable steps
For example, it’s much better to say, “I want to be rid of my credit card debt by Christmas, which means I need to repay $150 a week for the next four months”.
- Take control of your spending…
With a budget and some well-defined goals to work towards, it’s time to take control.
Think about your spending in terms of wants and needs. Needs are non-negotiable, for example you’ll always need to make room in your budget for groceries.
Wants are nice to haves such as gym memberships, new clothes or eating out, and if you’re in the midst of a PFC these should be the first things to go.
- … And your debts
First, look at whether you can minimise the interest you’re paying, for example through a credit card balance transfer or by consolidating multiple debts to reduce the overall interest you pay.
Go to www.getcreditscore.com.au , find out your credit score then either go to your bank and get a better deal on consolidating debts into a personal loan or use an alternative like a peer-to-peer lender.
Next, try to channel all of your additional money into making extra repayments, which will save interest and help you pay off the debts faster.
(A quick note: Don’t be afraid to use your savings to make extra repayments. Money in the bank only earns around 3 per cent these days, while credit cards or personal loans still charge interest rates in the double digits.)
Finally, if you’re having trouble repaying a debt or bill, speak to your lender or biller immediately. They may be willing to negotiate more favourable terms and you could avoid a black mark on your credit report.
- Don’t go it alone
If you’re drowning in debt or simply don’t see a way out, there is help available.
Financial counselling is a free service provided by many organisations and is aimed at helping you get back in control of your money.
Contact Financial Counselling Australia on 1800 007 007 to find a counsellor near you.
- Plan for the next PFC
Hopefully, the steps we’ve outlined help you take control and get through your PFC (and improve daily financial habits too).
But a PFC could happen again, so make sure you’re prepared.
Start setting aside money in a savings account for the purpose of covering unexpected expenses. This is what’s known as a ‘rainy day’ fund.
And make sure to do a full review of your insurance, both for your things (think home, contents and car for starters) and for you and your family (life, income protection, health insurance and total and permanent disability).
This will ensure you can weather the next PFC if it comes along.
GOLDEN RULES OF SHARE INVESTING
Given the recent turmoil on sharemarkets, it’s worth taking a deep breath and reminding ourselves of the golden rules of share investing.
- Do your homework before buying… don’t buy or sell on rumour, hunch or impulse.
- Balance the risk and reward factors… look closely at past performance and future prospects and remember the sleep test. If the worry of your shares falling keeps you awake at night, don’t buy them.
- Keep checking after you’ve bought… investment conditions, company management and objectives can change.
- Be patient… don’t expect to become wealthy overnight..
- Don’t forget shares can bring income and capital appreciation.
- Be alert to trends… try to put political, economic, scientific events through an investment filter and implications for companies.
- Be prepared for unexpected events….review the situation promptly before taking any action..
- Don’t try to back every horse in the race… it is far better to hold a smaller portfolio of shares which you know well and are comfortable with than to invest in a larger number of companies in the hope of picking more winners.
- Check the environment… be reassured the economic and market prospects look fair for the company, for the year ahead. Don’t buy a share just because the price looks cheap.
- Take a loss quickly… don’t let pride or stubbornness prevent you from accepting a mistake and correcting it.
- Consider upgrading your portfolio at regular intervals… check your portfolio every six months.
- Follow the market… don’t try to beat the trend. In bear markets, be cautious; in a fluctuating market, think twice; in bull markets, take greater risks.
- Take a profit… it is better to make a little less profit by selling too soon than to take the greater risk of overstaying the market in a stock which is overpriced.